27 May 2021

Agri commodity prices have taken a tumble so far in May. Funds have massively sold into the improving weather conditions and commercials are considering this sudden price drop as an opportunity to cover their needs. Who is right, who is wrong? The buyer or the seller? Most of the answer relies on the next two months’ weather conditions, especially given that most recent crop losses have been caused by adverse weather during June and July.

US weather has improved permitting quick planting and this, together with expanding corn acreage expectations, has led to heavy fund profit-taking. Still, with Brazil’s burnt Safrinha and a lengthy northern hemisphere weather market ahead, funds could revisit their decision to sell so soon. On the fundamental side, we have low supplies in the major exporters and a lot of weather risk still to go before good yields materialize.

Looking at price history, this sudden price drop did not really come as a surprise. The timing is more surprising as we would have expected this consolidation to happen once crop production levels have been secured, sometime in July. Historically, when prices have reached such high levels in the past, they always collapsed very quickly. Indeed, when markets consider the need for demand rationing to be over, price simply returns to more natural levels.

So, did funds sell too soon? Have we seen the markets highs? Is there more downside potential for our prices? In ODA we consider this first price drop as exaggerated, simply because it happened too soon in the season. With global stocks set to remain tight throughout 2020/21 and well into 2021/22, crops in the ground will really need to deliver. The fundamental outlook remains supportive and weather conditions in June and July will very probably provide new opportunities for farmers who haven’t yet sold into the recent highs.

Sébastien Mallet