Head of Commodity Strategy
Summary: The grains sector, measured by the Bloomberg Grains Index, has reached a fresh 17-month high thereby continuing the strong rally that started back in August. The latest jolt higher was provided by the U.S. Department of Agriculture after it said that U.S. corn and soybean stockpiles at the end of the 2020-21 marketing year will fall to their smallest in seven years.
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CBOT Soybeans - SOYBEANSJAN21
CBOT Corn - CORNDEC20
CBOT Wheat - WHEATDEC20
AIGG:xlon - WisdomTree Grains ETC (UCITS eligible)
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The grains sector has reached a fresh 17-month high thereby continuing the strong rally that started back in August. The latest jolt higher was provided by the U.S. Department of Agriculture after it in a report said that U.S. corn and soybean stockpiles at the end of the 2020-21 marketing year will fall to their smallest in seven years.
Normally the November World Agriculture Supply and Demand report (WASDE) tends be a non-event given the amount of establish clarity with regards to the production and stocks. This year, however has been anything but normal due to adverse weather and accelerated buying from China.
The government report slashed its supply forecast for both soybeans and corn due to harvest downgrades, but also due to a surge in expectations for China’s grain-buying. For soybeans, the USDA cut its forecast for the end of season domestic inventories by 100 million bushels to 190 million, well below the forecast for 244 million. For corn, the forecast for U.S. ending stocks was slashed by 465 million bushels to 1.7 billion bushels, the lowest since 2013-14 and some 300 million bushels lower than expectations. This on a combination of a yield downgrade and a hike in U.S. exports expectations for this season to a record 2.65 billion bushels (67.3 million tons). Some of that due to reduced competition in international trade with an expected 8 million tons reduction in shipments from Ukraine after drought conditions across the country devastated the corn crop, the USDA said.
With regards to Chinese demand the USDA said the weakened expectations for Ukraine output come at a time when China’s grain import needs are soaring, thanks to the “strong recovery in the swine sector” from African swine fever losses, a revival “which has been driving feed demand higher”. The impact of the purchasing spree will be to lift China’s grain imports overall to a “record level in 2020-21 driven by demand for feedstuffs,” the USDA said.
Corn (ZCZ0) jumped 3.5% to $4.22/bu, a 15-month high while soybeans (ZSF1) settled 3.2% up at $11.46/bu, the highest in more than four years. This on the same day where the price of palm oil, the world’s most widely used vegetable oil, rose to an 8-year high on the Malaysian exchange.
The Bloomberg Agriculture Index has rallied by 23.3% during the second half, thereby outperforming the other commodity sectors. Leading from the front has been the grains sector which has risen by 25% led by the soybean complex followed by wheat.
Driven by tightening market conditions across the grain sector, the one-year roll yield has seen a dramatic shift during the past six months from contango to backwardation. This change in outlook has added fuel to the rally with speculators now receiving a positive carry for holding a long position. For years they suffered, not only from falling prices but also from a negative carry (contango) due to persistent oversupplied markets.
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