Grain market pops on big Q3 stock drop Grain market pops on big Q3 stock drop Grain market pops on big Q3 stock drop

Grain market pops on big Q3 stock drop

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  The grain sector finished September and the third quarter with a bang after all three major crops rallied strongly on Wednesday. Overall it was a strong quarter for agriculture commodities in general with gains seen across all three sub sectors of grains, softs and livestock. Signs are that the trend will continue thereby supporting Central Banks desire for higher inflation, unfortunately in this case, the worst kind of inflation


What is our trading focus?

CBOT Soybeans - SOYBEANSNOV20
CBOT Corn - CORNDEC20
CBOT Wheat - WHEATDEC20
AIGA:xlon - WisdomTree Agriculture ETC (UCITS eligible)

____________________________________________________________________________________________________

The grain sector finished September and the third quarter with a bang after all three major crops rallying strongly on Wednesday. This after U.S. Department of Agriculture stockpiles data showed corn, soy and wheat inventories all trailing the average estimates from analysts. As a result the Bloomberg Grains index finished the quarter up 12.3% to record its best quarter in more than five years.

Overall 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 Nina event will continue to support the sector over the coming months.

Thereby providing support to Central Banks desire for higher inflation, in this case unfortunately, the worst kind of inflation as it hurt consumers, especially in emerging market economies, that can least afford it.

A potential break on the current rally could either be another leg higher in the dollar which reduces overseas demand for U.S. farm products and/or the risk that China may pause its buying in response to the recent rally in both corn and soybeans.

Source: Saxo Group

As mentioned the quarterly stock report blindsided the market in showing a bigger than expected decline in stocks for all three crops at the end of last quarter. 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. Adding to this 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.

Bulging stocks from a continued rise in production in recent years helped keep the forward curves in a state of contango where the spot futures contract traded lower than the next. It meant that passive long only investors were facing headwinds from negative roll yields.

The rally during the past quarter across the whole agriculture sector have flattened the forward curves and sharply reduced the mentioned headwind. The average one-year roll cost using Bloomberg Commodity subindexes of 11 major food commodities has returned to zero for the first time since 2014

Source: Saxo Group

While supply and demand differences will always be the ultimate determining driver for prices, the removal of the contango headwind may potentially now also attract increased investment demand. ETF’s that are designed to track the performance of a basket of agriculture commodity futures are showing signs of breaking the downtrends which for most was established close to ten years ago.

An example being the WisdomTree Agriculture ETC (Ticker: AIGA:xlon and UCITS eligible) which is designed to track the Bloomberg Agriculture Subindex Total Return Index of nine major agriculture commodities. As per the chart, the recent rally has triggered a breakout with the next area of interest being $4.1, the January high

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.