Grains rally on weather worries and record Chinese demand

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Grain prices continue to surge higher with the Bloomberg Grains spot index, up 17% year-to-date and hitting the highest level since 2013. Strong speculative demand being supported by a combination of cold U.S. weather delaying planting and declining crop conditions in Brazil at a time of strong overseas demand. All developments that have left the market increasingly tight of 2020-21 season supplies


What is our trading focus?

CORNJUL21 - CBOT Corn (July)
SOYBEANSJUL21 - CBOT Soybeans (July)
WHEATJUL21 - CBOT Wheat (July)

____________________________________________________________________________________________________

Grain prices continue to surge higher with the Bloomberg Grains spot index, up 17% year-to-date and hitting the highest level since 2013. The rally has been led by edible oils and corn with the latter trading above $6 per bushel in Chicago for the first time since 2013. Soybeans trades at a seven-year high at $15 per bushel while wheat – following a setback in March – has surged higher to reach $6.8, also a seven-year high.

A combination of cold U.S. weather delaying planting while hurting the seeds already in the ground and declining crop conditions in Brazil at a time of strong overseas demand, especially from China, has left the market increasingly tight of 2020-21 season supplies.

The USDA’s Beijing office on Wednesday said China would import a record 28 million tons of corn during the current season in order to meet a shortage of supplies after China replenished is hog herds following the deadly African swine fewer outbreak. For the next season the USDA expects demand will drop to 15 million tons as China attempts to reduce its reliance on foreign grains while also recommending a reduction of corn and soymeal in animal feed.

With this in mind and considering the prospect for a bumper Northern Hemisphere crop this summer, lower new crop prices are expected later in the year. Hence the current steep backwardation between elevated old and lower new crop prices. Both old crop futures contracts of corn and soybeans currently trades close to 12% above the new crop contracts of November soybeans and December corn.

Source: Bloomberg

The market is overbought and while the fundamental outlook remains supportive, the market will increasingly be at risk of correction. Not least considering that current weather problems have occurred so early in the season with plenty of time left for the outlook to improve. Given the current strong momentum, especially in corn and to a lesser extent soybeans, money managers have maintained a near record long position since December. Especially in corn where the net long at 402k lots, a ten-year high, accounts for 75% of the net long being held in the three major crops.

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 is not intended to and does not change or expand on this. 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/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.