Market alert - grains experience wild price rally

At the beginning of the year nobody expected that grains could become one of the hottest markets. Until then, there were many reports suggesting perfect conditions to plant major grains like wheat, corn or soybeans - the prime factor behind low prices. However, a flood present in the US in the spring delayed the planting season which is the worst one in 30 years. In this article we incorporate the above-mentioned factors and analyse two key markets - corn and wheat.

Summary:

  • A 25%+ increase in corn and wheat prices has occurred due to unfavourable weather conditions
  • A 12% increase in soybean prices due to the US-China trade tussle as well as demand issues in China
  • Gloomy data on planting points to the worst season in 30 years
  • Corn prices approach the critical levels

Dismal planting data

The start of the planting season in the US was mixed as it began somewhat later than usual on the back of unfavourable weather conditions (soggy soil). There was also the second reason standing behind the lacklustre planting season this year, namely low prices of major grains due to the ongoing trade battle between the world’s two largest economies. The trade thread concerned predominantly soybean, as another chapter of the trade war led to increased difficulties for US farmers in selling their grains. What does the state of play look like?

  • The plan for corn planting for this year has been done in 58%, below the 5-year average of 90%

  • If this trend keeps going, the plan could be fulfilled ultimately in 75/80%

  • The plan for soybean planting has been fulfilled in 29%, below the 5-year average of 70%

  • The plan for spring wheat planting has been fulfilled in 84%, above the 5-year average of 70%

  • Heavy rainfall in the vicinity of winter wheat crop as well as expectations regarding higher temperature deteriorated quality of grain to 61% from 66%; it was the first fall this year and even a deeper deterioration of quality is expected

The corn planting season is the worst at least in 30 years. The similarly weak seasons were present in 2013 and 1995 when corn prices soared. Source: Bloomberg

What does the planting season mean for prices?

Prices of major grains have been responding to planting data for three weeks. As far as wheat is concerned, the clear swing to the upside is seen this week due to a lowered degree of grain quality. These gloomy releases in conjunction with the downbeat forecasts regarding weather act in favour of higher prices. Of course, concerns with regard to possible drought are off the table right now, but if it arises it could also act to the detriment of grains quality. On the other hand, the upcoming USDA reports should show a notable revision of the data concerning both expected output and ending stocks. Furthermore, at the end of June the USDA will release a release on grains planting which tends to bring heightened volatility.

This report compares the planned level of planting with its actual realisation and it may confirm the overall weak landscape in the US. On the other hand, it may also show that the current concerns are undue. It is worth noting that the release tends to surprise positively (showing less downbeat numbers) - it was the case in 2015 and 2016 in the corn market. In turn, focusing on wheat it is worth looking at 2017 when prices slumped to 420c from 570c per bushel. Such a scenario may also occur this year. On the other hand, in 1995 planting of major grains proved to be really hideous and led to a massive price rally in the corn market.

China still poses risk

While the ongoing price rally needs to be impressive, no one should forget about China. The trade war limits a market for US farmers (the US exports a lot of its grains to China). However, these farmers are unexpected to stop sowing soybean at all partly due to a governmental aid program announced recently by the US administration. Nevertheless, we have yet to be given more details regarding this program, hence farmers are not interested in switching to soybean from other grains like wheat. Last but not least, the ASF virus in China (and other Asian countries too) also plays an important role here as it lowers Chinese demand for soybean/corn used to feed livestock. The weak demand is also reflected by low prices in Brazil.

Technical overview

Corn

Corn prices have rebounded recently from 350c per bushel and managed to break above the local highs from the second half of 2018. Currently corn prices are approaching the important supply zone (ca. 400c) which coincides with the 23.6% retracement of the latest big bearish wave. The current price rally has already reached a size of similar movements in the past. Source: xStation5

Wheat

Wheat prices bounced back sharply from the multi-month lows but there is still some room to reach the last years’ peak. The closest resistance is localized at around the 61.8% retracement of the latest bearish wave, whereas the important support might be found nearby 485c per bushel. Source: xStation5

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