Traders have been surprised by the activity of fund buyers in driving commodity prices upwards in recent weeks in spite of plentiful supplies of the main feed materials.
Money has been flowing into commodities as equities in the US hit all-time highs causing speculators to look around for something “cheap” to buy.
Thus hedge fund buyers have been active across all commodities, taking unusually long positions on soya, reducing their short positions on wheat and going long on corn.
The weather outlook for most of the world’s main crop producing regions is fairly benign and there are no major concerns on the supply side for most commodities. This should lead to a bearish outlook on pricing eventually but the flow of money trumps the fundamentals over the short term. Soya meal is a case in point with the funds long by 74,000 contracts which is exceptional in terms of recent history. The prospects for the soya crop in South America are very good with harvesting conditions in Brazil much better than last year and with almost 40% of the crop already safely in store the latest forecasts predict a massive 108 million tonne crop – up two million tonnes from last month. The Argentinian harvest is still a few weeks away but although it will not challenge the record 61 million tonnes seen in 2014/15 analysts are predicting a harvest in the region of 55 million tonnes.
The market for maize and wheat in the United States has been buoyed by speculation over the Trump government’s policies regarding bioethanol support. It is expected that the government will change from a blenders’ credit to a producers’ credit, meaning imported ethanol could no longer qualify. This could increase demand for US maize to be used in ethanol production and fuels concerns about supply which will keep a firm feel to the markets for old crop grains. Inevitably the legislative process will be slow, possibly taking as long as four years to enact, but it does add another layer of uncertainty.
In Europe wheat demand is also firm, particularly for the old crop due to lack of selling by the Russians and a strong demand for milling wheat from Egypt. DEFRA have reduced their estimate for the UK wheat crop by 84,000 tonnes. Supply concerns driven by increased feed wheat demand predominately by the poultry sector combined with increased demand from the flour milling and energy channels have pushed the old crop futures to a premium of £10 per tonne over the new crop.
As always currency plays a major part with renewed pressures for a Scottish referendum enough to cause a weakening of sterling and a lift in grain prices. As we get closer to pushing the big red button for Article 50 further currency volatility is to be expected.
The impact of the currency devaluation in the immediate aftermath of last summers’ Brexit vote is still to be fully reflected in feed prices at farm level. The coming weeks will see the unravelling of winter feed contracts – many of which pre-dated the 23rd June - and this will inevitably lead to a significant uplift in farm pricing.