The Market Faces Challenges of Rising Interest Rates, Wheat Exports from the EU 27% Lower than Last Year

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Last week, commodity prices on exchanges were mostly declining, with some exceptions such as TTF gas. We will see if this trend will carry over into this week or if it was just a pause and an opportunity for investors to take profits on their positions. At the start of the new week, the market faces challenges from the so-called ‘hawkish policy’ of the FED, rising interest rates, a strong US dollar, a spike in energy prices, and the looming shutdown of the US government next weekend (for the first time in history federal debt has exceeded $33 trillion). The agri market will closely monitor several additional bearish factors, including low levels of the Mississippi River, reduced Chinese demand, stable grain flows in the Black Sea, and favorable weather conditions ahead of critical harvest weeks in the US.

As expected, the US FED did not raise interest rates further at last week’s meeting, but they indicated that they might raise them once more by the end of the year and keep them at elevated levels longer than previously anticipated. A monetary policy with a still restrictive tone is expected until 2026. This scenario is also the most likely for other central banks in Western countries as inflation is not easing as quickly as investors and traders had hoped. Consequently, this means that economic growth will further slow down, which will, of course, reflect on the demand for all commodities. Financial markets continue to digest the FED’s stance on the ‘higher for longer’ policy (higher interest rates for a longer period), but I am surprised why this is a surprise when the FED has been saying this all along? Probably because the market is always optimistic.

New Geopolitical Problems

The geopolitical situation in the world is becoming more complicated. In addition to the war in Ukraine, tensions are also brewing in Moldova, Armenia, and Azerbaijan. Even if you do not know where these places are on the map, it is not hard to conclude that any escalation of war could have significant consequences first on energy and then on agricultural products, especially if Russia and Iran also enter these wars. Iran, Russia, and to a lesser extent Azerbaijan are among the leaders in global gas and oil production.

Overall, it seems that China continues to struggle. A recent survey of American companies in China revealed that optimism regarding investment in China continues to decline. Of the 325 companies surveyed, 48% had negative outlooks on their development in China over the next five years, while 40% indicated they are relocating supply chains and investments out of China. Only 17% of surveyed companies stated that China is their first option for investment in the global market. One-third of respondents indicated that Chinese policies and regulations towards foreign companies have been less friendly than a year ago. Chinese regulators have promised to continue improving the business environment for these foreign companies, but so far they have not been successful in doing so.

Some optimism comes from the OECD, which states that although the prospects for economic growth remain weak, the global economy showed unexpected resilience in the first half of 2023. Global growth is expected to be lower in 2024 due to controlled monetary policy and a slower recovery in China. There is still underlying inflation, driven by the service sector and a tight labor market situation. Risk margins are lower, with the possibility of persistent inflation and sharper slowdowns in China. The global economy is projected to grow by 3.0% in 2023, before slowing to 2.7% in 2024. Despite the slowdown in China’s recovery, Asia is expected to contribute significantly to global growth in the 2023-24 period.

Slight Decline in Oil

After three weeks of growth and reaching the highest levels this year, oil prices on global markets slightly declined last week. Primarily because, due to high inflation, central bank interest rates will remain elevated longer than expected, which will slow down economic growth and thus demand for oil. At the beginning of the week, Brent oil is trading around $93 per barrel (a decline of 0.7% on a weekly basis), while US WTI is at around $90 per barrel (a decline of 0.8% on a weekly basis). In the short term, prices are likely to be defined mainly by signals on the demand side. On the other hand, price support is provided by reduced production from OPEC+ members who are trying to maintain elevated oil prices and push oil towards the $100 per barrel level.

However, with higher oil prices, production from shale, as well as other global production, is becoming increasingly attractive and profitable again. Last week, traders were surprised by Russia’s announcement that it is temporarily banning the export of gasoline and diesel to ensure supply for the domestic market during the harvest and stabilize prices. Moscow did not specify how long this will be in effect. Futures prices for European natural gas rose by nine percent, to around €44 per megawatt hour, approaching the highest level in five months due to supply concerns.

Norwegian gas system operator Gassco extended the closure of the Skarv field from October 2 to October 8, resulting in delays in natural gas production. Despite large winter stocks in Europe, the market remains sensitive to various risks, including outages in the US, extreme weather conditions, and potential disruptions in Russian gas exports. Traders are closely monitoring LNG deliveries from the US following last week’s drop in gas flow to the Sabine Pass LNG plant, which is the largest liquefaction terminal in the country.

On agri exchanges, the market structure remains unchanged. Wheat is potentially bullish, corn is bearish, and soybeans are neutral to bullish. More or less, this is also how the opening is at the start of the new week, with the strong dollar currently not favoring US commodities. High interest rates, pressure from Russian, Ukrainian, Danube/Balkan, and Brazilian harvests on the markets combined with weak exports from the US and EU pushed exchanges down last week. In the physical market, prices remained unchanged, with buyers directing more demand towards wheat than corn, and generally, the pressure from the corn, soybean, and sunflower harvests aims to push prices down. Declining consumption of animal feed (partly due to issues with swine fever in the region) and the coverage of feed factories with raw materials in the short term further emphasized this situation.

Corn Imports 44% Lower than Last Year

Without a strong geopolitical event, this situation will last at least until mid-next month. On Friday, the USDA report on the state of stocks in the US as of August 31 will be released. A fairly important data point that will reflect the state of American consumption and exports. It is unlikely that we will see significant changes in fundamentals by the end of October. However, the feeling is that for milling wheat, the potential for further decline is limited. An additional boost for the EU wheat market could come if Russian exporters adhere to their government’s call not to sell goods below $270 per ton FOB Black Sea (€254 per ton FOB Black Sea) as was the case in last week’s tenders. Geopolitics and exchange rates will be market drivers, and from November, the southern hemisphere wheat market will also begin.

Currently, wheat exports from the EU are 27% lower than for the same period last season, while corn imports are as much as 44% lower than 12 months ago. Globally, the IGC estimates stocks of the largest exporters at the end of the 2023/24 season: wheat at its lowest in the last five years, at 55 million tons (11 million tons less than 2022/23); corn at its highest in the last five years, at 79 million tons (27 million tons more than 2022/23); and soybeans at 16 million tons (4 million tons more than 2022/23).

An increasing number of investors and mining entrepreneurs highlight the significant gap between perceived reality and the actual quantity of metals needed for the expected green transition. The energy transition will create unprecedented demand for metals and minerals. This will certainly be a bullish factor for markets in the future. The Russian government has increased export duties on precious metals, which now range between zero and seven percent, depending on the dollar exchange rate. Regarding last week, copper futures prices fell below $3.7/lbs, moving close to the lowest level since the end of May, amid renewed pressure from a strong dollar and weak industrial sentiment worldwide. Despite the current recovery in industrial growth and new loans in the largest consumer, China, ongoing concerns about the financial health of entrepreneurs maintain worries that the uncertain macroeconomic backdrop of the country has not yet hit bottom.