Stay Updated with the Commodity Market in September

Stay Updated with the Commodity Market in September

Volatility in the Markets Following the Drought in Central Europe

The excess heat has wreaked havoc in the countries of Northwestern Europe and the British Isles. It has not only affected cereal crops, which we will discuss later, but the absence of pastures in countries where they traditionally abound is forcing these countries to import fibrous raw materials in unprecedented volumes.

Map 1. Pasture Production Index in Europe

Graph 1. Historical Stock/Consumption Ratio in Major Exporters

Imports of Palm Kernel Meal in Ireland usually amount to 100,000 tons annually, and currently, in just 6 months, they have already accumulated over 200,000 tons.

Both factors have led to sharp price increases in all cereals, led by Wheat.

The demand (which did not expect this increase) has reacted unevenly. On one hand, the directly affected countries have resolved their needs by immediately purchasing their positions in the global market, however in Spain, where we also have a large harvest, the coverage for the September/December period is really low.

Cereals

Wheat

From July 20/22, data began to emerge about the negative impact it was having on the countries of Central Europe and, specifically, the reduction in cereal production in countries like the UK, Germany, Denmark, Poland, and France. At that point in the harvest, these were data that caused a strong upward market reaction, mainly for Wheat, which has dragged the rest of the cereals with it.

Therefore, supported by the lowest Stock vs Consumption data (Graph 1), investment fund positions in Chicago have gone very long.

Graph 2. Wheat Positions of Investment Funds. Current and Last 6 Years

In Spain, despite the large harvest, prices and sales retention are influenced by the import market, driving prices to the highest levels seen in 2018, around August 10.

During the two central weeks of the month, we have entered dates of low commercial activity, which is causing more selling liquidity and prices have started to fall, although not yet significantly.

Graph 3. Global Wheat Balance

Barley

In the case of Barley, we can see in the global balance that during the past and present campaign production has been below demand and, consequently, global stocks have decreased, despite the large harvest in Spain, where we went from 5.2 million last year to approximately 10 million according to estimates by Cooperatives, Accoe, and Cesfac.

Graph 4. Global Barley Supply and Demand Balance

Corn

Regarding Corn, there is tension in the Peninsula due to low unsold physical stocks, both in ports and domestically. It is expected that the arrival of Brazilian-origin corn at the ports may alleviate the situation in the short term.

It will be regularized during the last week of August and the first week of September. In Spain, all areas will arrive late compared to their usual production dates due to the delay in sowing (due to the rainy spring weather). It is expected that throughout October-November a large harvest will be reached in Eastern Europe, which will surely affect international replacement prices for our country.

Graph 5. Investment Fund Positions for Corn

Soybeans and Alternative Proteins

Soybeans

The weather in the U.S. is respecting the evolution of the Soybean crop. So far, the Good/Excellent ratings have been revised down by only 1% compared to the highest estimates. We have been monitoring the weather in different states and have found that during the last two weeks there have been no excessive temperatures but also no rain, so soil water reserves are lower than the usual average.

Table 1. Soybean Crop Conditions in the United States

Investment funds in Beans remain short and have slightly increased their positions in Meal. If the harvest finishes correctly, we will have a more balanced balance and, with it, some recovery of the stocks lost with Argentina’s deficit last March. We would return to stock levels very similar to those of two campaigns ago.

Graph 6. Soybean Supply and Demand Balance

China continues to source from Brazil, and with it, the stock in the U.S. from the old campaign has risen significantly compared to recent years. Logically, FOB prices (Graph 6) have changed completely, rising in Brazil and falling in the U.S. For Europe, premiums remain high to balance international replacement.

Graph 7. Evolution of FOB Soybean Prices and Difference Between Brazil/U.S.

September 2018 Forecasts

Evidently, the change in the situation mentioned has caused the price scenario to be significantly higher than a month ago.

The wheat at port is at levels above 215 €/ton, although it is strange not to see any correction yet, especially in Eastern Europe, where the pressure on sprouted wheat and feed has not yet been felt.

In the inland peninsula, despite the sales retention, prices remain below import replacement, although little is being traded. In Burgos/Palencia, the approximate levels of 192/194 €/ton origins make them competitive, even for coastal areas.

In general, throughout September there should be a greater selling intention in Cereal positions. Certainly, for now, further price increases seem excessive, especially considering the prices for Corn, which maintain too wide a difference compared to the other two main cereals.

Soybeans will be affected by a dollar around 1.14, raising its relative price (although some speak of 1.11 as the next barrier to seek). For now, it remains at stable quotations as it has been all summer. Surely if the harvests evolve as the numbers now suggest, we should see better net price levels at port lower towards the end of the year.

Alternative proteins, highly demanded by China, maintain nutritionally less competitive prices compared to last month. We assume that manufacturing will tend to increase Soybean Meal consumption at the expense of Rapeseed, Sunflower, Corn DDG, Palm Kernel, and substitutes.

For Fibrous products, seasonal demand and the rise in Wheat and Barley are causing increases in most of them for September. Wheat Bran points to an increase of more than 10 €/ton.

ESSWIEBR00106h