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Sentiment keeps swelling global grains prices, but uncertainty remains

Global grain prices saw an unprecedented price rally during 2020 as the world grappled with the coronavirus pandemic, which gave rise to challenges and fears never seen before.

Amid the widespread uncertainty and crumbling economies, demand for all major commodities fell due to drawn-out lockdowns. But the global agriculture sector has been on a different trajectory to other commodities, and after an initial setback saw demand soar, partially on pandemic-led fears, but mostly on China's grain hunt.

Driven by these factors, the grains price trend is likely to continue through the rest of the year. However, some uncertainty remains as various risks lie underneath the expectations of continued higher demand, from China to weather disturbances.

Demand story

The grain price rally so far has been demand-driven, with China in the driver's seat, said Peter Meyer, head of grains and oilseed analytics at S&P Global Platts Analytics.

China's enthusiastic grain purchases stem from recovery in the country's pig herd and reported stocking up of inventories. China's corn imports in 2021 are seen at a record-high 24 million mt, while wheat imports are estimated at 10 million mt, the highest in over 25 years, according to US Department of Agriculture's estimates. The country is likely to import 100.33 million mt soybean in 2020-21, up 13.4% on the year.

Agricultural commodity prices surged significantly over past year supported by the rising demand. On the benchmark Chicago Board of Trade, US corn, soybean and wheat prices gained in the range of 30-120% during the last one year period until April end.

CBOT prices wheat corn soy 2020-2021

Global grains demand keeps rising

Markets are factoring in that China will continue to buy grains at the same pace, if not higher. However, uncertainty remains around how much grain China will need going forward in 2021-22.

Reports of African swine flu outbreaks in China are also to be noted, as some in the market believe China may be underreporting cases: any major outbreak could result in lower feed requirement and therefore lower grain imports.

"Even though China has a huge potential to remain as a key importer going forward, it's highly unlikely China would purchase as much grain as in 2020," said Abdolreza Abassian, senior economist at the Food and Agriculture Organization.

"Generally speaking, I think if we were not to have China coming into the market in 2021-22 for the same amount of purchases as it did in 2020-21, I think we are not going to see further firmness in prices," Abassian said.

Weather worry

Weather conditions are set to be the leading factor for grain price movement going forward in 2021.

In Brazil and Argentina, the corn crop is likely to be reduced due to persistent dryness. Weather in the US was also being closely watched as the country entered its spring planting season, when corn and soybean are planted—currently the most volatile and weather-sensitive grain products.

Corn prices on the CBOT jumped recently following one cold week in the US, even though only 8% of corn was planted until then. "The US corn market is highly sentiment driven right now," said Meyer.

Though there are concerns of dryness for the US in the longer term, the current weather is nothing to worry about, he added.

Meyer also said that t he current higher prices could encourage US farmers to plant more corn and soybean in the ongoing spring planting, the extent of which would only be known by end-June.

Food nationalism taking back seat

The pandemic has once again brought into focus threats to food security—raising concerns about long-established trade policies and globalization.

On the exporter side, countries limited exports or implemented export taxes for economic reasons and to stem domestic food inflation, while on the import side, the fear that tomorrow supplies may shrink, or prices may go up, led to stockholding beyond needs.

So far, many big grain exporting countries like Ukraine, Russia, Argentina and the EU have put certain restrictions on their exports.

The trade measures, however, did not have the effects that were anticipated earlier on, Abassian from the FAO said. These measures did not play much of a role in supporting grain prices and would be the fourth or fifth factor affecting grain prices right now, he added.

Real crunch on supply side

Global grain stocks are seen shrinking in 2020-21, while global consumption of grains is seen rising, USDA estimates show.

USDA global grain stocks 2019-2021

The world's top grain supplier, the US, is likely to see its stocks tightening in the 2021-22 marketing year as final production figures for 2020-21 fell short of the previous estimates for all major products in the category.

In the USDA's quarterly stocks report released March 31, corn stocks were reported at a six-year low. Soybeans stocks were the lowest in five years, while wheat stocks were the lowest in six years.

On top of that, US farmers' planting intentions for 2021-22 came out much lower than what was expected by analysts and suggested by the higher market prices.

Tightening stocks in the US, with concerns of lower production in Brazil and Argentina and rising global demand, seem like a perfect recipe to keep agriculture and food prices simmering.

Uncertainty prevails

However, there are many unknowns in the market right now that could also strongly influence prices.

Grain demand from China, US acres in 2021-22, the impact of several export restrictions, and US dollar movement are some of the factors in play.

Over the past year, funds have also had a strong influence in the global grain trade, a recent report by UK's Agriculture and Horticulture Development Board said. Since early in the year, analysts have pointed to economic recovery and inflation expectations as drivers pulling investors towards commodities across the board.

In the last few days futures have moved into overbought territory and as uncertainty clears, the market should be aware of the risk of funds unwinding their positions, the AHDB report said. "If we were to see more US acres or risks for the Chinese pig herd, futures could fall, quickly," it added.

Overall, the tightening supply situation is still the key short-term market driver, but participants will be watching keenly for any new signals.