CHRISTMAS CONSOLIDATION OR LONG-TERM BEARISH TREND?

Sébastien
16 Dec 2021

Trees do not climb to the sky, even if sometimes farmers believe they can. We have been repeating this adage for months. We have been warning our clients that, sooner or later, as we approach new crop harvest, prices will start reflecting the probability of a restocking cycle in 2022. We are not there as yet, but markets are currently showing the first signals of weakness since the disastrous 2021 grain & oilseeds harvest. So, is this significant consolidation to be considered as a short-term profit taking move or shall we view it as a real, longer-term change of trend?

From a historic perspective, current prices are trading at very high levels, especially for new crop. Reviewing history , prices have never stayed so high for a long period. They climb for only two reasons: to ration demand and to incentivise farmers to drill. As the market starts to consider that these objectives can be achieved, then prices fall back to their natural level.

In 2022, considering higher production costs, we anticipate these natural levels to be €200 for MATIF Wheat, £170 for LIFFE wheat and €450 for MATIF Rapeseed. Some 10 to 20% below where they currently stand.

Of course, it is not yet a given. A lot can still happen between now and harvest. Stocks are still historically low and weather risks are still ahead of us. Price sshould remain supportive for a while as  old crop will remain very tight. 

Simultaneously, outside risks are also on the rise with inflation (impact on currency rates and financial markets), COVID (impact on energy prices) and geopolitics (China / Russia) will also continue to add uncertainty, on both sides. 

That is the reason why we have advised farmers to secure more volumes than we usually do at this time of the year. Very decent margins are still present. Risks are on the rise. Risk management is not a science but should definitively incentivise farmers to hedge a potential price decrease in 2022. We call it a no regret move. 

This will be my last editorial for 2021. It has been a real pleasure to inform you here, weekly, on my global view of our volatile markets. I will look forward to continuing to do so in 2022. Meanwhile, the ODA team wishes you all a Merry Christmas with your family and a happy and safe New Year!

Sébastien Mallet 

 ODA UK