06 May 2021

Following on a few days of consolidation amid improving weather conditions in the US and Europe, grain and oilseed prices are back to the one-way trend initiated 6 months ago. Markets are now pricing a major risk materializing in Brazil.

A deep market analysis is not needed to understand that the weather situation in Brazil has become critical. The feedback we are getting from Brazilian farmers is very pessimistic and corn crops are now definitely affected by the lack of water, except for North Mato Grosso. As a result, we have already revised our production forecast to 90/95Mt. Yet at least 15Mt were lost when compared to the previous April USDA forecast. We knew that the 2020/21 stocks were very low. We now know that world balances will remain tight for the coming season too.

US corn stocks are already as low as they can be, with world demand was very much reliant upon Argentina and Brazil to balance the current deficit. Traditionally these two countries account for 60% of the world exports during the July/December period. The combination of low stock levels in all exporting countries (US, Brazil, Argentina, Ukraine) and lower supplies can only be solved by higher prices to ration demand. This is what the market is currently pricing. Yet, for now, the only way is up!
So where do we stand now? Have prices done their job already to destroy part of the demand?

Yes, part of the job for the feed compounders is done as corn prices are now trading at a premium to wheat. This will lead to a massive switch of feed demand in favour of wheat and barley. This is already happening everywhere, in the US, in Europe and in China. As a result, wheat is starting to develop its own bullish fundamentals too!

However, we consider that demand destruction has not, as yet, fully occurred. At current levels, for both grain and oilseeds, industry margins are still profitable for biofuels, ethanol and crush as sub-products prices have also surged with vegetable oils, meals and bioethanol trading at record levels too! So more will be needed to ration demand. In 2008, corn prices had to climb above $8/bu. They are now trading just above $7.

Markets will now need bumper crops, as soon as possible. Wheat production should be very decent in 2021. So, all eyes will focus now on US and Ukrainian corn planting and weather conditions until August. A weather market will thus remain buoyant for the coming 4 months and prices will continue to react very strongly to any further risks!

In this context, it is quite probable that market highs have not yet been seen!

Sébastien Mallet