Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Grains rally on weather worries and record Chinese demand
Ole Hansen
Head of Commodity Strategy
Summary: Grain prices continue to surge higher with the Bloomberg Grains spot index, up 17% year-to-date and hitting the highest level since 2013. Strong speculative demand being supported by a combination of cold U.S. weather delaying planting and declining crop conditions in Brazil at a time of strong overseas demand. All developments that have left the market increasingly tight of 2020-21 season supplies
What is our trading focus?
CORNJUL21 - CBOT Corn (July)
SOYBEANSJUL21 - CBOT Soybeans (July)
WHEATJUL21 - CBOT Wheat (July)
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Grain prices continue to surge higher with the Bloomberg Grains spot index, up 17% year-to-date and hitting the highest level since 2013. The rally has been led by edible oils and corn with the latter trading above $6 per bushel in Chicago for the first time since 2013. Soybeans trades at a seven-year high at $15 per bushel while wheat – following a setback in March – has surged higher to reach $6.8, also a seven-year high.
A combination of cold U.S. weather delaying planting while hurting the seeds already in the ground and declining crop conditions in Brazil at a time of strong overseas demand, especially from China, has left the market increasingly tight of 2020-21 season supplies.
The USDA’s Beijing office on Wednesday said China would import a record 28 million tons of corn during the current season in order to meet a shortage of supplies after China replenished is hog herds following the deadly African swine fewer outbreak. For the next season the USDA expects demand will drop to 15 million tons as China attempts to reduce its reliance on foreign grains while also recommending a reduction of corn and soymeal in animal feed.
With this in mind and considering the prospect for a bumper Northern Hemisphere crop this summer, lower new crop prices are expected later in the year. Hence the current steep backwardation between elevated old and lower new crop prices. Both old crop futures contracts of corn and soybeans currently trades close to 12% above the new crop contracts of November soybeans and December corn.
The market is overbought and while the fundamental outlook remains supportive, the market will increasingly be at risk of correction. Not least considering that current weather problems have occurred so early in the season with plenty of time left for the outlook to improve. Given the current strong momentum, especially in corn and to a lesser extent soybeans, money managers have maintained a near record long position since December. Especially in corn where the net long at 402k lots, a ten-year high, accounts for 75% of the net long being held in the three major crops.
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