What grain market is waiting for in SH of 2024? – Zsolt Vincze

The global grain market is in a somewhat wait-and-see position. Both on the part of exporters and importers, which is caused by the difficult economic situation of certain countries, geopolitical conflicts around the world, the prospects for harvests of key crops in 2024, and huge grain stocks of all key players.

We spoke with Zsolt Vincze, deputy vice president of leading US investment firm R.J. O'Brien , about what the global grain market is currently experiencing, what are the main factors affecting it, and what to expect in the second half of the year.

- Since 2019, the global agricultural and food system has been developing under difficult conditions: COVID-19, the global economic crisis, Russia’s war in Ukraine, the military conflict between Israel and Palestine, and a general aggravation of the geopolitical situation. What is the current state of global agriculture at the beginning of 2024 and what are the economic effects? What are the features that you can distinguish?

- Since 2019, we have seen our fair share of volatility in the market – COVID-19, adverse weather, the war between Ukraine and Russia, the Israel-Palestine conflict, and now the tensions in the Red Sea regions. In general, production has responded to higher prices, and now we have sufficient stocks of wheat, soybeans and corn globally, and the outlook for the current South American production is better than a year ago, despite the adverse weather in parts of Brazil.

In my opinion, the biggest factor, and it is happening right now, is what is taking place in China. The stock market has dropped significantly, and the indications are that the Chinese economy is in recession. Hard numbers are down, margins are down and ultimately that’s going to and already has affected the demand. So, that’s the first factor. Obviously, another, or I should say, ongoing factor will be the elections in 2024. We’ll have a lot of elections globally, and I think everybody’s concerned or talking about the most is the US elections in 2024. And I think it could have a huge effect on the grain markets, depending on the outcome of the elections.

- The elections factor is mainly connected with relationships between the US and China? So, if there is a new president, and it is Trump, there can be some obstacles?

- Yes. Everybody remembers what happened. We would expect more of the same this time around as far as the relationship between China and the US goes. And it could have huge effects on the grain trade as well. Not only for the US in China relations but for the global grain trade. What I mentioned is that basically, the Chinese economy in the stock market is not doing well I think that’s bearish for demand because China is the major importer of grains globally. What they do has a big impact on the markets, or what they don’t do. But generally speaking, elections tend to be positive for the grain trade, because governments or parties, who want to get reelected want to make sure that there’s enough grain, and the food prices are under control, so typically that boosts the trade. But like I said, the US elections is an exception to that this year.

- Does the crisis in the Red Sea deteriorate the situation right now?

- The increasingly difficult situation in the Red Sea in theory would be short-term bullish for US grain exports off the PNW.

Yes, I don’t think that we are seeing the normal reaction in the market right now with respect to the Red Sea situation. If you look at it, we have ongoing hostilities and WTI crude oil is trading at 73,5 USD/b. Under normal circumstances, I would say it would be trading a lot closer to 100 USD/b given the importance of the Red Sea in terms of trade flows and everything else.

And I think that’s why you are seeing how much smaller or subdued the Red Sea events impact the energy markets than you would normally expect.

- And of course, energy markets affect the commodities market and that’s why there is no bullish effect on prices, and they are falling.

- The Red Sea situation is bullish, but we are not seeing the reaction in the market that you would expect. It’s a pretty significant trade flow issue. I mean, normally 7 mln tonnes of traffic goes through the Red Sea. Right now, it’s down to about half. Mostly, the companies are rerouting shipments.

- If we dive into the grain market, most specifically the wheat market, what are the expectations about the prices for wheat and other grains in the SH of the season? Taking into account economic issues, elections, the crisis in the Red Sea, etc. What can be expected in this area?

- If we look specifically at the wheat market, Russia remains the key factor in the wheat market. They have plenty of stocks and they have been aggressive sellers. You can see that by looking at the prices for wheat which has been dropping even recently. And that remains the key factor in the wheat market. The second one is that with the new government in Argentina we expected Argentina to be a very aggressive seller in the global market for wheat and for corn as well. And that’s going to limit the upside. So, what we are seeing is a bearish outlook for wheat prices.

