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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Wheat conditions supports elevated prices
Ole Hansen
Head of Commodity Strategy
Summary: Global food price inflation remains a key concern with supplies of many key food items becoming increasingly tight. Driven by a combination of weather worries and the war in Ukraine, the latter being the main reason why wheat and edible oils have led the rally. While speculation may have reached a peak based on historic developments, the market desperately needs improved weather in Europe and North America as well as an end to hostilities in Ukraine.
Global food price inflation remains a key concern with supplies of many key food items becoming increasingly tight. Driven by a combination of weather worries and the war in Ukraine, it is raising concerns for lower supplies ahead of the coming northern hemisphere winter.
The table below shows where the pain is currently being felt the most, and not surprisingly it is wheat and edible oils that are showing the greatest level of stress and soaring prices. Both being impacted by Putin’s war in Ukraine, a powerhouse and exporter of several key agricultural products, as his occupation has dramatically cut Ukraine’s ability to export its production via key exports hub on the Black Sea coast.
The American Farm Bureau wrote this in one of their recent update: “Ukraine has six primary products with over a billion dollars in export sales: corn ($5.8 billion), sunflower seed ($5.7 billion), wheat ($5.1 billion), rapeseed ($1.7 billion), barley ($1.3 billion) and sunflower meal ($1.2 billion).”
Because of tight market conditions and surging prices, we are increasingly seeing governments step in to protect domestic supplies to curb food price inflation. Most recently an Indonesian export ban on palm oil, partly because of surging prices for sunflower oil, was followed up by India’s surprise curb on wheat exports. This just weeks after analysts had predicted a near doubling in India’s wheat export from an already record level in 2021. However, a heatwave this past month has dramatically cut recent forecasts for a bumper export wheat, and this was followed up yesterday by an announcement that India is planning to cap sugar exports at 10 million tons for the current season that runs into September. A measure seen as an extreme precaution given current projections for production and available stock levels.
The weekly Monday update from the USDA (US Department of Agriculture), regarding planting progress and crop conditions in the US, highlighted the precarious state of the US wheat market. While the planting of corn and soybeans has picked up momentum, the outlook for wheat spring planting remains challenged with only 49% of the wheat in the ground compared with 93% a year ago, and the slowest pace in 20 years. In addition, drought has hurt the quality of the soon to be harvested US winter wheat with the latest survey from the USDA showing a good to excellent rating of just 29%, compared with 48% last year.
North Dakota grows half of the US protein-rich spring wheat, and following the second wettest and eight coldest April in history, the fields have since received regular doses of water which has not allowed fields to become properly fit for planting.
In the week to May 17, speculators or managed money accounts increased bullish bets on Chicago wheat to a 14-month high, but at ‘just’ 26,586 lots, the price impact remains relatively subdued. Overall however, the exposure across the six major Chicago traded grain futures remain elevated at 683k lots representing a nominal value of $37 billion, with the bulk held in corn (340k lots) and soybeans (147k lots). During the past 20 years the net long has only exceeded 800k lots on four occasions, the latest two in January last year and just five weeks ago. On the first three occasions, prices slumped to the extend that the net length on two occasions returned to zero while the one last year triggered a 60% reduction.
Whether history can repeat itself all depends on near term weather developments, not only in the US but also in Europe where several major producers led by France are struggling with hot and dry weather. An end of the war in Ukraine would most certainly also send a relief correction through the crop market, however with some damage already done to this years crop, the prospect for elevated food prices for longer unfortunately remains a risk.
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