Head of Commodity Strategy
The grains sector is close to erasing its 2024 losses with the Bloomberg Grains Total Return Index, tracked among others by the WisdomTree Grains ETF (AIGG:xlon), having rallied by around 13% since hitting a three-year low back in February. Besides price changes, the total return index also takes into account the impact of rolling a futures position from an expiring month to the next, and for many months this activity has created a drag on investor returns with ample supply having left the futures curve in contango, meaning the cost of grains from the latest harvest period have traded at a discount to the price of the next crop which will be harvested later this year.
A large carryover of stocks following last year’s strong Northern Hemisphere production season has for now left the market relatively immune to weather developments, but as we enter the important growing season in Europe, Russia, and North America, as well as the end of the harvest period in South America, the weather will increasingly play an important part, when it comes to determining the level of volatility and overall direction of the three major crops of wheat, corn, and soybeans.
The Bloomberg Grains Total Return Index tracks the performance of the three major U.S. grain and soybean crops, split almost evenly between soybeans (35.6%), corn (34.9%) and wheat (29.5%).
As the U.S. planting and growing season gets underway, the USDA is publishing weekly updates on Mondays, initially covering the pace of sowing of the three major crops before the attention turns to rating the condition of the emerging crop. For now, only the winter wheat is rated on a weekly basis with the latest report showing 50% of the crop being rated in a good to excellent condition, compared with 29% a year ago. Last week the planting of corn and soybeans was slower than expected with corn at 36% complete falling behind the 5-year average at 39%, and soybeans at 25% but still ahead of the 5-year average at 21%. Spring wheat remains well ahead with 47% planted compared the 5-year average of 31%.
So far the attention has primarily been focused on adverse weather impacting wheat, the first of the three crops to be planted, not least due to volatile weather in Russia, the world’s top exporter, which has seen May frost in the north and unusually dry conditions in the south. The CBOT Wheat futures for December delivery encapsulates the markets view on supply and demand following the current harvest season, and during the past two weeks the mentioned developments in Russia, as well dry conditions on the U.S. Plains have driven the price to an August 2023 high near USD 7 per bushel, a year-to-date increase of 2.6%. However, improved US rating and planting progress and better chances of rain in parched southern Russia in the week ahead may weigh in the short term, highlighting the kind of weather volatility that can be expected in the coming weeks and months.
Speculators, such as hedge funds and CTAs, tend to anticipate, accelerate and often amplify price changes that has been set in motion by fundamentals, in the case of grains leading to months of short selling amid weak fundamentals driven by ample supply. Being followers of momentum, this strategy often sees this group of traders buy into strength and in the recent case with grains, sell into weakness, meaning they are often found holding the biggest long near the peak of a cycle or in this case the biggest short position ahead of a trough in the market.
Followers of the weekly Commitment of Traders report will know that speculators just a few weeks ago held a near record combined short position of 593k contracts, equaling nearly 3 billion bushels or roughly 78 million metric tons. As the fundamental outlook starts to improve the risk of higher prices have emerged, not least due to the need from hedge funds to reduce exposures to a potential loss-making short position.
Most exposed to the mentioned short covering from hedge funds is the CBOT Corn contract, after the net short position back in February reached a record 341k contracts. So far, however, the fundamental outlook does not paint the same level of fundamental support as seen in wheat, but that could change on a combination of weather developments in the US Midwest while crops in Brazil have been exposed to dry weather in some places and flooding in the south.
Argentina, meanwhile, has slashed its 2024 harvest due to damage from bacteria being spread by a plague of leafhoppers. Having slumped by 11% during the first seven weeks of trading this year, the new crop December 2024 contract has yet to trade positive on the year, but a tightening outlook and the recent improvement in the technical outlook may change that, and potentially drive prices higher supported by the mentioned short covering from wrong-footed short sellers.
The US Department of Agriculture is scheduled to release its key monthly world supply and demand report on Friday (WASDE), and analysts predict the estimate for US 2023-24 corn stockpiles will be trimmed while soybeans and wheat will remain close to April’s expectations. World ending stocks meanwhile are all expected to be lowered for all three crops. Overall, this report is seen a potential influential one, as it includes the first full USDA forecasts for crop supply and demand for the 2024/25 crop year, which starts around August.
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