Grains Weekly Analysis

The commodities markets have been showing high volatility in recent months, with significant changes in a single session, from one day to the other, in weekly and monthly comparisons.

Notably, the volatility currently registered is still not close to that observed around 2008.

The coronavirus pandemic starting in 2020 resulted in disrupted supply chains, a race for commodities such as wheat, and concerns about demand worldwide amidst social isolation measures to prevent/decrease the spread of the disease.

This scenario impacted commodity prices in the face of the pandemic's uncertainty. The measures to combat the disease varied between countries, and after the first few months, the pressure to relax social isolation increased, and by the end of 2020, vaccines became available. With this, 2021 began more optimistically, with fewer restrictive measures in most parts of the world and a more significant recovery in economic activity. 

Central banks moved to stimulate the economy by reducing interest rates and adopting monetary easing measures. However, this greater availability of money, stimulating demand, was not accompanied by a proportional expansion of supply, a situation that supported the prices of many products, including commodities, in addition to the imbalance in the logistics chains, such as the crisis of the lack of containers in important global cargo hubs, which ended up being poorly distributed around the world. 

With this, a scenario of higher price inflation was created, as the monetary authorities retreated from their expansionary measures and started to raise interest rates, which, as a result, has fueled the possibility of a recession.

Added to the macro context, 2022 started with the heightening of geopolitical tensions, with the invasion of Ukraine by Russia. This situation brought price spikes for corn and wheat since Ukrainian corn has great weight in the export market and wheat from the two countries directly involved in the conflict. As for soybeans, prices also reacted, but in a more moderate way, since the war's reflexes are indirect, through the vegetable oil market, since Ukraine and Russia are the main players in the world's sunflower market.

Currently, there are doubts about the size of Ukrainian production in 2022/23, and an agreement has been formed to allow the country's grain to flow through the Black Sea, whose ports have been blocked by Russian forces. However, there are still many doubts about the volumes to be exported.

Another point that has also moved prices is the new US crop. At first, a larger acreage was estimated for soybeans than corn as corn has higher production costs and the inputs were also expensive. Then there were delays in the country's spring planting as the lowland areas, where wheat is grown, faced drier conditions.

More recently, the USDA reported that soybean acreage is expected to be lower than corn acreage, and drier and warmer weather in the Midwest is on the radar, contributing to price volatility in recent weeks, and should continue to be seen in the coming months.

Besides this, the 2022/23 soybean planting starting in September and summer corn planting starting in October in Brazil should bring another point of attention to the market. Thus, the weather in the coming months will be of great importance for the performance of the new Brazilian crop and will be another element that will bring price volatility. On August 1, StoneX will release its first estimates for 2022/23 soybean and corn summer crops. 

Soybean quotes on the CBOT- (cents/bushel)    

Cotton has undergone major turbulence in recent weeks, moving from historically high quotes to a sharply lower trend, which managed, in just three weeks, to bring down the value of futures by up to 30%. However, causes related to traditional fundamentals, such as supply and demand, have played a secondary role in explaining the recent fluctuations due to the large participation of speculative agents in the market during the 2021/22 cycle. 

The cotton prices trend has suffered major inflections in recent years. In 2020, with the pandemic and lockdowns, the textile sector was severely affected, destroying part of the cotton demand that year. Most goods derived from natural fiber are considered non-essential and more income sensitive. In other words, in times of crisis, families prefer to postpone the consumption of second necessities in favor of essential goods. In addition, with the limited movement of people, the physical commerce of clothing, for example, decreased, which further harmed the cotton market. With supply exceeding demand, producer prices and profitability sank, contributing to a drop in production for the next cycle. However, with government aid and income transfer policies, as well as the resumption of people movement after vaccines at the beginning of 2021, the demand for cotton goods began to grow again, encountering lower supply, which supported prices.

Since then, the upward trajectory of prices has encountered few negative sessions, attracting funds and other speculative investors, especially because of the dynamics of on-call positions. Thus, these agents entered the market massively: the strategy consisted in holding the long positions and selling them to the guarantors near contract expiration, when the market becomes less liquid and buying pressure supports prices. Thus, contract after contract of the 2021/22 cycle, prices went on a new upward trajectory, reaching their peak in May this year, when the N22 reached USD 158.2/lb. 

The good times ended as the world economy began to show signs of stagflation in 2022 and 2023. The movement in the financial market in June affected several assets, especially agricultural commodities, as investors sought safer sources of income amidst pessimistic expectations. Since then, cotton has suffered from a significant exodus of these speculative agents, which has put pressure on prices. In July, the December/22 contract reached US¢ 83.22/lp, a drop of 47.4% from the year's high. Thus, while this movement does not stop, it is likely that cotton will continue to decline and lose the gains of recent years.