More downside potential on the new than on the old crop

28 Jan 2021
In the past 2 days, prices consolidated for the first time in many weeks. Markets seem to have found a compromise, for now, between tight supplies on the old crop and higher stock and production prospects for the new crop.
Uncertainty prevails. That’s why we need to remain very cautious in our predictions, stick to our convictions and use appropriate strategies to turn the expected volatility into a risk management opportunity.  So, what do we currently know and what can we expect?
The latest January USDA report confirmed the tensions on soya and corn stocks. The latest government interventions in Argentina and Russia (and possibly Ukraine soon) are now worrying wheat traders as exports are affected and it is hard to find out how they will be compensated. The only solution for now relies on higher prices to ration demand. So, we can consider that the old crop tight fundamentals are already known, and their downside potential is thus limited in the coming weeks…
New crop prices are trading at a massive discount to old crop now. This illustrates that traders currently anticipate a much more comfortable balance sheet in 2021/22. From there, we can anticipate two different market stories.
If weather conditions are more friendly during the spring, as La Nina is confirmed to have peaked in January, then it is likely that new crop prices will start declining, widening further the already very large discount to old crop prices.  Operators will watch very closely the weather conditions in the US (spring drillings),  in Brazil (The Safrinha to be planted after the ongoing soya -late- harvest), in Argentina (some rain still needed), in Russia (very favorable conditions needed to boost poor crop conditions) and Europe (where the yield potential remains intact, so far). Under this scenario, without any major crop issue, new crop prices could well be close to their highs now.
However, we are clearly not there yet. Furthermore, given current low stock levels, prices are more sensitive to risks. Especially on the supply side. We can thus anticipate volatility to remain very high.  At this stage, an even more bullish scenario remains possible as global demand will not cope with any new production incident. Yet more rationing would be needed.
Facing so many uncertainties, in a high price environment, should lead farmers to take action and grab some of the current profitable price opportunities. As we approach new crop, the current tensions might be replaced by a more ample supply  expectation. Looking at different scenarios, taking price insurances or selling into the rally is a safer approach than trying to predict the future and only looking at higher prices.
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Sébastien MALLET