It is hard to believe we are working our way into November and that the year is now mostly over. Corn and soybean harvests are over half complete across the US Corn Belt, with farmers and elevators working to put bushels away into storage.
Production-wise, most traders and analysts feel the USDA figure is relatively close to reality, with nothing really indicating a sharp adjustment higher or lower will be necessary going forward.
From an overall fundamental standpoint, we are in that interesting time of the marketing year where we try to figure out what the next 10 months’ worth of demand will look like. Traditionally, this is a relatively easy exercise. We tend to have a general idea of what trade flows, economics and logistics will look like both short and long term. This data can then be used to forecast whether the current figures projected by the USDA need to be adjusted and what that could mean for overall supply availability.
However, with all that is happening in the world today, there is absolutely nothing easy when it comes to forecasting what happens next geopolitically and how those developments will impact trade flows, economics, and logistics. When it comes to trying to guess (in an educated manner of course) where we are headed next pricewise, it is vital to look at what is happening in the world today, what that could mean for overall fundamentals and more importantly, what it could mean for money flow.
Is War Inherently Inflationary?
One thing I keep hearing from many analysts across a whole host of sectors is that war is inherently inflationary. Looking back over the years, commodity prices have tended to rally during what were well-known periods of conflict. Grain prices rallied during both World Wars, as a significant amount of Europe’s agricultural production and shipments were obviously limited. The next most memorable run-up in grain prices did not occur until the 1970’s.
As the situation between Israel and Hamas has unfolded over the last few weeks, many have discussed the grain markets of the 70’s, tying the rallies seen that decade to all the unrest that unfolded in the Middle East during that same period. While I am far from an expert on what took place in the grain markets years before I was born, I have spent a lot of time over the last couple of years looking at the fundamental backdrop of the grain markets in the 70’s and struggle to see a connection between the two.
A lot of what took place to move prices higher in the 70’s is like what took place to move grain prices higher from late 2020 to now. The 70’s kicked off with Russia’s Great Grain Robbery where tens of millions of metric tons worth of unexpected demand was found. A shift in global economics and the availability of petrodollars sent world demand for grains soaring, with one report indicating global grain imports increased nearly 30% from 1971-72. The sharp increase in import demand pushed many countries to enact protectionist policies, further reducing grain supplies—like what we saw shortly after Russia’s invasion of Ukraine in 2022.
This uptick in demand and contraction in supply was further exacerbated by a precipitous fall in the US dollar after government officials untethered it from the gold standard in 1971. The falling dollar not only helped make foreign purchases more attractive, but it also helped add to the inflationary pressures that resulted in double digit interest rates seen a decade later in the 80s.
So, while, yes, we did see a sharp increase in values when we saw a similar conflict break out in the 70’s and have seen other rallies during times of international conflicts, I remain unconvinced war is the reasoning behind the run.
What About These Particular Wars?
When it comes to the influence on price, we see from the two major conflicts we are watching, the situation differs greatly. Many had expected grain prices to rally at the start of the Israeli conflict like what we had seen after Russia’s invasion of Ukraine, so far to no avail. The role of Russia and Ukraine as suppliers to the global market is the obvious difference between the two, as the countries in the Middle East are traditional importers.
My concern more than anything with the situation at hand is we see a spill-over of tensions expedite a formation of interesting trade and global alliances. The influence Chinese demand has on price cannot be ignored, and with China actively working to support the export infrastructure buildout across many commodity producing countries around the world, how they operate behind the scenes remains incredibly important.
As it stands currently, it seems the situation between Russia and Ukraine will likely continue for quite some time with limited progress. Risks of shipment and production disruptions out of both countries will keep a floor under prices, while the world will work to get acclimated to new trade flows or at the very least trading with potential shipping disruptions lurking.
The Middle Eastern situation feels a bit more concerning as the divide between “good” and “bad” does not feel as clear as the situation continues to unfold. World leaders are pushing for a ceasefire and diplomatic resolution, with neither party of the conflict seemingly looking to stop attacking one another anytime soon. The likelihood of a spillover of the conflict into other regions, involving other countries and the countries they have alliances with feels nearly unavoidable.
An increase in uncertainty, tighter financial conditions and a displaced populace does not generally result in an increase in demand.
What Matters Now?
Of course, how trade flows develop relies ultimately on production and supply availability. I can sit here with all types of ideas on what happens when it comes to world demand, but all of them would simply be turned on their head if we were to see a major production problem in South America.
Planting has been delayed in Brazil, with concerns over a need to replant across parts of Mato Grosso. According to Agrinvest, a Brazilian analytical group, industry experts put the percent of acres needing to be replanted across Mato Grosso at 5%, saying it would be higher if financial conditions were better and farmers were able to absorb the higher costs.
The biggest delays in planting seem to be across Northern portions of the country, with heat and dryness expected to remain in place for much of this week according to the GFS. Both the GFS and Euro have rainfall later in the extended forecast, though signs of a major pattern shift remain limited. Traders in Brazil say this will delay the start of their new crop export program, allowing for US business to extend out into February.
Weather does look to improve for Argentina, something that is necessary after drought decimated their production last year. Soybean planting will get underway in the month ahead, with the forecast expected to be conducive so far at least, to production.
There were reports China had washed out of some Brazilian beans this week, pressuring futures. Though with some logistical issues out of Brazilian ports as well as improved domestic crush margins there, switching Brazilian bean purchases to US ports makes sense economically.
In the end, the world is a mess and what that means for grain prices remains mostly unclear. This will likely keep prices violently range bound until we know more about South American production potential and the health of the global economy. As always, let me know if you have any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
