The grains market has moved this year from handling an unprecedented worldwide pandemic to dealing with a war involving two of the planet’s biggest exporting nations. At the same time, as always, the fundamentals of supply and demand continue to exert their influence.
Speaking on the virtual platform Zoom to journalists on Oct. 3, Arnaud Petit, executive director of the International Grains Council (IGC), explained that “the crisis in the Black Sea region is reverberating differently on the grains markets.”
“When we talk about the crisis in the Black Sea … on rice, wheat, on maize, we have a different situation, mainly because the fundamentals are different,” he said. “We have this opportunity maybe in maize and soybeans for the harvest in South America to alleviate the pressure on those markets.”
Petit stressed the important role that is being played by the exchange rate movement, with the dollar assuming its longstanding safe-haven status against the background of the war and rising sharply.
“That is the main development we have seen from July, and which might have an impact on the demand side in terms of rationalization of the demand side for net importer countries,” he said. “We are not necessarily looking for a very positive trend of trade, bearing in mind … uncertainty, both economic and demand, and in that way political decisions which can be taken by one country, and another might change the forecast quickly in terms of trade.”
He pointed out that some net importers respond to supply uncertainty by “moving from a strategy of just in time to just in case.” As well, importers were “even looking for not necessarily the cheapest origin but trying to diversify, which might also develop a new trade trend,” he noted.
Alexander Karavaytsev, the senior economist with the IGC, pointed to “geopolitical tensions in the Black Sea and some macroeconomic factors, which, (along with) fear of impending recession, have been pressuring markets in recent months.” But he explained that “before that, in late May, we saw prices that were their highest level in at least 22 years,” a range of dates that goes back to the point at which the IGC started compiling its index of grains quotations.
“That was mainly due to escalating tensions in the Black Sea,” Karavaytsev said.
“Since late May we have seen some decline,” he added, with the proviso that they are still “at a relatively elevated level.”
“Looking specifically at the wheat market, prices have declined since May,” he said. “If we look at the key exporters, the spread has been widening.”
“The general decline in the market has been linked to some seasonal pressure because harvests have been advancing in the Northern Hemisphere,” he said, particularly noting rising estimates for Russian production, although it is “very difficult to see how much that origin can export.”
The resumption of shipments from Ukraine’s Black Sea ports, under the UN-brokered Black Sea Grain Initiative, “has also pressured markets, but that was more a psychological effect rather than a real effect on fundamentals because in the initial weeks we have seen those shipments mainly focused on maize, but we now see wheat shipments rise as the harvest has been complete.”
Improving conditions for planting in the Northern Hemisphere besides parts of the United States and Canada, along with the surging dollar added to the downward pressure, although the IGC expert pointed out that uncertainty over the future of exports from the Black Sea has triggered a recent upturn.
Russian President Vladimir Putin called the deal into question in a speech in September. The Russian leader repeatedly has attempted to blame food shortages on western sanctions, rather than on Russia’s invasion of Ukraine, something that the EU, in particular, rejects vehemently.
Karavaytsev also highlighted downward impetus on prices from excellent Australian grains production prospects.
Impact of strengthening dollar
Rises in the dollar value, more pronounced against some currencies than others, have wiped out declines for certain countries.
“Turkey, Sri Lanka and Ghana at the top of the list have depreciated very sharply,” he explained, discussing a slide showing the biggest currency falls year on year. “That has been adding to prices since May 2021.”
He pointed out that the US dollar index is trading at around a 20-year high. For Ghana, that meant prices in local currency went up by around 70%. Overall, the effect of a dollar increase of 30% was an 8% rise in the wheat price index.
“It influences all the markets,” he said. “It is not only about supply and yield of supply and flat dollar prices, but also about the dollar.”
The IGC’s latest forecast, at the time of this writing in mid-October, is for 2022-23 wheat production at 792 million tonnes, a year-on-year rise of 1.3% and a record, based on a record average yield of 3.5 tonnes hectare. Trade is expected to be down by 2% at 192.8 million tonnes.
