If you would have told me when I was writing last week’s column that soybeans would finish the week the gain leader, I would have probably thought you were joking, but alas here we are. After a week of big headlines, we saw corn finish unchanged, wheat finish 18 better, with soybeans up 63.
While wheat and corn started hot on Sunday night’s open after Russia had pulled out of the corridor last Saturday. The fact that ships kept on shipping and that Russia re-entered the agreement by Wednesday took much of the wind out of that bullish headline’s sails.
What really got traders excited late in the week last week was the idea China was on the brink of reopening—even in the face of an epic spike in cases and increased lockdowns. Like hopes of a soon to come Fed pivot, the idea that China will rollback a slew of Covid restrictions, opening its borders to foreigners and sending its citizens out in public to spend money, helped turn around what had been an historical rout in both China’s stock indices and its currency.
Unverified social media reports bolstered the recovery, propping up crude, soybeans and most commodities in general. However, over the weekend a much-anticipated Saturday afternoon press conference did not deliver the news many were hoping for. Instead of indications of rollbacks in foreign flight rules and quarantine times, the official from China’s National Health Commission said the current Covid measures are the most economical and effective for the country.
With Covid cases spiking to their highest since early May, reports of a potential more contagious strain found in Inner Mongolia and Guangzhou officials saying they’re facing the most complex and severe outbreak in 3 years, it is likely the market will soon realize a sharp turn around in government policy will remain elusive. In fact, Goldman Sachs feels any actual major change in Chinese policy towards Covid is unlikely to come until sometime in the second quarter of 2023.
How China continues to approach Covid will have huge implications on potential demand going forward, likely meaning more headline risk in the weeks ahead.
Speaking of Chinese demand, China’s government approved 136 different Brazilian entities for corn imports into the country. This approval is likely to open the door for big Brazilian imports to help cover the estimated 15 mmt or so left of corn China is expected to import this year. If realized this would be a major reduction in demand for China’s traditional corn suppliers, though traditional would be a stretch as China’s corn imports were relatively mundane until late 2020.
China’s corn purchases from the US are currently down over 70% from last year, a drop of nearly 10 mmt (394 million bushels). We will be watching to see how much of that remaining demand Brazil gets but with current offers a dollar or more less than US values, it is likely to be the bulk of it.
In addition to hopes of a Chinese pivot towards Covid rules getting dashed over the weekend, I will be watching how the market handles its hopes of a soon to come Fed pivot getting dashed as well. Fed Chair Jerome Powell confirmed the central bank's much anticipated 75 basis point increase last Wednesday, providing some signs of relief by indicating upcoming increases would likely be smaller, with a break in hikes coming soon.
The relief was short lived however, when Powell doubled down saying their peak rate target is likely going to be higher, with rates remaining elevated for much longer.
Friday morning’s jobs data showed continued job growth, with openings coming in higher than expected. We will get updated CPI data on Thursday of this week, with a significant amount of importance placed on whether we are seeing signs the Fed rate increases are doing anything to reduce prices. Traders are anticipating overall CPI data to show costs are up 7.9% year over year, with expectations of continued increases in core inflation data showing Fed moves so far have had a muted impact.
The government will also update its monthly supply and demand forecast on Wednesday. Ahead of the report, traders are expecting slight reductions in domestic wheat carryout, a slight bump in corn carryout, with a slight increase in bean carryout as well. Global ending stocks are expected to be reduced across the board.
This report is important as it is the last real update to production until January. There has been some talk recently that we could see the USDA bump corn yields slightly with more objective data compiled since the last report. We have seen a handful of private analysts up their estimates recently, with reports of better than expected yields in the Eastern Corn Belt and across Illinois especially.
In addition to all things mentioned here so far, I will of course be watching the election results on Tuesday. While Tuesday’s results will have a limited impact on agricultural markets directly, they could have an impact on the writing on the next Farm Bill, thus bear watching.
Speaking of elections, Brazil’s election results putting Lula back into office spurred great discontent across rural regions of the country, with hundreds of roadblocks reported at one point last week. The blockades prompted concern Brazilian exports would be impacted, though with much of the country’s crop already been moved and it being planting season the overall impact so far has been muted.
Bolsonaro came out late Wednesday asking his supporters to remove the blockades, helping to reduce the areas impacted and unblocking access to ports. Protests are continuing, though with Bolsonaro cooperating in the transition of government power, they seem to be lacking a prominent leader.
Headline risk remains real in this market, with worries that many of the most bullish headlines are baked in. Russia and Ukraine will continue to negotiate the extension of the Black Sea corridor agreement beyond the 19th of November, with the back and forth of negotiations likely keeping things volatile.
There are reports Russia has made pointed requests on the rollback of sanctions for one specific bank, saying doing so will help them better facilitate exports. The UN has joined Russia in its request that Western sanctions not work to inhibit fertilizer exports as well, saying the world needs access to Russia’s full export capacity. The corridor remains Russia’s last true bargaining chip when it comes to increasing its cash flow as sanctions are reportedly starting to bite. I’m waiting to see if Russia can get some of the guarantees they’ve been asking for in writing, thus guaranteeing the continuation of the corridor, even if for a short time.
The week ahead is guaranteed to be loaded with geopolitical, global economic and fundamental grain news, keeping the markets exciting, good luck and happy trading!
More Grain News from Barchart
- Wheat Futures Gain on Friday
- Soy Futures Rally into Weekend
- Corn Closes Net Stronger
- NY Cocoa Prices Rally on Dollar Weakness
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