Surging grain prices add to inflation unease
Head of Commodity Strategy
Summary: The six-month long bull market in crops received a fresh boost yesterday after the World Agriculture Supply and Demand (WASDE) report from the U.S. government lowered the outlook from already reduced expectations. The combination of cuts to U.S. corn and soybeans production and estimates for more exports helped support prices with both crops along with wheat surging to fresh seven year highs
The six-month long bull market in crops received a fresh boost yesterday after the World Agriculture Supply and Demand (WASDE) report from the U.S. government lowered the outlook from already reduced expectations. The combination of cuts to U.S. corn and soybeans production and estimates for more exports helped support prices with both crops along with wheat surging to fresh seven year highs.
The US Department of Agriculture (USDA) pegged the 2020/21 domestic soybean ending stocks outlook at 140 million bushels, down 77% from the 610 million bushels projected in August, and corn ending stocks at 1.552 billion bushels, lowest since 2013 and down more than 50% since the June projection. The USDA also lowered its forecast for upcoming harvests in key export countries Brazil and Argentina while highlighting the risk to supplies after countries such as Russia (wheat) and Argentina (corn) have or are considering to introduce measures to limit exports in order to preserve domestic supplies to keep a lid on prices.
The rally in agriculture commodities led by grains and oil seeds has to a certain extent occurred while the focus has been elsewhere. But the continued surge which has seen the Bloomberg Agriculture Index rise by close to 45% during the past six months has started to bring back worries about the impact on economies and inflation.
In recent updates we have been highlighting several supporting factors that are likely to see commodities continue higher in 2021. What is different this time, compared with previous and more short-lived rallies during the past decade, is that all three sectors of energy, metals and agriculture are all moving higher. Driven by a tighter supply outlook, a vaccine-led recovery in global demand and the prospect for a weaker dollar and increased demand for hedges to protect against rising inflation.
The 12-month roll-yield for holding a basket of 25 major commodities (ex. natural gas) has turned positive for the first time since 2014. Thereby supporting a continued inflow of funds betting that the sector will continue to thrive as inflows to value, cyclical and reflation investing strategies continue. As per the chart the big change in roll yields have so primarily been seen across the grains sector.
The catch-22 of these developments is the feedback loop of rising prices attracting an even higher amount of speculative buying, both from a momentum and reflation perspective. A development that is likely to create a period of elevated volatility as several commodities given the strong buildup in speculative positions, could be left exposed should the technical and/or fundamental outlook change. According to the weekly Commitments of Traders report, speculators entered 2021 with a record net-long position across agriculture commodities.
The total net long across 13 major agriculture commodities reached 1.2 million lots in the week to January 5, representing a nominal value of $41.5 billion. Biggest exposure was held across the soybean complex with 373k lots, followed by corn’s 350k lots and sugar at 229k lots.
There are several ETF’s that tracks the agriculture sector. An example being the WisdomTree Agriculture, a UCITS eligible ETC that is designed to track the Bloomberg Agriculture Subindex. After reaching a record low in June it has since rallied by 47% to a near three-year high.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.