Head of Commodity Strategy
Summary: The grain and soybean sectors have started June with strong gains, led by growing concerns that a current dry spell across Northern Europe, the Black Sea region, and parts of the US may negatively impact this year's crop production. Still down by more than 20% on the year, wheat has led from the front with Paris and Chicago wheat both jumping by around 6% during the past six trading sessions.
Today's Saxo Market Call podcast
After weeks and in some cases months of price weakness, the grain and soybean sectors have started June with strong gains, led by growing concerns that a current dry spell across Northern Europe, the Black Sea region, and parts of the US may negatively impact this year's crop production. Still down by more than 20% on the year, wheat has led from the front with Paris and Chicago wheat both jumping by around 6% during the past six trading sessions.
Lack of rain is also hurting spring wheat in Russia, the world’s top exporter following last year’s bumper harvest, while planting of winter wheat in Argentina is facing some challenges. In addition, the fighting between Russia and Ukraine has led to the destruction of a giant dam raising fresh fears about Black Sea supplies from the war-torn area.
Meanwhile in the US, the world’s biggest corn grower has seen key areas getting worryingly dry. US corn rated in good to excellent conditions dropped to 64% as of last Sunday from 69% a week earlier. Number two growing state Illinois saw a 19-point drop while surrounding states in the eastern belt also saw declines following a very dry period.
Asia looks set to be in for some punishingly hot weather in the coming months if forecasts for a returning El Ninõ prove to be correct. The anticipation of this weather phenomenon starting to be felt from around July has already seen the Australian government cut its wheat production forecast for the coming season by about a third. Hot and dry weather across Asia has already up until recently been giving sugar and Robusta coffee a boost while adverse weather in Florida has seen the price of frozen orange juice concentrate hit a record high amid outlook for the smallest crop in 60 years.
Overall, these across-the-world developments highlight the continued risk of changing weather conditions leading to much more volatility growing conditions. While there is still time left to correct the current dry weather impact, the window is closing with heavy rain needed within the coming weeks in order to avoid further price supportive downgrades to this year’s crop production.
On Friday, the US Department of Agriculture will publish its monthly World Agricultural Supply and Demand estimates (WASDE) and the market will be looking out for any revision to US production, ending stocks as well production estimates from South America. Analysts see US corn ending stocks a little higher to 2.25 billion bushels from 2.22 billion last month while the US wheat production is expected to show a small upgrade to 1.67 billion bushels from 1.66 in May. South American data will continue to focus on the hot weather damage to corn and soybeans production in Argentina with surveys pointing to further downgrades, in corn by 3.8% compared with May while soybeans is seen 8.5% lower.
Money managers which include leveraged traders such as hedge funds and trend-following CTA’s remain key actors in the grain market, and on a weekly basis the US CFTC through its Commitment of Traders Report give insight to the positioning among this group of traders. Instead of causing them, this group tend to anticipate, accelerate and amplify price changes that has been set in motion by fundamentals. Being followers of momentum, this strategy more often than not sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
The latest COT report covering the week to May 30 saw major short covering in corn, and after recently hitting a 118,000-contract short, the biggest since August 2020, it was reduced to 51,000 contracts during the latest reporting week. A net short has been held in CBOT wheat since last July, and last week it reached a five-year high 127,000 contracts, an elevated exposure that was only partly offset by a 10,000-contract net long in the Kansas HRW wheat contract. Soybeans meanwhile has seen its position being cut to neutral for the first time in three years amid exporters struggling to compete with those from South American.
Overall, the net position across the three major crops was a net short of 178,000 contracts, some 627,000 contracts below the level seen this time last year, and 329,000 below the five-year average for this time of year. Developments which highlight the potential upside risk to positioning should the technical and/or fundamental outlook turn more price supportive.
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