Sunday Scaries: What I'm Watching in the Grain Markets This Week

Sunday scaries started early this week with Putin announcing Saturday morning that Russia will no longer support the Black Sea grain corridor, removing itself from the agreement indefinitely. 

Russia is citing an early Saturday morning attack by a swarm of 16 drones on its Black Sea fleet stationed in Sevastopol, near Crimea as the reasoning behind its withdrawal, saying it can no longer use those assets to defend the corridor, therefore it cannot guarantee the safety of a civilian ship. For its part Ukraine denies the attack, saying Russia is trying to cover up its inability to handle its own weapons.

Though many traders had been penciling in the idea the corridor would be shut down after the completion of its first phase in late November, the official announcement Russia would cease participating felt like a shock to market watchers and government officials around the world.

While it is easy to feel an emotional reaction to the news, and assume the market will do the same, I feel it is important to look at the reality of the situation.

First let’s look at the knowns. As it stands currently, the grain corridor has provided movement for 9-10 mmt of grain that would have otherwise been stuck in storage. This falling short of the initial 20-25 mmt estimates, but providing corn, wheat, and other grains to countries around the world, with over half of it going to African and Asian nations.

The opening of the corridor in conjunction with road and rail routes into Europe modernized after the initial invasion upped Ukraine’s export capacity, pushing it to above pre-invasion levels even for a short time. The movement through the corridor however has slowed significantly recently, with Russia limiting the number of inspectors sent to Turkey, resulting in a line up of nearly 200 ships waiting to be cleared. 

The slow pace to shipments seen recently in addition to uncertainty around the future of the deal, had all but closed the corridor beyond the first part of November, with cash transactions limited.  

Ukrainian President Zelenskyy called Russia suspending its participation in the corridor predictable, saying grain movement had already been limited by Russia for the last several weeks. 

Russia for its part continues to play the role of the humanitarian victim, acting as though it had no choice, saying the UN failed to follow through on facilitating the Russian side of the agreement and that as a result of the closure it will provide 500,000 tonnes of grain to poor nations in the coming weeks for free. 

I’m watching how the situation unfolds throughout the week, as I feel this continues to be the only bargaining chip Russia has left. Every world leader is coming out condemning Russia, saying the move will increase starvation, indicating Russia needs to come back to the table to negotiate further facilitation of the deal.

Alexander Gabuev, a Senior Fellow with the Carnegie Endowment for International Peace and an expert in Russian politics, wrote a fantastic Twitter thread on the subject over the weekend, saying the recent shift in the momentum of the invasion makes this move unsurprising, as Putin knows the power a threat of a global food crisis has. 

Early analysis of the deal by a colleague of his indicated Russia has nearly $13 billion of wheat alone it needs to export in the coming months, with a back up of fertilizer worth billions tightening cash flow as well. Russia needs a roll back in the sanctions it claims are making it impossible to export these supplies, and this may be the best way they are able to make that happen.

The worry this week becomes whether Putin makes moves to destroy the export infrastructure in the Ukrainian ports in question as indicated by some Russian analysts. This type of move would be far more finite in nature and would likely change the future of grain flow out of both countries for the foreseeable future. 

In addition to watching what happens next in the Black Sea, I will be listening to what the Fed says more than watching what it does this week, as most everyone anticipates a 75-basis point benchmark rate hike. 

It feels that the recent cycle in the outside markets, and subsequently the dollar index, is the expectation of a Fed pivot grow louder the week and a half leading up to each Fed meeting, when members are no longer in the media spotlight and the absence of their constant hawkish rhetoric makes room for optimism. 

I will be looking to see what Powell says about the recent economic indicators showing signs of slowing demand, and whether he feels just the initial signs of a slowdown are enough to start talking about peak rates or if he and other members need to see more.

So many traders have grown accustomed to the Fed changing its tune at any sign of economic distress, making for an interesting market set up if Powell were to indicate no desire to slow rate hikes any time soon despite a recent increase in bearish economic data. 

With GDP coming in better than expected and the overall economy showing limited signs of slowing, I can’t help but feel Powell will only increase his rhetoric regarding the need to control inflation further, as the market seemingly remains unconvinced. 

If Powell does double down, I expect the dollar to move back towards the high side of its recent range, and outside markets to shift back to a more bearish tone. This in the past has weighed heavy on grains as fund buying tends to dry up, even if only for a short time. 

I will also of course be watching what happens in China as zero-Covid policies continue to impact demand and keep consumers wondering what will happen next. 

China has been an active buyer of US soybeans the last few weeks, covering a large share of its November and December needs. Shipments have been better than many expected even in the face of river issues, but the economics of soybean imports through year-end will likely limit additional US purchases as margins for Chinese crushers are deeply negative until new crop beans out of Brazil hit the pipeline. 

Overall, we’re likely to see a solid pop in values on news of Russia suspending the corridor, follow through to the high side though will depend on if Russia escalates the situation further and what the Fed has to say when it comes to the potential of a pivot. 

As always, don’t hesitate to reach out with any questions! Have a great week.

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