Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Weather concerns aggravate grain and softs spike
Ole Hansen
Head of Commodity Strategy
Summary: Grain and soft commodities remain on fire as the immediate supply outlook continues to tighten on a combination of drought in Brazil, cold weather slowing the planting progress in the U.S. and surging overseas demand, especially from China. All three major crops of corn, wheat and soybeans have reached eight-year highs while coffee and sugar have both rallied strongly. The incredible 67 percent year-on-year gain in the Bloomberg Agriculture Index increasingly pointing to a bigger than previously expected impact on global consumer prices.
What is our trading focus?
CORNJUL21 - CBOT Corn (July)
SOYBEANSJUL21 - CBOT Soybeans (July)
WHEATJUL21 - CBOT Wheat (July)
COFFEEJUL21 - Arabica Coffee (July)
SUGARNYJUL21 - Raw Sugar #11 (July)
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Grain and soft commodities remain on fire as the immediate supply outlook continues to tighten on a combination of drought in Brazil, cold weather slowing the planting progress in the U.S. and surging overseas demand, especially from China. The Bloomberg Grains and softs indices have both already jumped by more than 15% this month while the incredible year-on-year gains increasingly point to a bigger than previously expected impact on global consumer prices.
The immediate concerns relate mostly to Brazil where expectations for limited rainfall during the next 6 to 10 day period continues to support dryness concerns across most of the regions, thereby impacting the yield prospects for soon to be harvested corn, coffee and sugar.
Corn traded limit up for most of the day yesterday and has continued higher today to reach $6.84 per bushel. After spending eight years rebounding back above $6 per bushel, the front month contracts of May and July have already set their sights on $7 per bushel. Soybeans rose for a 10th straight session, also touching the highest level in almost eight years. Another eight year high was also reached in CBOT Wheat which by now has rallied by more than 25% this month to trade close to $7.7 per bushel. Dry weather concerns in the key growing regions in the U.S., Canada and France, as well as the pull from corn driving rising feed substitution demand, have all dramatically change the price action from what we have seen during the past five years.
Using Bloomberg Commodity Spot indices, the year-on-year gain across the whole agriculture sector has reached 67% with the grains sector currently trading higher by 70%. Adding these gains to already elevated fuel prices and surging industrial metals, it raise questions about central bankers commonly shared view, that rising consumer prices will be transitory and as such should not be a major concern.
While the near month contracts are pricing in a tightening market due to strong demand and dwindling output from Brazil, the new crop months, i.e. those that reflects market conditions following the northern hemisphere harvest are still pricing in softer prices this autumn. December corn currently trades 19% below the soon to expire May contract while the November soybean contract trades 13% below the May contract.
Whether these lower prices can be achieved all depends on weather developments during the coming months. To assist traders in determining the outlook they will be watching data on exports as China attempts to reduce its reliance on foreign grains while also seeking to reduce the amount of corn and soymeal in animal feed. In addition, weekly planting progress reports, published on Mondays and later into the summer months, the weekly crop condition report will be watched closely.
How speculators respond to these developments over the coming weeks and months could have a significant impact on prices. Overall speculators have during the past six months maintained an almost unchanged but near record exposure in corn, soybean and wheat futures between 540k and 560k lots, representing a nominal value of close to $25 billion. In the latest reporting week to April 20, bullish corn bets saw a small reduction from a ten-year high, the wheat position flipped back to a net long while soybeans saw the biggest one week jump in net longs since September.
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