Agrimarket demonstrated good economic results in 2021, and prices for grains and oilseeds were increasing, despite continuing COVID-19 pandemic and logistics problems.
What the global market should expect in 2022, how the markets of crops, biofuel and crude oil will interact, how the buying strategy of importers shifts when the balance changes we discussed with Zsolt Vincze, deputy vice president of leading US investment firm R.J. O'Brien.
- Mr. Vincze, firstly, lets pay attention to the condition of global economy in the context of COVID-19 pandemic and its impact on the grain market.
- Indeed COVID-19 situation is still influencing the macroeconomic situation and logistics. The supply chain is really stressed, container shipping is a lot more expensive than usual. Besides, we have a lot of pent-up demand and lots of uncertainty because of weather and politics in the world. Bur if you look at 2021, it is interesting to note that the commodities were very good performers, the cryptocurrency was the only category that performed better than commodities. We anticipate that this will tendency continue so far in 2022.
- Considering good prospects for commodities in 2022, what can you say about the investment climate in agribusiness? How can current prices for commodities influence the market development?
- There are a lot of positive signs in agrobusiness. First and foremost, we see that the funds are a lot more active in commodity trading. When this happens, then open interest goes up, liquidity is better and we see more volatility in the prices. On the physical side of the commodities, we see ag-companies making major cooperation-agreement with energy companies, like the one with Bunge and Chevron (one of the largest integrated companies in the USA).
Besides, we also expect that there will be more opportunities for ag-commodities in such segments of biofuel as biodiesel, ethanol, sustainable airline fuels. Also, we should mention carbon trading which is the area we see a significant growth in.
In general, currently commodity prices are rising on the market. For example, in Ukraine we could see upward price tendency for corn in terms of CPT, and in Argentina and Brazil, which is also supported by higher farmers’ activity.
Of course, the outlooks are very good and obviously there are uncertainties right now specifically in Southern Brazil and Argentina with heat and lack of rain. Harvest activity has just started in northern part of Brazil, and the planting of safrihna corn, although rather slow.
At the same time, in the US and Canada we had a shorter crop not only for spring wheat, but also for the small grains – meaning barley and pulses and edible beans, and there will be a lot of competition in that area for acreage in 2022. Subsequently we see right now and have seen very high prices for old edible beans and pulses and sunflower and canola and everything else.
- What are the prospects of biofuel market development in 2022 considering high prices for corn, soybeans and changes in mandate in Brazil, for example. What would be the trade, considering the fact that pandemic remains, and the demand?
- We see that demand, specially for soybean oil, is going higher in the US, caused mainly by a short canola crop in Canada. Normally, or traditionally, Canada exports a lot of canola into the US and we see significant drop in that volume. In general, we seed a good outlook for the demand for the biofuels. And with increase in mandate, I think that higher biofuel consumption will remain. That will basically create a strong demand for oilseeds - canola and soybean oil, all the oils in general.
- Speaking about the crush margin and production of soybean meal, did energy crisis in China had any influence on this segment? What are the consequences can be for global market, if any?
- In recent past China had sold some of the crude oil from the state reserves, and eventually they will have to restock. We anticipate that the government in China will stimulate the economy and there will be a strong performance in the economy and China needs a lot of crude oil for their economy. That’s is not going to change.
Speaking of soybean meal. China has booked a lot of soybean cargos from Brazil, but so far, the loading has been slow in Brazil and arriving to China has been slower than anticipated. Because of that, soybean processing was lower as well. But if the loading to China is faster, crush will increase to make sure there will be enough stocks. In general, I believe that China will take all the purchases they have on the books and load it out of Brazil.
What we are seeing, is that there is a very strong basis for both meal and soybeans in Brazil right now, which is unusual considering harvest just started. Now we also getting reports that the early harvest in the northern Brazil is not as good as it we’ve been anticipating and the farmers selling has been slower than expected.
What we are also seeing is that the Parana River is having very low level, and Argentina is sending a lot of ships to Brazil, because they cannot load the ships completely due to the low water level in a Parana River, which unusual but has little effect on basis formation in Brazil.
So, that will have to be monitored closely to see how it goes, because the balance sheets looked OK, if Brazil is going to have record crop. If the Brazilian crop is shorter than the situation will get a lot tighter and then we will expect more volatility and higher prices for 2022.
- There is energy crisis in Europe as well. How does it affect fertilizer prices in Europe? There is information that some plants in England, producing fertilizers, are stopping operations until spring. In general, how would You characterize the fertilizer market and its influence on global commodity market and prices in the current and future seasons?
- The fertilizer situation is very complex not only in Europe but also in Brazil and the US, caused by huge fluctuation in energy prices.
If you recall, we had a big freeze in the US in 2021 in parts of Texas and southern part of the US. And then we had really huge spike in natural gas prices in the cash market. And then Europe experiences the same thing. And what you said its true that some of the plants stopped production due to high natural gas prices. And that affected the market.
