No Gamestop practices on grain market (yet)

Three key factors currently fuel the international commodity markets. These are the high demand for commodities, the export tariffs that Russia is imposing on wheat – and all the speculation surrounding it – and the interference of investors (speculators) in the grain market.

New loafers
Record to record is being tapped in the commodity markets for wheat, maize and soy. Price levels not seen in 8 years. This also attracts the interest of investors, but also index funds and non-commercial parties. These are parties that enter for a long period of time (long positions). This is clearly visible in the CBoT futures, such as those for grain maize.

The most traded corn futures contract had nearly 365.000 long positions and options at the end of January. At the same time, participants are holding 33.220 short positions (expectation of falling prices). This level had not been this low since November 2012, which indicates how positive stock market participants are in the competition. They are bolstered by gigantic export figures of American corn to China. On Friday, January 29, the USDA announced that China has purchased 2,1 million tons of corn from the US. The biggest deal ever with the country. In 4 days, the country bought 5,85 million tons. That's more than the US ever shipped to the country in a full season.

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But the Chinese are not only interested in corn. Wheat and soybeans are also in great demand by the Asian country. There are various reasons for this, depending on the commodity. One of the most important factors is that the country is rebuilding its livestock after the brutal outbreak of African swine fever (ASF).

That requires a lot of animal feed. Our own harvests were disappointing due to flooding last year, which means that more than usual purchases have to be made. On the one hand, this is striking, because three quarters of the global maize stock is already in Chinese hands. It must be asked how long this purchase policy will last and what this means for the 2021-2022 season.

In addition to China, many other countries also buy wheat, which has contributed to a rising price. The imposition of export taxes in Russia has further boosted their export engine. At the same time, new tenders from the Middle East are not forthcoming, as buyers are uncertain about availability and price levels. Meanwhile, taxes have backfired on the market as prices have only continued to rise.

In the past – when Russia also started taxing its exports – it did and the wheat market was pushed even further up. It ensured that poorer countries, especially in Africa and the Middle East, no longer had the purchasing power to buy expensive wheat. This resulted in a major uprising: the Arab Spring in 2010. A big difference is that the Arab countries then had sufficient revenues, especially from oil and tourism. This is not the case now due to the corona crisis.

Australia on offer
A country that is eager to take over the position of Russia is Australia. Literally far away, until now, it has remained quiet on that side of the world, with exports mainly to Asia. It is estimated that Australian wheat production will almost double this season: to 30 million tons compared to 15,2 million tons last season. Wheat exports can also double to 20 million tons.

Meanwhile, export expectations for Russia are lowered to 37,5 million tons by market agency IKAR. Last season the export volume was 34,5 million tons and in the 2018-2019 season it was 35,8 million tons. The USDA is counting on the country to have a closing stock of wheat of 12 million tons by the end of the current export season. That does not really indicate a shortage, as a result of which bread prices in the country have increased by a fifth.

New strategy
What does bother Russia, however, are the weak ruble exchange rate and low oil and gas revenues. The country's economy is also being hit by the coronavirus. Taxing wheat exports has had a counterproductive effect for the time being, because prices have risen. Incidentally, physical prices in the country do fall slightly at the beginning of February. New inside information shows that the government is working on a new export tax from June 1, which may also apply for the coming season. Wheat is taxed at 70%, minus a $200 FOB deduction. That pain may be much greater than the $50 currently on the schedule.

The news is not official (yet). According to analysts, it is only a matter of time, because the current policy is not effective. Arable farmers are meanwhile looking closely at their strategy for the coming season. The acreage of winter and spring wheat in Russia is about 50/50, because in many areas winter wheat cannot be grown due to extreme cold. With a sky-high export tax, it becomes uninteresting to sow spring wheat, which means that they are diverted to other crops.

That can have an impact on the acreage. Weather conditions have favored winter cereals now, with mild temperatures in the Black Sea region. A possible cold outbreak is still in the pipeline for mid-February, which could damage crops if the snow cover has melted too much. Cereals in Ukraine are also in good shape, despite a very dry autumn. As a result, 600.000 hectares less winter wheat has been sown than last year, bringing the acreage to 6,1 million hectares.

Unabatedly positive
Europe has to deal with cold weather, although we don't notice it much in the Netherlands. Snowfall ensures that the crops remain protected. Because the winter was mild for a long time, cereal crops developed well. Obtaining a favorable export position and being able to deliver quality is still difficult for the European market worldwide. When the economic prospects improve in the second half of this year. Analysts expect demand for commodities to increase further due to rising consumption. The signals for the grain market therefore remain green.