The first half of 2021/22 MY was passed with a high prices increase for wheat and corn. The market continues to exist in quarantine conditions as well as under the influence of weather, geopolitical and economic factors. APK-Inform Agency talked to Denis Drechsler, Project Manager of the G20 Agricultural Market Information System (AMIS) about current market mood and what should be expected in the second half of the season.
- Could You describe the current state of the macroeconomic and its impact on the world grain market (especially wheat and corn) in the first half of the 2021/22 MY?
As stated in our recent AMIS Market Monitor report, global markets are off to a bumpy start this year, with important implications also for the agriculture sector. The emergence of the fast-spreading Omicron variant of SARS-Cov-2 has brought another wave of economic uncertainty, while high energy, fertilizer and freight costs, as well as geopolitical tensions between the Russian Federation and Ukraine have significantly raised volatility in markets. In this context, and in view of persistently strong demand, global food prices remain elevated around ten year highs.
Among the main food commodities, global wheat availabilities for the marketing year 2021/22 seem particularly tight in view of strong demand, especially from the Middle
East and Central Asia, and low production in main exporting countries, especially of high-quality milling wheat. Although trade in 2021/22 MY is expected up by about 2% from last season on expectation of increased sales from Argentina, Australia, the EU and Ukraine, the global stocks-to-disappearance ratio of major exporters might fall further this season, which would be the fourth consecutive fall since 2017/18 MY to a multi-year low of 14%.
The market situation seems somewhat more balanced for maize, with a record production expected for marketing year 2021/22 on account of gains in area and a rebound in yield to 1.2 billion tons (+3.7% from last season). However, despite record output global inventories will only modestly increase due to persistently strong demand, especially for feed and industrial use. According to our latest forecasts (published in the AMIS Market Monitor report on 3 February), global stocks are expected to remain well below their five-year average at 293.6 million tons (+2.7% compared to 2020/21 MY).
- Does the macroeconomic and the pandemic coronavirus have any impact on the grain trade in first half of 2021/22 MY?
The agriculture sector continues to demonstrate strong resilience in the face of the challenges posed by the COVID-19 pandemic and the resulting difficult macroeconomic conditions. As already alluded to when we last spoke in June 2021, global trade in agriculture has continued to grow even during the pandemic, despite some logistical constraints and hiccups in global supply chains. While there have been spot areas of concern, the highly automated nature of global commodities trade, which usually involves bulk shipments, has prevented many difficulties experienced by other sectors that rely more heavily on manual labour, due to sanitary requirements, lockdown measures and thus missing personnel, for example. However, global trade in agriculture has of course not been immune from broader trends related to the pandemic, including container shortages (especially for rice trade) and escalating voyage costs (due to high energy prices and strong demand). Lately, restrictive trade measures by some countries in an attempt to counter food price inflation and to secure domestic food supplies could also be listed as limiting factors of grain trade.
- What trends that can be highlighted on the global wheat on market? What should we expect in the second half of the season?
As stated above, global availabilities appear particularly tight for wheat due to the limited supplies from main exporting countries and continued strong demand. While the supply situation has slightly improved following larger outputs than previously expected in Argentina, Australia and – to a lesser extent – the Russian Federation, the respite might only be of temporary nature, especially because of concerns for tight availabilities of high-quality milling wheat. In fact, after declining slightly in December 2021 and the first half of January 2022, global wheat prices are again on an upward trajectory and remain at levels not seen since 2011. Mounting geopolitical tensions between the Russian Federation and Ukraine have put a question mark on wheat availabilities and trade from the Black Sea region. For the second half of the season the further evolution of this international crisis will be a main determinant of how the market will be progressing.
- South America has traditionally been one of the main corn producers, but current supplies from region are limited. How do you assess the potential for South American corn trade in the second half of the 2021/22 MY and its impact on corn pricing?
Weather conditions have indeed not been conducive for South America’s maize output potential this season. According to information from our colleagues in GEOGLAM, crops that are currently in the ground in Brazil have suffered from drought in the Southern regions, but recent rainfalls might have saved crop development in the Central-West, Northeast, and Southeast regions. Also, sowing of the larger safrinha crop has started under favorable conditions, which might make up for some of the expected losses of the spring-planted crop. Similarly, drought and high temperatures have reduced yield expectations of the early-planted crop in Argentina, for which the recent rains might have come too late to significantly improve yields. However, the late-planted crop might still recover, which is nevertheless the smaller of the two. Export supplies from this region will obviously depend on final harvests, with important implications also on international maize prices. However, limited supplies from South America are not the only driver of prices, which are also pointing upwards in view of strong demand from processors (for feed and ethanol production), tight spot supplies in the US and mounting tensions in the Black Sea area.
- The USA has been the main supplier of corn in recent months to the world market due to limited source from other countries (including from the main competitor Brazil). How do you see competition between these countries in the corn market in 2021/22 MY?
The US will remain the main supplier of maize also in 2021/22 MY, by a wide margin and independent of final yields in Brazil. Until the safrinha crop is harvested in July/August this year, it might be difficult for Brazil to compete with the US for export shares, not only because of smaller expected production, but also due to firm local demand and attractive domestic prices. As for the US, despite higher production in 2021/22, exports might also decrease, mainly because of an expected reduction in Chinese imports and strong local demand from ethanol producers. Outside competition for the US was mainly expected from Argentina, where prices are competitive, but yield forecasts have significantly worsened due to adverse weather; also, most of the production will be for late-season varieties.
In fact, according to our latest forecasts (which allocate 2021 southern hemisphere crops to the 2021/22 MY) Argentina and Ukraine are expected to take second and third place for largest maize exporters this season, ahead of Brazil.
- On Your opinion, what factors will have an effect on the wheat and corn prices in the market in the second half of the 2021/22 MY? What trends will present on grain market?
Apart from global availabilities, which currently look tight for wheat and somewhat more balanced for maize, several other factors and trends can be expected to have an important bearing on prices in the second half of season-2021/22. While freight costs have come down significantly from recent highs, the situation continues being tense for global fertilizer prices and supplies. In addition, energy and especially natural gas prices remain elevated, with important implications also for the price level of wheat and maize. Related to the hike in international energy prices, but overall concerning for global markets, all eyes will be on how the geopolitical tensions between the Russian Federation and Ukraine will evolve. Already, the crisis has significantly increased volatility, so a further escalation could potential spark additional uncertainty in global markets.
Interviewed by Anna Lysenko, APK-Inform Agency