Besides, we have a lot of stocks globally and in the key regions. The farmers didn’t sell earlier and now have big stock and everybody’s waiting for a price rally to sell.

For the second half of this year, the other factor I want to mention is the weather. Even though you couldn’t really tell, but we have had a better market in the last couple of months because the weather wasn’t perfect or ideal in Brazil. But the prices have declined even though there was less rain and the crop estimates were and still are getting smaller in some cases.

Another factor that has been talked about a lot is renewable diesel in the biodiesel story in the United States. I think that will have an effect on the cash markets more so, than on the futures market. That affects the basis for soybeans and soybean oil more, than the futures market.

- Let’s talk about the Chinese market of grains. What are the prospects of China buying wheat, taking into account the recession scenario? Will China decline purchases of wheat and corn and soybeans, how will it manage the domestic demand for these commodities and its purchasing ability?

- If we look at China, in the last six months it bought a lot of grain. It bought barley from Australia and a lot of wheat from France. There were also purchases of SRW from the US and corn from Brazil. China has been buying soybeans from the United States mostly for the reserves. It bought as many soybeans from Brazil for the crushing industries as it could. But as you know, the Brazilian soybeans do not store, so for the reserves Chinese importers buy US beans off the PNW because they can store those for years without any issues. The way it looks to me is that China front-loaded the grain purchases and refilled the reserves, and I think going forward it will be keeping an eye on the economy in the stock market, and specifically the livestock industry or, to be very specific, the hogs in China. That’s the biggest factor. Importers will see what are the margins and profitability, and only buy if they need further purchases.

On paper, they have plenty of everything in China. I would expect that they’re going to slow down the purchases and only buy in the middle of harvest when Argentina will be harvesting corn crop later on this year. I think they will wait to see how the Brazilian growing season unfolds for the safrinha corn before they make additional purchases. I would say, given what’s going on, I think China is going to be slowing down the grain purchases and I expect them to buy less than they did in the previous six months.

- So, it will be kind of a wait-and-see position, right?

- Yes.

- China decided to resume trade with Australia to stock up the barley. How will the trade between these two countries develop?

- I think the barley purchases will slow down as well. But as you know, China is pretty price-sensitive, so if Australia lowers the prices significantly, then I think China would step in and end up buying large volumes again. But as I said, it has bought a lot of barley, so I think it will want to see what the next season looks like in Australia before it decides on any large purchases.

- China will basically wait and see what to do, what to buy at what prices, right? But what about buying US corn?

- What we have seen in the last six months is that the US is the last stop for China in terms of grain purchases. China goes and buys from everyone else before buying from the US.

Importers have been avoiding the US market as much as they can and only buy what they absolutely have to from the US.

- Let’s move now to the Black Sea grain market. How would you describe the situation in this market? The Grain Corridor, which Ukraine established itself, according to the latest information allowed to export nearly the same volumes as it was before the war. Does it have the ability to change the current wheat trade flows, or not?

- When you look at the Black Sea region, Ukrainian grain has been very competitive, and it has been causing some tensions between the neighboring countries. Farmers are claiming that Ukrainian grain is sold very cheap, and it ruined their market. There are plenty of stocks in Romania and Bulgaria, and Serbia, and Hungary, and Slovakia, and they’ve been complaining about the Ukrainian import.

But I think the bigger factor going forward will be, and I hope I’m wrong with this prediction, the threat of new Russian attacks on the port infrastructure of Ukraine. Ukraine, as you said, has been very successful with the Grain Corridor it established itself.

And unfortunately, I think there is a possibility that Russia will attack the Ukrainian port facilities, going forward to try to limit Ukraine’s ability to export grain.

Generally speaking, and it is true not only for the Black Sea region, but it’s true for global if you look at it, the farmers did not sell enough grain when the prices were higher. Now the prices are significantly lower, and everybody is sitting on inventory. It is true for Canada, true for the US, true for Brazil and Argentina. I think overall probably Australian farmers did the best job in terms of forward contracting. And it’s certainly true for the Black Sea region. There are plenty of stocks, not only in Russia but in Ukraine and neighboring countries. That is going to be the most limiting factor for a rally in Chicago future prices. The farmers missed the opportunity to sell and now we are entering a new growing season pretty soon in the US. Unless there are production issues, we expect the carryout to grow and the prices to go lower.

