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- The signing of the agreement between Ukraine and Russia on establishing a corridor for the export of grains and oilseeds has only temporarily reduced grain prices on exchanges
- It will be weeks before we see the first significant quantities of grain delivered from Ukrainian Black Sea ports
- Oil prices are still under pressure from fears of recession and global economic slowdown
- The eurozone economy is expected to shrink in July
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The main news of the past week is the signing of an agreement on Friday between Ukraine and Russia to establish a corridor for the export of grains and oilseeds from Black Sea ports. Due to this news, grain prices, especially wheat, significantly fell on all relevant exchanges on Friday. For example, the price of wheat on MATIF dropped by €25/t within a few hours of trading after the news was announced. I had previously predicted such a scenario in my analyses. However, the implementation of the agreement is yet to follow, and this is something the market will closely monitor in the days/weeks ahead.
The attack on Odessa on Saturday is not a step in the right direction and raises questions about the realization of the agreement itself. Therefore, prices are rising today. I personally believe it will be weeks before we see the first significant quantities of grain delivered from Ukrainian Black Sea ports. A secure trade corridor will allow Ukraine to export over 20 million tons of grain, as the stocks of the old crop are estimated, and at the same time, it will free up storage space for the upcoming harvest.
Decline in Key Grain Prices
It is interesting to compare how much key grain prices have fallen in the last two months. On MATIF, the closing price of the wheat contract for September on May 17 was €438.25/t. On Friday, the closing price for the same contract was €325.75/t. A drop of €112.5/t or 25 percent. The corn contract for November had a closing price of €379.75/t on May 17, while trading on Friday ended at €302/t. This is a 20 percent drop for the observed period.
The decline in rapeseed prices is even more pronounced. On April 22, the closing price for the August contract was €881.25/t, and on Friday, trading closed at €633.5/t. This is a drop of €247.75/t or 28 percent! A similar trend can be seen in price movements on CBOT.
The price of wheat is the lowest since February, and trading on Friday fell below the level of $7.60/bu, while the price of corn followed the same trend. By the end of the week, corn was traded at levels below $6/bu, the lowest since mid-January, effectively negating the overall price increase since the beginning of this year. Finally, the week was marked by a decline in soybean prices, although prices ended positively on Friday, they were not enough to offset the decline from previous trades, and at one point, trading occurred at levels below $13/bu for new crop soybeans (November contracts), the first time since mid-January.
The decline in prices is largely due to fears of recession and falling demand, which led investors and funds to close their positions on exchanges and take profits, and to a lesser extent due to harvest pressure, estimated quantities, and export potentials of certain regions.
Interest Rates Rising Due to Inflation
Inflation in the Eurozone is 8.6 percent! Such a level of inflation forced the ECB to react and surprise the market with an increase in interest rates by 50 basis points (when a rise of 25 basis points was expected). The main interest rate is now 0.5 percent, while the interest on excess bank liquidity is 0 percent after being in negative territory for a long time. Additional interest rate increases can be expected by the end of the year.
Consequently, the euro has strengthened slightly, and the EUR/USD exchange rate is currently around 1.02 (after the dollar was briefly stronger than the euro last week). Investors are awaiting key economic data this week, which is expected to influence the next moves of the ECB after recession concerns have returned to the market.
The eurozone economy is expected to shrink in July, according to preliminary surveys, with the steepest decline recorded in Germany and the weakest expansion pace in 16 months in France. In addition to raising interest rates, the ECB has approved the Transmission Protection Instrument. Preliminary data is expected to show this week that the eurozone grew by a marginal 0.1 percent in the second quarter, while the inflation rate in the bloc is expected to accelerate to 8.7 percent year-on-year in July, setting a new record.
This week, the US FED will decide on further interest rate hikes. A rise of 75 basis points is again expected. Additionally, this week data for US GDP in the second quarter will be released. It will be interesting.
Unpredictability of the Harvest
The barley harvest in France has been completed, while the wheat harvest is at 84 percent according to estimates from the Ministry of Agriculture as of July 18. Since then, the weather has been optimal for completing the harvest. Furthermore, it should be noted that the current very high temperatures have certainly led to a deterioration in the condition of spring crops, and it is expected that the condition of crops will further worsen in the coming days.
In Europe, rain is more than necessary, not only to help firefighters combat various fires raging across Europe but also to bring down the heat and help crops yield at least an average harvest for producers.
Unfortunately, for some areas and crops, the damage is already irreparable. In the US, according to current models, rain and favorable weather for crops are expected, which gives hope for an improvement in crop conditions during its critical pollination phase, alleviating concerns about global stocks. It is estimated that currently 64 percent of corn crops in the US are in good to excellent condition, unchanged from the previous week. Rain over the weekend has stimulated crops in the eastern Midwest, but it remains dry in the western areas. The IGC has released a new wheat production estimate of 770 million tons, while wheat exports are estimated at 194 million tons.
Fear of Recession Affects Oil Prices
Oil is trading at levels slightly above $100/bbl, still under pressure from fears of recession and global economic slowdown which prevail over current supply chain difficulties and lower supply. Market expectations that the FED will raise interest rates again this week have a significant impact on oil price movements.
Currently, oil is traded at a premium for closer deliveries compared to later ones, which only confirms that there is a limited supply in the market and a higher short-term risk and uncertainty. Last week’s visit of the US President to Saudi Arabia did not yield any promises regarding increased supply, nor did Arab leaders promise to pump more oil. The Governor of the Russian Central Bank stated that Russia will not supply oil to countries that impose price caps on Russian oil.
The price of gas remains above €160/MWh. Although the Nord Stream pipeline is back in operation, it is currently at only 40 percent capacity (in the style of Alan Ford, we can conclude that it is better than 0 percent) due to uncertainty regarding future gas supplies from Russia. Will we see sanctions on energy from Russia in the coming weeks?
Meanwhile, gas deliveries to China via Siberia are at historically record levels, in line with the strengthening of relations between Russia and China. The European Commission recommends its members reduce gas consumption by about 15 percent, but with the current heatwave, it is questionable how achievable this will be. Concurrently, work is underway on alternative gas sources, with an agreement signed with Azerbaijan to supply 20 billion cubic meters of gas annually to the EU by 202. On the other hand, the construction of the Russia-China gas pipeline through Mongolia will begin in 2024.
Coal Again Near Records
What can be said about coal? Prices on the exchange are again above $400/t, just below record levels. China, the leading global consumer of coal, announced that it will lift a two-year ban on coal imports from Australia after tensions between the two countries have eased. High coal prices are expected to continue due to rising demand, as even Europe is increasing its demand for coal again, and the same applies to India, the second-largest consumer of coal in the world.
Aluminum futures were traded around $2,450/t, a drop of about 40 percent from their peak in March, as fears of a global recession that will reduce demand and higher production levels continue to loom over the market. Base metal prices have come under significant pressure as central banks raised interest rates, and rising energy prices have diminished industrial activity. Moreover, the main consumer, China, continued to increase production as smelters recovered from last year’s aggressive energy efficiency targets and recent coronavirus-induced shutdowns.
After several weeks of decline, the price of copper stabilized at $3.3/lbs, about 30 percent lower than the record level in March. The same goes for the price of steel, which is currently trading at $3,800/t, at its lowest level since November last year.
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