Tight old crop fundamentals vs improving new crop prospects. Uncertainty and volatility are the main winners

21 Jan 2021
Markets are stressed, uncertainty prevails. With very tight old crop stocks, yields still under question along with pending weather risks in the US, Black Sea, Europe and South America, it is getting harder to predict the near-term trend. The current very high volatility is the consequence of this uncertainty.
This week’s price movements were a perfect illustration of the current market situation. Price consolidated by nearly 5% in Europe and 10% in the US on the back of better prospects for S. American crops and as we get closer to what is expected to be a record US spring acreage for corn and soya. Consequently, the new crop was taking the lead on the old crop fundamentals.
Yet when, on Tuesday, the USDA reported a record 1.4Mt Chinese corn purchase, prices rebounded instantly to their initial highs! And they suddenly considered the current rains in S. America as being bullish news as they are slowing down the already late soya harvest in Brazil! The day before, traders were considering this wet weather as beneficial for ongoing corn and soya drillings in Argentina!
This was a perfect school case to remind us that, in a tightening market, prices become extra-sensitive. With the 3 major crop stocks at historical low levels, we can only expect prices to remain very reactive until we get a better idea of the new crop production potential. It is now clear the prices will not move in a straight line.
At this stage, we still foresee two opposite scenarios. The old crop supply figures are now globally known and priced. The future trend will now rely on two major uncertainties: the level of Chinese appetite (still very strong at this stage) and the capacity of N hemisphere farmers to produce a decent crop.
Therefore we will still watch very closely weather conditions and production potential in the US, S. America, Europe and the Black Sea as well as Chinese purchases. When we will be in a position to better define these two elements of the world supply and demand, we will be able to fine tune our price prediction. Before then, the downside potential should remain very limited as traders will continue to buy the lows.
Meanwhile, we will also be closely watching the UK situation where the 2021/22 wheat production level remain very uncertain as wet weather has, yet again, not allowed winter crops to be fully established and risks are rising for  spring drilling. We consider that a sub 13.5Mt production would lead the UK to remain a net importing nation again! This possibility is rather increasing now, and new crop prices are trading to a relative low discount to Continental wheat, at £-8. To be watched for as this discount could become a premium if UK production does not meet market expectations!
Volatility, for reactive, agile and well informed farmers can be a real chance, if well handled.
Sébastien MALLET