- Do you think the farmers will start selling sometime before the new season, seeing the situation and seeing that the new crops will be high, and they will get need to get rid of the old crop. Will start selling?

- Not everybody is in the same position. In the US I think the farmer sold what he wanted to sell at harvest time and now he is able to store the rest and wait for better prices. I don’t know if the better prices will come or not, but that’s where they are right now.

In Brazil, farmers don’t have enough storage or generally speaking they have significantly less storage than what the production is. Basically, they have to sell whether they like the prices or not. That’s a different scenario. Until recently we saw the Brazilian basis getting very weak because of that, and just recently they rebounded because of concerns about crops size. The farmers slow down the selling. But eventually, the Brazilian farmers are going to have to sell their inventory.

The situation in Argentina is the opposite. Farmers there know how to store the grain in silo bags and they do that if they think that the economy or the exchange rate is going to be in their favor later on.

To answer your question about when the farmers will sell, I think when they need the money for input in the spring. Then they’ll make some sales. But I think they will want to wait and see how the growing season in the US goes before they sell in larger volumes.

- What you said about Argentina – the situation there with its economy is rather complicated. The new president Javier Milei was trying to do something about it. What is your opinion on the Argentinian economy and its grain market, what are the prospects there, what can change? And we should note here that recently Argentinian government thought about increasing the export tax, but then they abandoned this idea.

- Argentina is in a difficult situation. It needs money, it needs the hard currency, the dollars. Because of that the government has limited options. As you remember, a couple of months ago, when they were campaigning, Mr. Milei said that he would eliminate export taxes on the grains. But then, when he got into office, he realized that the government needed the money and that’s why he said that they needed to raise the taxes to generate more revenue. But that didn’t go over very well. What we are seeing in Argentina is that when the exchange rate, the official exchange rate and unofficial exchange rate (they called it the blue dollar) becomes large, then the farmers hold the inventory, and they don’t sell. When the spread between the official and unofficial rate is small or smaller – then they sell. Generally speaking, the farmers in Argentina are cautious sellers because they expect a further devaluation in the peso. That’s why I think they’re not going to rush and sell everything at harvest time. But they will still store grain.

I think it’s too early to say if the reforms are going to work in Argentina or not. They certainly are making a lot of efforts to cut subsidies and to open up the markets. But they don’t have a lot of options because of the fiscal situation the government is in.

Not necessarily that they will sell at harvest time, but if we compare Argentina with the new government to Argentina with the previous government, I think Argentina’s share in the global market is going to increase for the grain trade.

- What changes in terms of exporters and importers may be? What changes in the TOP-5 players may be, or there will be changes in volumes only?

- What we have seen in the grain trade, specifically in the wheat trade globally, is that everybody is going hand-to-mouth as far as the importers go. They only buy what they absolutely have to, and they wait as long as they can. There are other issues impacting that. Specifically, the shortage of US dollars was one factor. But back to your question about how will the volume look, and who will be the top five players, I expect Argentina to move up in the exporters’ rank, and the US to move down. There will be more competition for US grain export from South America and from the Black Sea. Too early to see what Australia is going to look like, but that’s potential there as well.

- What can you say about the Canadian grain trade?

- I think Canada will remain an interesting player and competitive to maintain its market share across wheat and canola. According to statistics on grain stocks at the end of December 2023, there are enough to keep Canada an aggressive seller.

- Looking at the EU canola import statistics, Canada declined shipment to the European Union, while most of the volumes are going to China, i.e. trade with China intensifies?

- There’s a lot of politics involved with that, unfortunately. China and Canada didn’t have the best relationship in 2023, so that affected the trade, to be fair. There was a lot of politics involved in the China-Australia barley trade as well. So that’s not unique. But I think, China will remain a key trading partner for Canada and I don’t see a major change with that going forward.

Interviewed by Kateryna Mudriyan