The grain market has been under pressure again over the past week due to the increase in market sales. The main cause is that the US dollar is recovering from the previous week’s losses.
We continue to see signs of a global recession, and these are negative too. The main point of interest in the market continues to be the problems in the Mississippi River, with more barges running aground. Forecasts now believe that the low tide problem will be resolved by mid-November, significantly narrowing the window for US exports.
We are seeing increased market positioning for this week’s US Department of Agriculture (USDA) report (12) and this is limiting strong selling in the futures market in Chicago. The decline in the soybean market in that global reference market is due to the same factors that we have been talking about for months in these columns; One of the main ones is the question.
Additionally, last week was also a week of falling demand, with China out of business due to the Golden Week holiday, which put downward pressure on prices.
South America continues to export large volumes of soybeans and next year sales are expected to be even higher given the expected size of soybean production and particularly in Brazil, if time permits of course.
Economy in China
We are seeing indicators that the Chinese economy is in worse shape than initially suspected, mainly due to its negative real estate sector. This news sparked the idea that imports from China are likely to deviate from current estimates.
Traders are once again showing less enthusiasm for the US economy and, in a complete turnaround, now expect another 75 basis point interest rate hike at the November meeting.
Chinese officials have lowered soybean import forecasts and believe October deliveries will be the lowest in two years. Chinese soybean crushing margins have been in negative territory for several months, resulting in lower imports.
Inflation has also limited purchasing demand from China in recent months, exacerbated by the Eastern power’s Covid response plan, which has shut down much of its economy for several weeks.
OPEC + has announced that it will cut crude oil production by 2 million barrels per day, but this has had little impact on the market as expected. The US export situation remains a mess, with reports of barges failing to reach the Gulf terminals. The remnants of Hurricane Ian are helping with the low water levels, but much more rainfall will be needed. Until we see it, buyers are moving away from the US.
Global economy and the Federal Reserve
The state of the global economy continues to be a predominant factor in the discovery of daily prices for the commodity market. Global inflation continues to rise with several countries posting double-digit increases for the year. It is of great concern in the European Union, where inflation is 10% and high heating costs for the coming winter could push it even higher.
However, some economists now believe that interest rates have risen enough and we need to see if the indicators become more favorable before raising rates further.
While this is likely to be true, the US Federal Reserve has announced that it plans to continue raising rates until inflation returns to 2%. The question in agriculture is how this situation will affect export demand, but it could also be a factor that will affect U.S. plantations next year. If interest rates rise and finances are strained, we could easily see farmers reducing inputs or switching to the lowest-cost crops. Based on historical experience, this would favor soy over corn.
A very complicated landscape in Argentina
The drought affecting Argentina is critical and in particular in the central area of the country. This situation is already affecting the wheat yields in the central area with losses of between 50 and 80% of the expected yields. Last weekend a chill hit hard again that will leave its mark on us too.
The drought also hit the first season maize planting hard, with a significant drop in acreage. Therefore, the 2022/23 corn cycle would have the lowest early maize planting in the past 10 years according to GEA / BCR.
Several analysts estimate an increase in the soybean area in Argentina. In a few days we will begin to see the movements for the planting of the oily seed and the prospects for the future are not at all encouraging. The lack of water in central Argentina is very critical. The soybean complex cannot afford to lose production in this upcoming South American campaign.
Energy costs and the Mississippi basin
Energy costs are rising again, creating uncertainty about demand and its impact on consumer spending. This too is raising concerns about a recession. A strong US dollar is already hurting US exports and will continue to do so.
The river system of the United States remains a mess with 2,300 barges stranded at various points in the Mississippi. This too is starting to reduce interest in exports. Concerns about the global climate and its impact on manufacturing provide market support.