Market alert - grains experience wild price rally

At the beginning of 2019, nobody expected that grains could become one of the hottest markets of the year. At that time, the prime factor behind low prices were many reports suggesting perfect conditions to plant major grains like wheat, corn and soybeans. However, a flood in the US in the spring delayed the planting season, which made it the worst such planting season in 30 years. In this article we incorporate the above-mentioned factors and analyse two key markets - corn and wheat.

Summary:

• A 25%+ increase in corn and wheat prices has occurred due to unfavourable weather conditions
• A 12% increase in soybean prices due to the US-China trade tussle as well as demand issues in China
• Gloomy data on planting points to the worst season in 30 years
• Corn prices approach the critical levels

Dismal planting data

The start of the planting season in the US was mixed as it began somewhat later than usual on the back of unfavourable weather conditions (soggy soil). There was also the second reason standing behind the lacklustre planting season this year, namely low prices of major grains due to the ongoing trade battle between the world’s two largest economies. The trade thread concerned predominantly soybean, as another chapter of the trade war led to increased difficulties for US farmers in selling their grains. But what does the state of play look like?

• Only 58% of the planned corn planting for 2019 has been planted so far, below the 5-year average of 90% at this time of year

• If this trend keeps going, only 75-80% of the planned planting will be fulfilled

• Only 29% of planned soybean planting has been completed so far this year, below the 5-year average of 70% at this point

• 84% of spring wheat planting has been completed so far, above the 5-year average of 70%

• Heavy rainfall in the vicinity of the winter wheat crop as well as expectations regarding higher temperatures deteriorated quality of grain to 61% from 66%; it was the first fall this year and a deeper deterioration of quality is expected

The corn planting season is the worst at least in 30 years. The similarly weak seasons were present in 2013 and 1995 when corn prices soared. Source: Bloomberg

What does the planting season mean for prices?

Prices of major grains have been responding to planting data for three weeks. As far as wheat is concerned, the clear swing to the upside is seen this week due to a lowered degree of grain quality. These gloomy releases in conjunction with the downbeat forecasts regarding weather act in favour of higher prices. Of course, concerns of possible drought are off the table right now, but if it arises it could also act to the detriment of grain quality. On the other hand, the upcoming USDA reports should show a notable revision of the data concerning both expected output and ending stocks. Furthermore, at the end of June the USDA will release a report on grains planting which tends to bring heightened volatility.

This report compares the planned level of planting with its actual realisation and it may confirm the overall weak landscape in the US. On the other hand, it may also show that the current concerns are undue. It is worth noting that the release tends to surprise positively (showing less downbeat numbers) - this was the case in 2015 and 2016 in the corn market. In turn, focusing on wheat it is worth looking at 2017 when prices slumped to 420c from 570c per bushel. Such a scenario may also occur this year. At the other end of the spectrum, in 1995 planting of major grains proved to be really hideous and led to a massive price rally in the corn market.

China still poses risk

While the ongoing price rally needs to be impressive, no one should forget about China. The trade war limits a market for US farmers (the US exports a lot of its grains to China). However, these farmers are not expected to stop sowing soybean at all partly due to a governmental aid program announced recently by the US administration. Nevertheless, we have yet to be given more details regarding this program, hence farmers are not interested in switching to soybean from other grains like wheat. Last but not least, the ASF virus in China (and other Asian countries as well) also plays an important role here as it lowers Chinese demand for soybean/corn used to feed livestock. The weak demand is also reflected by low prices in Brazil.

BOTTOM LINE

In the past more often than not the markets overreacted and price gains were often fully erased after the USDA report. However, there is still 1 month left to the report release date so there's plenty of time for traders to speculate. In rare situations, where the USDA report exceeded gloomy expectations, the ensuing price gains were really tremendous. 

Technical overview

Corn

Corn prices have rebounded recently from 350c per bushel and managed to break above the local highs from the second half of 2018. Currently corn prices are approaching an important supply zone (ca. 400c) which coincides with the 23.6% retracement of the latest big bearish wave. The current price rally has already reached a size of similar movements in the past. Source: xStation5

Wheat

Wheat prices bounced back sharply from the multi-month lows but there is still some room to reach last year's peak. The closest resistance is localised at around the 61.8% retracement of the latest bearish wave, whereas the important support might be found nearby 485c per bushel. Source: xStation5