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Grain rally curbed on weather outlook and speculative retreat
Ole Hansen
Head of Commodity Strategy
Summary: The grain market rallies this past month are showing signs of pausing as weather developments in some key growing are turning less hostile with rain finally beginning to ease yet elevated concerns about this year's production outlook. In addition, we are seeing reduced pressure from speculators, who following a three-week period of aggressive buying have managed to turn positions around to reflect the current outlook.
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The grain market rallies this past month are showing signs of pausing as weather developments in some key growing are turning less hostile with rain finally beginning to ease yet elevated concerns about this year's production outlook. In addition, we are seeing reduced pressure from speculators, who following a three-week period of aggressive buying have managed to turn positions around to reflect the current outlook.
The Bloomberg Commodity Grains Total Return Index which holds futures positions in soybeans (35.4%), corn (34.6%) as well as CBT and KCB wheat (30%) trades up around 15% so far this month and close to unchanged on the year. Despite some emerging profit taking which has seen top to bottom corrections between 6% and 8%, the gains this month are still notable, led by CBT wheat (+17%) with soybeans up 13% and corn 10%.
As mentioned, the rally has been driven by the prevailing hot and dry weather conditions in crucial agricultural regions, which have raised concerns about this year's crop production levels. These developments have spurred a significant amount of speculative buying, although the pace seems to have moderated recently due to weekend rains in the Midwest and forecasts of more precipitation in the coming days, which have provided some relief for crops.
Nonetheless, drought conditions persist, and their impact can be tracked through the weekly crop condition report released by the USDA (United States Department of Agriculture) on Mondays. In the latest report, both corn and soybeans received their lowest ratings since 1988, with 50% of corn and soybeans being rated as good/excellent, while wheat saw a small improvement to 50%. These statistics underscore the urgent need for rainfall to alleviate further upward pressure on prices.
In this recent update from our equity strategist, Peter Garnry, he writes that agribusiness stocks are among the best performing segments of the equity market in June, up 6.3% compared to just 2.5% for global equities. The combination of stable to higher crop prices and the focus on initiatives to support production despite increased weather volatility is likely to drive more price supportive mergers and acquisitions across the sector in the coming years.
The iShares Agribusiness UCITS ETF holds exposure across 69 companies which tracks the S&P Commodity Producers Agribusiness Index. It is designed to track companies involved with production, distribution and processing as well as supplying equipment and materials. All companies that are needed to improve global access to food resources.
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