Tightening supply keeps grain sector supported

Commodities 5 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary:  The agricultural sector has continued to build on the strong gains seen during Q3 when the Bloomberg Agriculture Index recorded its best quarter since Q2 2016. The grains sector in particular was, and continues to be, the sector which is driving these strong gains. This past week the price of wheat reached a five year high above $6/bu while soybeans continued to find buyers above $10/bu


What is our trading focus?

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

____________________________________________________________________________________________________

The agricultural sector has continued to build on the strong gains seen during Q3 when the Bloomberg Agriculture Index recorded its best quarter since Q2 2016. The grains sector in particular was, and continues to be, the sector which is driving these strong gains. An unexpected decline in U.S. inventories, strong U.S. export demand from China, dryness in key growing areas together with growing concerns over La Nina are all potential strong forces that may support a sector that has already rallied by close to 15 percent during the second half of 2020.

This week, the price of Chicago Wheat raced past $6/bushel to reach the highest levels since December 2014, before seeing some profit taking ahead of a global supply and demand report from the U.S. Department of Agriculture on Friday. The latest rally has been backed by Russia and U.S. dryness worries, at a critical time as it challenges the establishment of the winter wheat crop. Bloomberg reports that in eastern Ukraine, some areas have been the driest on record since mid-July, while in Russia some regions are the most arid in three decades.

Soybeans, meanwhile, continue to find fresh buying interest with the price of the current front month contract reaching $10.65/bushel, the highest since 2018. On top of continued strong buying interest from China, the planting progress in South America has also been hampered by dry conditions across Brazil and Argentina. In Brazil, a bumper export program to China has reduced supplies while farmers have been hoarding stocks as a dollar-linked hedge against a weakening peso.

Source: Bloomberg & Saxo Group

The result of these developments across the grain market can be seen in the weekly COT report, released on Fridays covering the week ending the previous Tuesday. In the latest reporting week to September 29, the combined net-long speculative position in U.S. based grain and soy futures reached 533,000 lots (one lot equals 5000 bushels), very close to the previous two peaks in March 2018 and June 2016.

The total net-long in soybeans, oil and meal reached a record 396,000 lots or 74 percent of the total sector long, while corn at 107,000 lots took up 20 percent. That left just 6 percent or 30,000 lots of the total exposure in the Kansas and Chicago wheat contracts. While soybeans will need continued fundamental and technical support to sustain a speculative position this elevated, wheat is a different story with plenty of room before reaching the February high at 79,000 lots or the August 2018 record of 130,000 lots.

Source: CFTC, Bloomberg & Saxo Group

The risk of food price inflation emerging again following years of stable to lower prices was highlighted in the United Nations FAO’s latest update on food prices for September. The FAO Food Price Index which tracks the change in international prices of a basket of 95 food commodities rose by 2.1% to the highest since February 2020. The year-on-year rise reached 5 percent with firming in prices of vegetables oils and cereals being the main driver. Not all sectors rose with those of sugar and meat retreating from their August levels.

In a separate cereal supply and demand brief they did however say that: "Global cereal markets are expected to remain adequately supplied in 2020/21 despite this month’s downward revisions to production and inventories. With trade in cereals seen expanding in 2020/21, global cereal markets continue to demonstrate their resilience amidst the challenges and uncertainty caused by COVID-19."

Source: UN FAO & Saxo Group

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. This meant that long-only investors were facing headwinds from negative roll yields.

The rally during the past quarter across the whole agriculture sector has flattened the forward curves and sharply reduced the mentioned headwind. The grains sector in particular has seen its average one-year roll move from a contango, averaging -5 to -10 percent since 2016, to backwardation for the first time since 2014 (see insert in chart below).

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 commodities are showing signs of breaking the downtrends which for most was established close to ten years ago.

An example being the WisdomTree Grains ETC (Ticker: AIGG:xlon and UCITS eligible) which is designed to track the Bloomberg Grains Subindex Total Return Index. As per the chart, the recent rally has triggered a breakout with the price currently trading around $3, an area that has provided support and resistance on a few occasions since 2018.

Source: Saxo Group
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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.