0
It's almost impossible to keep up with the speed of the headlines these days. As if the trade war or the conflict between the United States and Iran (and their proxies) weren't enough, we now have a new virus on the scene. A priori, it appears to be under control and statistically unlikely to trigger a pandemic. But after COVID, headlines and images of healthcare workers wearing PPE inevitably bring back bad memories of 2020 for all of us.
Amid this flood of news coverage, it is easy to lose direction as the narrative swings from one report to the next. That is why, once again, we are going to take a more measured approach and try to focus on the key factors that will shape prices in the coming weeks.
Harvests and the climate threat
Let’s start with the harvests. We are on the verge of wheat and barley harvest in the Northern Hemesephere. So far, everything is progressing well. In Spain, we can say that our crop won't be quite as exceptional as last year’s, but the latest reports still estimate it at around 1920 million tonnes. In the United States, corn and soybean crops are also developing favorably. In short, the harvests are progressing satisfactorily.
Although let’s not fool ourselves: there is always a “but.” News about the arrival of a Super El Niño from the summer months onward is already beginning to influence the positions taken by commodity funds. Super El Niño is an intensified version of the El Niño phenomenon, the warm phase of the ENSO climate cycle (El Niño-Southern Oscillation). Under normal conditions, the trade winds push warm water toward the western Pacific; during this phenomenon, the winds weaken and the warm water shifts toward the eastern Pacific, disrupting rainfall and temperature patterns across the globe.
When people speak of a Super El Niño, ocean warming can exceed an average of 2 degrees Celsius. The likely effects include droughts in South and Southeast Asia (for example, reduced wheat harvests in Australia), excessive rainfall in Argentina and southern Brazil (creating problems for corn and soybean planting), and the possibility of drought conditions in the U.S. Corn Belt. In other words, right before our eyes we have a high probability of facing a weather phenomenon that has traditionally driven grain prices upward. That adds yet another layer of uncertainty to the market. To add a sprinkle of optimism, it is also true that there have been years in which lower corn production in Argentina and Brazil was more than offset by increased output in the United States.
Fertilizer, energy and grain markets
Another key factor for the sector, which we have already discussed, is that the blockade of the Strait of Hormuz has caused fertilizer prices to skyrocket, as 20-30% of the world's fertilizers (35% of urea and 45% of sulfur) pass through its waters. The impact of this price increase is not immediate and will take approximately six months to be reflected in the price. Given the rising fertilizer prices for the next harvest, farmers may reduce the amount of fertilizer applied, which will lower yields and, in turn, also affect the price.
Another detail to consider is that, given the uncertainty surrounding the conflict in the Persian Gulf, wheat and corn are moving in completely opposite directions. Corn prices have risen, mirroring the fluctuations in crude oil prices due to its use in ethanol production. Over the last few weeks, the price of corn replacement stocks has been rising to around €232/t for delivery through year-end. Meanwhile, wheat in Europe has been affected by a lack of competitiveness compared to other origins, and we have seen MATIF prices fall to levels typical of the peak harvest. Just a few weeks ago, a Saudi tender for almost 1 million tons was diverted to the Black Sea region due to the high prices in European markets. With this price drop, wheat is now competitive with corn, although this excludes immediate delivery stocks, not new crop transactions. A specific example is that wheat for immediate delivery in June has been available for around €220/t, a price €12/t lower than the price of corn. Wheat becomes the most competitive cereal in ports.
A market paralyzed by uncertainty
Locally, in Spain, consumption has yet to take off, and we are facing the warmer months with lower consumption. The uncertainty caused by the outbreak of African swine fever in the province of Barcelona has led to fewer piglets being brought in, resulting in a decrease in feed consumption, which is noticeable locally. With the harvest just over a month away, discounts are being offered for available storage space at the ports.
This week, US President Donald Trump is scheduled to visit China. The trip includes a one-on-one meeting with Chinese President Xi Jinping. It is presumed that two key issues will be addressed, issues that have the world on edge: the trade disputes that have plagued the two countries since Trump took office, and the expectation that Trump will urge Beijing to use its influence to pressure Iran into a ceasefire, especially after this past weekend when the ayatollahs' regime rejected US ceasefire conditions, once again provoking President Trump's Twitter ire. In short, the whole world is watching these two men and their teams, trying to anticipate future events. Sun Tzu, the ancient Chinese military strategist and philosopher, wrote the following in his work "The Art of War": "Supreme excellence consists in breaking the enemy's resistance without engaging in combat," and the world will be holding its breath to see if these two men apply this maxim.
In short, uncertainty continues to hinder purchasing decisions for future positions. Generally, the market is burying its head in the sand, avoiding the difficulty and risk of buying until the end of the year. But we must remember that, while it's true prices have risen since the beginning of the year, we are still within a range that cannot be considered expensive.
