Head of Commodity Strategy
Summary: The agriculture sector remains bid with the latest extension being led by surging wheat prices after the introduction of a Russian export tax in order to curb a rise in domestic food prices triggered by the Covid-19 crisis. In 2011 surging wheat prices helped trigger social, political and economic upheavals around the world but most noticeable in North Africa. The rally highlights another tragic development caused by the Covid-19 pandemic as it impacts those who can least afford it.
The six-month bull market in crops continue with sugar, corn and not least wheat being the latest markets receiving a strong bid. Overall the Bloomberg Agriculture Index has already risen by 6% this year thereby contributing to the 43% gains seen during the past six months.
Recently the grain market has received most of the attention. First corn which following the latest WASDE report leapt higher after the US government cut its supply forecasts by more than investors had expected to a seven-year low.
Adding to the general strong sentiment has been the latest moves from Russia, the world’s largest wheat exporter, to reduce shipments in order to curb a rise in domestic food prices triggered by the Covid-19 crisis. After announcing a €25/t tax on wheat exports from mid-February to June they went one further by raising it to €50/t from March with the added risk of being extended beyond June.
Wheat prices on both sides of the Atlantic has rallied strongly with CBOT wheat (WHEATMAR21) at $6.88/bu and Milling wheat in Paris (EBMH1) both trading close to eight year highs. Looking at the Milling wheat chart below, the market may unfortunately soon start to worry about the potential political and social implications of a continued rally.
Russia has a history of disrupting the wheat market through restrictions or taxes. The last time it happened was in 2010 after drought destroyed crops. The move caused wheat futures to spike higher and some researchers saw it as an indirect contributor to the Arab Spring uprisings. Having rallied 12.5% so far this month, Milling wheat only trades 14% below the 2011 peak.
In the week to January 12, the speculative net-long held by money managers across 14 major agriculture futures contracts stood at 1.2 million lots, representing a nominal value of $41 billion. The grain and soybean sector accounted for the bulk while the three biggest individual positions being held in corn (375k lots), sugar (220k) and 166k lots.
The number of lots held in on-the-move Chicago wheat only stood at 17k lots, well below the recent peak at 65k lots. Kansas or Hard Red Winter (HRW) wheat which is a high protein variety used in food production has seen elevated speculative interest with the net at 55k lots being close to a 2 ½-year high.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
