By Ben Buckner
The global nature of grain markets means that anything from geopolitical uncertainty in grain producing areas to rising weather risks can impact the availability of grain products in a given year. This year, there are five key factors that have the potential to influence the dynamics within grain markets.
1. Will Russia produce a third consecutive record wheat crop in 2024?
When the Russia-Ukraine war began in 2022, the Russian wheat market was oversupplied and wheat in Ukraine and Russia was priced to sell. The Black Sea Grain Initiative ensured that exporters could clear their inventories and stabilized prices throughout 2022 and 2023.
However, for the first time in two seasons, the weather in Russia is far from ideal and could decrease the amount of wheat that will be available to export. Large portions of critical winter wheat producing regions in eastern Ukraine and southern Russia have experienced only 10%-30% of normal precipitation.
World importers, particularly in the Middle East and North Africa, now rely heavily upon cheap and available Russian supplies. Crop loss in Russia strips the market of this bearish sentiment from summer onward. Russian rainfall and temperatures in May will be critical. Additionally, the European Commission projects that European soft wheat production will decline 5 million tons in 2024 due to lost planted area.
2. South American corn production shrouded in mystery
Brazil in 2023 was the world’s largest corn exporter. In years of normal weather, Argentina and Brazil combine for 40% of global trade, up from only 30% in 2010 and highlighting the countries’ increasing importance.
Normally, the United States Department of Agriculture (USDA) and South American agencies (such as CONAB, Brazil’s USDA equivalent, and the major grain exchanges in Argentina) are aligned in their respective South American production estimates during the spring months. This is not the case this year:
The USDA projects Brazilian corn production at 124 million tons, while CONAB in Brazil estimates production at 111 million tons. The USDA projects corn production in Argentina at 55 million tons, while the Buenos Aires Grain Exchange estimates production at 49.5 million tons.
This combined 18.5 million ton spread is the difference between an adequately supplied global corn market and one that’s rather tight. USDA numbers imply major exporter corn stocks as percent of consumption – the primary driver of price – at a large 10.8%. South American agency numbers imply major exporter corn stocks at a very tight 7.7%.
3. La Niña and its impact on global weather patterns
Northern Hemisphere producing countries largely avoided major weather issues as La Niña transitioned to El Niño. El Niño’s presence during the Northern Hemisphere’s summer months is typically a positive to rainfall patterns and grain yields. Grain yields were very close to longer term mathematical trends in the U.S., Europe and Black Sea Region. This kept fear of supply issues mostly absent from the market.
However, the return of La Niña is imminent. La Niña typically challenges rainfall patterns and yields across the southern United States, while allowing for excessive heat in wide portions of the U.S. agricultural belt. But more than using normal La Niña-based correlations, it’s the speed at which La Niña arrives that leaves forward supply outlooks less reliable. The coming transition, expected to take place by July, will be much speedier than normal.
La Niña is typically bad for Argentina and southern Brazil. The 2023/24 South American growing season has ended, but based on longer term ocean temperature forecasts, La Niña will likely be present during December and January, which is strongly correlated to drought in Argentina. This could continue to impede the growth in total crop yield that is required to build global grain stocks.
4. Currency relationships
U.S. dollar strength correlates with bearish trends in major grain markets, and the recent cycle of interest rate hikes has kept discretionary participation in the ag space limited. It is also a measure of purchasing power elsewhere in the world. A strong U.S. dollar implies currency weakness in other countries. The Egyptian pound and Turkish lira sit at all-time lows, and currency weakness in places like Nigeria and China have, on the margin, slowed imports there.
Countries will import to maintain food supplies, but growth in trade will likely struggle amid the U.S. dollar strengthening. With the potential for rate cuts and a greater focus on U.S. national debt, the question in 2024 centers on whether U.S. dollar strength will continue.
5. Mexico’s soaring demand for imported ag products
Mexico is expected to increase its imports of corn in crop year 2023/24 by 1.7 million tons, or 9%, year-over-year. U.S. corn export commitments to Mexico as of early April totaled 18.7 million tons, up 4.8 million tons, or 35%, year-over-year. The catalyst for enlarged corn imports is consecutive years of drought, which is still in place across key areas of Mexico’s winter corn production belt.
Even assuming record corn imports of 21.1 million tons, Mexico’s corn ending stocks on September 30, 2024 will total only 2.2 million tons – which covers only 18 days of consumption. Assuming flat Chinese demand places Mexico as the world’s top importer, AgResource expects Mexican corn imports to increase another 2 million to 3 million tons each year for the next two to three years to increase inventories. The U.S. will likely be the top supplier to Mexico, but Mexico’s need for larger imports will contribute to total global corn trade growth, which raises the burden on yield performance in the U.S., Brazil and Argentina.
Overall, grain market uncertainty in 2024 is mostly a function of weather. We expect the market to readjust its assessment of risk on a weekly basis over the summer months.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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