From growing tensions between Ukraine and Russia to the forecast for hot and dry weather across the Midwest, grain prices shot higher through midweek.
On Monday, Russia said it would halt participation in the year-old grain deal that was brokered by the U.N. The deal is important, as it allows Ukraine to export grain through the Black Sea. Just hours before, a blast knocked out Russia’s bridge to Crimea. Moscow called it a strike by Ukrainian sea drones.
Following the announcement to halt the deal, Russia also stepped up attacks on Ukrainian grain ports, while also issuing a vital warning later in the week: ships heading toward Ukrainian ports in the Black Sea will now be considered to be carrying military cargo, opening the door for more attacks.
Immediately following the escalation on Monday, grain markets were slow to respond. Chip Nellinger of Blue Reef Agri-Marketing says there’s been so much changing narrative about whether the grain deal will be renewed or not, but the deal has continued to be renewed. He thinks that’s why traders were slow to respond to the news.
“I think that there’s been so much back and forth about whether the black sea grain corridor is going to be renewed by Russia, the market has become a little bit weary,” says Nellinger. “And then Russia came out and said they were not going to renew that. And the market didn’t react to that, because I think a they thought maybe that there was still a chance. But I think by the middle of the week, it was apparent that Russia was playing hardball, they started attacking some Ukrainian ports and said they may look to fire upon some of these ships that are moving into the Black Sea towards Ukraine, and that really is what spooked the markets and got the algos coming in to the long side on the headline.”
Musical Chairs of Short Grain Supply
Nellinger says the funds have been short in the wheat market, and even though it was slow to react, the funds continue to buy breaks in the market as the situation in Ukraine and the Black Sea remains volatile. But there are still questions on who will see short supplies due to the interrupted flow of grain.
“I think the rally we’ve seen is the musical chairs that’s going to be played here in regards to who’s getting shorted with supply,” says John Payne of hEDGEpoint Global Markets. “On the global balance sheets, the loss of the Ukraine crop, at least the export terminals, isn’t a huge deal. What is a huge deal is if we’re going to lack any commercial shipments at all in the Black Sea.”
Payne says there is one port in the southern part of Ukraine that will be open, as well as others in the southeastern part of the Black Sea.
“At this point, I think that’s the uncertain events, is figuring out how is this going to play out as we move forward,” he says. “I don’t think we’re going to see $14 Chicago wheat, but I think you could have some knee jerk reaction in the nearby contracts.”
Nellinger says a massive drop in Ukraine’s production, compared to a year ago, was already a known fact.
“In my mind, it’s more about Russia, and they supposedly have a big crop. That Black Sea grain corridor probably benefited Russia as much as much as it did Ukraine. And now if that’s going to really slow, and there’s been talk that Russia is going to keep some of that wheat off the market for an internal supply reserve, so to speak.”
Nellinger says bigger picture, the question is if Russia will continue to supply the world now that the Black Sea is closed, and he says Indian and China have been big benefactors of Russia’s grain.
High Heat and Little Rain Forecasted for the Midwest
While the uncertainty in Russia and Ukraine were the big market movers earlier in the week, by mid-week, the U.S. markets were looking at weather.
Eric Snodgrass of Nutrien Ag Solutions says the heat that’s been parked in Texas and across the Southwest this month, will barge into the Midwest starting on Wednesday. He says it’ll push into the central United States and the Plains.
“And we’re going to be talking about temperatures that are going to be in the mid upper 90s as far north as Minnesota and the Dakotas, and then possibly, there’s going to be some pockets in Missouri, Illinois, Nebraska, Kansas, that are going to be over 100 degrees Fahrenheit,” says Snodgrass. “And so we always worry it’s going to last. Is this going to be a two to three day event? Or is there going to be a 10-day event or a 30-day event?”
He says the current thinking is the heat starts on Wednesday and then lasts through the weekend. There are some forecasts pointing to 105 degree heat in Iowa.
“But the question we have is, there’s humidity in this pattern. So, will there be storms that blow up in the middle of this and bring some cooler weather? That’s a possibility,” he says. “So, I would call it hot, hot with a lot of isolated storm activity. There’s going to be winners out of this, and there’s going to be a larger area that’s going to see some crop damage.”
Nellinger also says the duration of the heat is the biggest question for the markets.
If it’s three days of 100 degrees, and then you get some rain on top of it, probably not that big of a deal. If it’s three weeks of 100-degree temperatures, like some of the weather models are hinting at, and no rain or the rain has pushed north because of the high-pressure ridge, then you’re talking about heat and dryness at the exact wrong time. And it’s going to affect both corn and soybeans that will be starting to flower,” says Nellinger.
Nellinger thinks the volatility that happened this week in the markets, is only going to expand next week, depending on what the weather forecast says.
Payne says the forecast for next week caused the insurance cost for short-term options to skyrocket.
“That is kind of a front running event where if this weather would really turn dry in August, you could see some short covering, obviously, but I think the funds have moved out to a general degree. It really comes down to soybeans,” says Payne.
Payne says he doesn’t think the corn supply satiation is as threatening s the soybean crop.
“The lack of acres puts a lot of stress on whatever we’re going to have the crush numbers come in at. While they’re smaller, crush margins are really good. So, a break in the price isn’t going to help unless you get soy oil and soy meal falling with it, and right now you have meal up and oil up.”
