Highlights - Grains experience another choppy week as war and weather peak funds interest

It’s been another volatile week of ags, with renewed interest from funds, weather risks and the ongoing war in the Middle East continuing to add risk premium. 

As the war nears the end of its first month with mixed messages on a solution from the US and Iran, many are beginning to quantify the worst case scenario of a protracted war and resulting higher energy prices. We covered this in our scenario analysis on day-1 of the the war. 

Grains and oilseeds have been relatively insulated from the direct impact of the war, however if weeks turn into months, the implications for supply chains cannot be understated.

Already ,the decision of the EPA to waiver ethanol mandates in response to higher oil prices, coupled with expectation of a lower US corn area - already seen at 5Mac below last season - which may be amplified by higher fertiliser costs due to corns more intensive requirements. 

Investors have take a renewed interest in grains and oilseeds, with buying in European wheat in particular leading to a mutli-year high net short, to a now net long position, in a matter of weeks. 

Next week the USDA will deliver two of its most anticipated reports - one on US grain stocks, part of a quarterly series which has a history of sparking price volatility, and the other the Prospective Plantings report which is one the year’s most closely-watched USDA releases. It shows US farmers’ planting intentions for corn and soybeans for harvest-26, and is based on a survey undertaken in the first half of this month, so will make at least some allowance for implications of the Iran war. 

The next move of Trump or the Iran is unknown, however we do know that grain markets are becoming increasingly twitchy to the potential for supply disruptions which could long outlast the conflict.

There is a lag effect due to the seasonal and long growing cycles of agricultural commodities and the impact that reduced inputs or lower areas could have, not to mention increased demand that could come from even higher energy prices. 

Goldman Sachs issued a memo to clients on the impact of Hormuz disruption on agriculture prices, the key points:

• Strait of Hormuz is critical for global fertiliser and LNG flows

• Disruption would tighten fertiliser supply and raise costs

• Biggest impact on grains is lower yield and therefore supply, not just higher costs

• Risk of lower yields and crop switching

• US relatively protected (fertiliser already secured)

• Europe, Australia and Southern Hemisphere more exposed

• Could increase demand for US exports → push grain prices higher

• ~80% of commodities exposed → inflation up, growth down

• Commodities seen as a hedge against supply shocks, further buying could be seen