Tighter maize situation
Looking at maize prices, Miriam Morath, an economic analyst with the IGC, identified tightening supply and demand, and uncertainty surrounding grain export flows from the Black Sea, as well as bearish global fundamentals as key drivers.
Prices had declined from earlier record levels, “but nonetheless they remain higher than a year ago and also much higher than the five-year average,” she said.
Maize output is expected to be down 4% in 2022-23, at 1.168 billion tonnes, but despite the sharp fall the crop would still be the second largest on record, while Morath pointed out that lower feed use will lead to a 2% drop in demand, “but it could nonetheless be the second highest year on record,” she said. “The impact of high energy costs and inflation on not only consumers but also livestock producers remain uncertain.”
She also said that further tightening of the balance sheet is expected to happen as inventories drop to their lowest levels since 2012-13.
“This includes a large figure in Ukraine at the moment,” she said. In its September Grain Market Report, the IGC put cumulative carryovers in the major exporters — Argentina, Brazil, Ukraine, United States — are placed at “a smaller-than-average 50 million tonnes (down 10%), which includes a notional 8.9 million (up 30%) in Ukraine.”
A contraction in world trade, expected down 4% to 172.3 million tonnes, “is mainly due to China,” Morath said, pointing out that the country’s economy was hit by COVID restrictions kept in place for much longer than elsewhere, and that despite the Black Sea trade initiative, supplies from Ukraine were less available.
The IGC forecasts a 16% year-on-year reduction in Chinese imports of maize, to 19 million tonnes.
“The EU is the key actor,” she said, noting that if shipments are as forecast, the EU, with imports now forecast at 20.5 million tonnes, compared to the previous year’s 17.8 million, will be the largest importer in 2022-23.
As for maize, barley prices are coming down, she said, noting that the “key buyers, China and Saudi Arabia, are not coming back into the market.” Because of the tightness in the maize market, she expected some barley in the EU to be shifted into feed use. Russia has had a good crop, but there is uncertainty over the export potential, while Ukraine’s exports had lacked the previous year’s pace.
World barley production in 2022-23 is forecast at 148.8 million tonnes, up 2% on the year, but just below the five-year average. Consumption during the year is seen fractionally up at 149.9 million tonnes, with the trade forecast down 4% at 30.8 million.
Diana Sarungbam, market analyst with the IGC, noted a forecast significant decline in US sorghum production, expected to lead to a 2.9% drop in the total crop, to 60 million tonnes.
“Globally for sorghum, feed use could decline,” she said, but forecast that use for food, mainly in sub-Saharan Africa would rise. Food use of sorghum is forecast 9.9% higher at 31.1 million tonnes, while that for feed is seen down 1.8% at 23.7 million. Trade in sorghum is expected to fall 20% year-on-year to 9.8 million tonnes.
Bigger oilseed crops expected
Darren Cooper, senior economist with the IGC, covered soybeans and oilseeds. He started by explaining that in December 2021, when it was clear there were going to be production problems in South America, mainly Brazil, there was “a degree of panic in the market.” However, although the market remained volatile, the US crop, which is “going to be a good one,” helped push prices lower, while, “as more supplies are getting out of Ukraine — that’s had a particularly bearish effect on oilseeds.”The IGC is forecasting a recovery in the soybean crop in 2022-23 by 9.8%, giving total output of 387 million tonnes. Trade is expected to increase by around 10 million tonnes, to 165.4 million, just short of the 2019-20 record. Rapeseed output is expected to rise by 11.9% in 2022-23, reaching 82.3 million tonnes, while trade in the crop is forecast at 17.7 million tonnes, up from 14.6 million the year before. The world’s sunflower seed crop is forecast at 9.8 million tonnes, compared to 11 million in 2021-22. The main driver is a sharp fall, from 16.4 million tonnes in 2021-22 to 10.5 million in 2022-23, with rises elsewhere not enough to compensate.