We knew already that grain and oilseeds stocks were sharply down this season. We alerted that ongoing risks could bring more fuel to the bulls. Some of these risks are now clearly becoming reality. Despite mild conditions thus far, US and Russian winter wheat faced record cold temperatures in February. With the end of La Nina, heavy rains in Brazil are slowing down the soya harvest leading to major supply delays, quality risks and last but not least, great difficulties for farmers to drill on time the 2nd corn crop, which accounts for 60% of their total production.
The traditional switch between US and S. American origins can just not take place now and will be at least one month late. This is what we call a market squeeze. Demand cannot be fulfilled and the only option for prices is to go up to ration remaining stocks. With more than 270 Panamax vessels queuing in the Brazilian ports, difficult logistics and a lot of farmers defaulting, traders have no other choice to buy on the spot market to fill their vessels.
We can thus only expect prices to remain buoyant for the coming few weeks as, on the other side of the equation, international demand remains very strong, with China leading the race. As a consequence, ocean freight rates jumped by 40% this month, illustrating a very dynamic trade demand.
In this tight context, March and April will be key months. The US drilling season is now about to start with record acreage expected for both corn and soya. Brazilian farmers will do their best to finish the corn drilling , but we already expect 40% of the planting to be out of the ideal window. Needless to say that world weather conditions will continue to be monitored very closely and price will remain very sensitive to any further risks.
We keep our supportive short-term view on prices for the next 2 months. The ongoing lower supply risks and stronger demand should continue supporting prices on the longer term too as strong harvests in 2021/22 would not reflate balance sheets but rather keep global demand from rationing. With low stocks, volatility is likely to continue. We can therefore consider that, in the event of satisfactory conditions from now on, price increases would ease off but markets would not drop significantly. So, let’s be prepared to catch some price opportunities but without haste for the moment as any downside is very limited.