The grain sector came second after ending the third quarter up 12.3%, its best in more than five years. The latest pop came after U.S. Department of Agriculture stockpiles data showed corn, soy and wheat inventories all trailing the average estimates from analysts. Heavy buying of soy and corn by China, as it rebuilds its massive hog herd after the African Swine Fewer outbreak, was a major driver. In addition, lower U.S. yield estimates and dry weather in parts of South America could mean that the sector, after years of oversupply, will begin to tighten.
It was a strong quarter for agriculture commodities in general with the sector finishing up close to 12% with gains seen across all three sub sectors of grains, softs and livestock. With the strong finish for the grains sector, there are now expectations that a lower U.S. production due to adverse weather in August and increased worries about a La Niña event will continue to support the sector over the coming months.
With these developments in mind, the inflationary transition from commodities into the wider economy has received some attention in recent weeks. However, if realized it would represent the worst kind of inflation as it will hurt consumers, especially in emerging market economies that can least afford it. However, countering these reflation concerns were developments across growth-dependent commodities such as energy and industrial metals where crude oil and copper traded lower in response to weakening fundamentals.
Crude oil extended its decline due to continued worries about the pace of the recovery in global fuel demand together with increased focus on OPEC and its ability to keep production down. This comes after Libya’s oil industry, all but shut down since January because of civil war, began to recover, potentially leading to rapid output growth over the coming months.
The demand side, meanwhile, remains troubled by the continued rise in Covid-19 cases leading to renewed lockdowns. With the timing of a widely available vaccine still uncertain, the captains of the three biggest independent oil trading houses don’t see a meaningful recovery in global oil demand for at least another 18 months.
Having found resistance at $42.60/b, Brent crude turned lower and broke below recently established support to touch the lowest level since June. The market will now be focusing on the June 12 low at $37/b as the next key level of support. Given the potential for a continued slowdown in U.S. oil production and the risk of additional action from the OPEC+ group, we struggle to see oil run into another April-styled collapse. What is abundantly clear, however, is that the recovery will not occur until the pandemic is either brought under control or a vaccine is made widely available.