And then there is also another factor, affecting the phosphate fertilizers, because in the US there has been a ban put on fertilizer import from Belorussia, because of political reasons, and also Russia put a limit on fertilizer export which altogether pushed the global prices higher.
Due to this, in the US the current price increase means that the cost of production for corn went up over 200 USD per hectare for US farmers, which is a very significant increase.
We are seeing the same in Brazil but there the system is slightly different. Brazilian farmers do a barter trade. They give part of the production in exchange for fertilizers – they make those deals with Bunge, Cargill, ADM or the grain trading companies, for example, “we give you 70 sacks and you give us fertilizers and chemicals”.
Such situation on the global market of fertilizers will lead not only to price rise, but also more fierce competition for acreage. Because in order to increase areas and production farmers need increase prices for products, which we could observe already in December 2022.
- What are the prospects for crop production in South America? Recently, USDA in January report cut soybean and corn production in Brazil. If these forecasts come true, how will this influence the global market and China’s market in particular, considering it’s the largest buyer. And how can it influence the competition with the US?
- Yes, we have seen a pretty big cut in production estimates in January report. Commercial participants say that actually the expectations are even lower than the USDA’s. I’m sure you saw the estimates for safras and corn. And obviously we don’t know what exactly the final size of the production will be. In Argentina there was a lot of corn planted in December so that corn and soybeans will be affected by the February weather as far as Argentina goes. Brazil is somewhat on the different timetable because harvest already started in Brazil, not only in Mato Grosso, but also in Parana and Rio Grande do Sul. So far in the southern parts of Brazil the reports are not good in terms of the yield. Besides, as you well know that in northern Brazil in Mato Grosso, they also grow a lot of corn and the prices are very good right now so there will be a competition for acreage between the crops in Brazil as well. Overall, if the Brazilian production is lower and China keeps buying – that will push the demand to the US. And China will be forces to buy more beans from the US if the beans are not available in Brazil.
- How would you explain the recent active soybeans buying by China from Brazil, in December – almost 3 mln tonnes compared to nearly 300 thsd tonnes in December 2020, and lower buying from the US?
- China is very well aware of production cycles and time. They were anticipating as everybody else 2 months ago, that there will be a record Brazilian soybean crop. Thus, they bought a lot of beans in anticipation of that. And at that point the Brazilian farmer was a willing seller as well and premiums were lower. Now what we are seeing in the last couple of weeks is that the Brazilian farmer slowed down the sales and the premiums appreciated significantly, which is unusual.
If you look at the shipment so far for January also the shipments have been very slow. So, yes China has a lot of soybeans on the books from Brazil, but we don’t believe that all of it is going to be shipped, or not at the time that they expected. So, they’d have to move some of the January purchases into February, or if they need the product than they will have to buy more from the US. Or what happens a lot of time, if they buy optional origin beans, then they switch the sales to the US from Brazil. We’ll have to see how the harvest progresses in Brazil and what is the yield. But so far, generally, if we see a good harvest, then there is heavy farmer selling and the weakening premiums. And that’s not the case today. We’ll have to monitor the next 2 to 4 weeks to see how everything goes and how premiums behave, and make adjustments on the exportation. But I think if we see higher purchases by China from the US than that will be a sign that the Brazilian crop is smaller and China is looking for another source. Also, if the market gets very strong in Brazil, China is not afraid to sell some of the purchases back and make some money on what they call wash-outs. They are good traders, they understand that part of it very well.
- China continues to recover its livestock segment. But in 2021, the demand in China for feed compound was shifting from corn and partially soybeans to feed wheat, because of better prices for wheat. What can we expect in 2022 in this segment?
- If you look at China, it had a lot of wheat in the state reserves, and some of the wheat was several years old. Thus, the government made a decision to sell wheat from the reserves to cool down the prices and also, we believe, that they want to rotate the stocks. So eventually long-term that’s very positive for wheat because wheat is a political issue in China, meaning that government will make sure there is enough wheat in the reserves so that they can control the prices. And we believe that they going to buy wheat from the market. It’s just a question of logistics and price.
But, as you know, nobody exactly knows the size of grain reserves in China and we believe that some of the stocks either are not usable anymore, or only exist on paper. Because in China the central government gives the subsidies for the local government based on reported yields. And in China you have a lot of small farmers, not many large operations.
And we believe that the farmers don’t always report the production because when you have a very small farm (around 100 ha), it is very difficult to explain high production. But when the local government combines data, they have more incentive to inflate the yield and production. We have seen government to clap down the officials who overreported the grain stocks and things like that. So, that’s why when we look at the global stocks, we tend to look at global stocks without China.
But in general, the stocks are going to be pretty low. And that also points to higher volatility. But as far as China goes, we don’t expect major shift in the grain part, meaning that government will maintain the state reserves and they will maintain the higher prices for the farmers. That almost guarantees that China will be a buyer of corn and wheat. Basically, they had been buying feed grains and almost everything for the last 6-9 months and we expect that trend to continue.
