Spot cash markets remaining firm

Writers Posted 12/11/20
If you have had some wheat or barley to sell, well done and keep cashing in!

There is an old Indian proverb that says: “He who rides a tiger dare not get off.” This could equally apply to the ‘bull market’ I heralded last month. The bull needs to be fed to keep him going, and so far the ‘bull run’ has been mostly unchecked, with spot cash markets for all commodities remaining firmer than later positions, for which there has been little carry or indeed appetite for buying.

So, if you have had some wheat or barley to sell, well done and keep cashing in! China may have been where Covid-19 originated, but while we were busy locking down from its effects during the summer, the Chinese were engaged in a very astute marketing operation. It’s not quite up there with the Russian “sting” of the 1970s (when they bought half the USA maize crop, before revealing their own crop failure) but it may not be far short.

From the end of August, when their granaries were about empty, China began a programme of buying US maize and soya when maize was then at the bottom of the market. Since then they have been buying up to 750,000 metric tonnes per week. The U.S. Department of Agriculture (USDA) had forecast that China would need to import only seven million tonnes of maize this year, yet the trade thinks they have bought nearer 20 million tonnes! Likewise, on soya 15 million tonnes was their import estimate. They are now heading for 30 million tonnes.

Everyone kept saying that in the context of a world maize crop of 1.1 billion tonnes, this was insignificant, but recently the USDA reduced the estimated US crop by another seven million tonnes. There is also a rumour that the three billion bushels they are supposed to have in store has been over estimated and they only have half of it! As maize prices have risen, buyers switched to the cheaper Ukrainian origin but they haven’t had as good a harvest as expected and logistically they are struggling to supply export contracts.

Europe alone needs about 20 million tonnes of maize, and within that the UK needs three million. The imported price is now about £40 per tonne higher than it was in August, but with wheat at £180 and barley at £140, maize still calculates in feed rations. Because of GM issues and maybe a ‘Trump tax’ on exports, I cannot see much coming from America to the EU, so that leaves a huge responsibility on Brazil and Argentina, where the maize harvest is only just underway.

China hasn’t only been raiding America for maize. Because it’s fallen out with Australia, France is now supplying most feed and malting barley to China. They are also buying French wheat, which really cannot be the cheapest origin for them. But, all this has increased internal EU prices and pushed up the imported values for the UK. A month ago the trade was thinking that currency would dictate what we would have to pay for imported wheat. Now, though, the biggest factor is what price the exporter to the UK wants when they have other buyers closer at hand.

Despite its big wheat crop, 83 million tonnes up from 76 million, even Russia is having second thoughts about supplying all-comers with its cheap wheat. Alarm bells are ringing domestically, with big price increases prompting flour millers to request up to eight million tonnes of milling wheat be held in reserve. They are talking now about imposing export quotas. With the final solution being that the Russian government is now controlling the grain trade again, if President Putin says ‘nyet’ to any more wheat exports, no one will argue with that!

So that’s all the bullish stuff, but what about the bearish news, I hear you say! Well there are just the first hints of weakness, starting with the MATIF oilseeds and Chicago soya futures just off recent highs. China hasn’t bought any more soya for two weeks. What if they achieved what they set out to do and withdraw from buying soya and maize? Those markets would not sustain current levels. It’s interesting that China is in the middle of its latest five year strategy review covering food security, strategic reserves and energy, with a move away from reliance on coal and even securing stocks of metals, which is one reason why copper has increased in value recently. So perhaps this is all joined up after all?

As a final thought, I mentioned last month the activity of the largest world hedge funds liquidating equities and replacing them with commodity futures. They now have the biggest open long position ever recorded of maize futures. If President Trump is re-elected and stability returns to the stock markets those hedge funds may go into reverse and dump their futures, which could also bring maize down sharply. By the time you read this the 3 November election will have happened and you should know the answer. For now these are still very good prices to be wrong at, so keep on trading!

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