- In the FH of 2021/22 MY, there was a high demand on wheat together with limited supplies on the market. Will this trend continue in the SH of the MY or not?
- We believe that the trend will continue. Like I said, there is wheat harvest somewhere in the world every 3 months. We have seen record production in Australia, but after certain point it doesn’t matter how big the crop is, because Australia is limited on what they can deliver to the ports and ship. We also seen, for example, some wheat export from India into different part of the world because they had good production and the prices are high. But in general, we see continued political volatility in the 3-6 months. And that happens when governments tent to stock up on wheat to make sure that there is no political unrest because of high bread prices, for example.
We anticipate strong demand for wheat from largest importer Egypt, as well as from Iran due to very short crop, and from North African countries, due to political unrest.
There is one more thing to point out – political risk in Argentina. The government might step in and limit exports, and/or devalue the currency and that can be a pretty big factor in terms of wheat. Because Argentina does compete with Ukraine and Russia on the wheat market. We’ll have to monitor what happens there.
One of the main factors to form global market of wheat is weather conditions. This also applies to Black Sea region, in the context whether there will be frost in winter or not, which will further determine the export potential.
- Speaking about competition. What can you say about the main market players?
- If You look the main competitors, France has a great advantage when it comes to Algerian and Moroccan markets. So, the competition will remain there between French and Russian wheat, and in lesser scale to Ukrainian wheat. Going forward it will be closely monitored of what are the production prospects are going to be in France and also in Russia.
With the recent drop in the wheat futures the prices spread became a lot smaller, for example, between US HRW wheat and Russian wheat, which intensifies competition.
As far as what is going to happen. As you mentioned, there are pretty significant export taxes right now on Russian wheat, which makes it more expensive. We believe that the export taxes are going to be in the future, reflecting to what they expect the production to be. If Russia is anticipating good wheat production in 2021/22 MY then eventually the export taxes will be relaxed and Russia will be very competitive in the market. In the middle of January, you don’t know what is going to happen, and I think they are going to be in a wait-and-see position.
- In the latest Algerian tenders for wheat, importer bought probably Russian wheat, some Argentinian, but no French origin. What does this actually demonstrate to the market?
- I think this demonstrates to the market that there is pretty good competition as far as wheat goes. As I mentioned there are several players right now – its Argentina, Russia, Ukraine, France and Australia. The US and Canada are not really active. Canada had a very short crop and the US prices are too high. So, we anticipate the competition to remain strong. Like I mentioned earlier, if something happens in Argentina then it obviously will give opportunity to the EU wheat, and to the Russian and Ukrainian producers to get more market share. There are prospects for the Baltic wheat and also wheat from Romania and other parts of Europe to compete. But the fact is that Russia, Ukraine and France remain the main market players.
- But if Argentina has prospects to increase its market share, will it be able to meet its export potential?
- Well, situation is that Argentina and government need dollar revenue. Basically, the grain exports are the main source of revenue for Argentina. It will be a delicate balance because they also have to monitor the inflation and the domestic prices very closely, and right now we understand from our contacts in the country that the farmers are nervous that there will be a devaluation of Argentinian peso. If that comes to reality, then they will be holding back the grain and not selling much.
As you well know, the inflation rate is very high in Argentina, also the lending activity is not favorable for farmers in Argentina, meaning the interest rates are very high and its difficult for farmers to get loans. So, basically, Argentinian farmers don’t put the money in the bank. They stock the grain and sell it when they need money. And that’s a big factor. Also, as you well know, a lot of the farmers store the grain in silo bags because they don’t want their money in peso sitting in the bank. That situation is going to be critical going forward. And we’ll have to see what happens. I think the devaluation is likely and the farmers will sell the grain once they know what the exchange rate is.
- In conclusion of our conversation, what are your general expectations of the SH of 2021/22 MY? What would be the main factors, red line until the end of the season?
- I think, going forward the energy prices are going to be a very good indicators, specifically crude oil prices. If we see crude oil prices go up to 100 USD per barrel that will translate into higher ag-commodity prices as well. Obviously, what happens to US dollar is going to be very important factor. We anticipate that the US dollar could get significantly weaker going forward. And then, obviously, the stock market indicators will be a big factor.
Obviously, the weather is going to be a key factor. It is already today in terms of Brazil and Argentina. And that will continue to be the case for the next 6 weeks. After that, obviously, we should monitor weather in the Black Sea Region, and then the US and Canadian planting season.
And last but not least, politics will continue to be a factor. When you put it all together, we anticipate increased volatility for the next 6 months and good prices for the farmers. So, I think we will see a lot of opportunities in the next 6 months in terms of agricultural commodities.
Interviewed by Ekaterina Mudriyan
