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Another generally bearish week for commodity futures is behind us. This marks several consecutive weeks in which commodity prices have predominantly been on a downward trend. We will see if this changes in the week ahead.
The market in the new week will focus on the weather forecast in Brazil, the new president of Argentina, and the announcements he will make following his election victory on Sunday, demand in the U.S., this week’s FED meeting, and the very important Thanksgiving Day for Americans, which will result in somewhat less active trading on the exchanges as most traders will take an extended weekend.
Geopolitics will continue to play its role in the markets, with the ongoing conflicts in Ukraine and Gaza. This will keep macroeconomics in play following weekend reports that the IMF is “seriously considering” a possible increase in Egypt’s $3 billion loan program due to economic difficulties caused by the Israel-Hamas war.
The elections in Argentina are final, with ultraliberal economist Javier Milei winning, whose narrative is to dollarize the economy and create a very pro-export economy, and overall, some radical changes are expected in Argentina. Will this reflect on the activity of Argentine farmers in the market? Generally, his victory leans bearish for the global agri market.
According to the American banking giant Goldman Sachs, the global economy in 2023 has exceeded the most optimistic expectations: (i) the labor market has been solid, with unemployment rates falling below pre-pandemic levels; (ii) inflation has decreased in most countries; (iii) central banks have made significant progress in bringing inflation back to their targets; (iv) GDP growth is on track to exceed consensus forecasts from a year ago by one percentage point globally and by two percentage points in the U.S.
At the same time, the Lazard Global Outlook 2024 Report hints at an expected slowdown in global growth this year, but the risk of recession is low, inflation is expected to peak in 2023 and then gradually decline, the U.S. economy should continue to grow, a slowdown in the Chinese economy is expected, geopolitical risks remain high, and the 2024 elections in the U.S. will introduce an additional level of uncertainty into the global economy.
FED Has Done Quite a Good Job
According to the latest data, annual inflation in the U.S. is at 3.2 percent, unchanged from last month. Thus, this is bullish for stocks, bearish for the dollar, and gives optimism to the market that interest rates may soon fall. The S&P 500 index has risen nearly eight percent just this month! The market still reluctantly acknowledges that Powell and the U.S. FED have done quite a good job; by raising interest rates, inflation has been brought under control, while a severe recession has been avoided.
When it comes to major currencies, primarily the EUR/USD relationship, we are still in a trading range of 1.06 to 1.12. Only when we break out of these trading boundaries will we have clearer movement. Currently, the euro has risen above the $1.09 mark for the first time since the end of August, supported by a broad weakening of the dollar amid expectations that the FED has likely finished its interest rate hikes.
Meanwhile, eurozone data recently confirmed a sharp slowdown in year-on-year inflation, reaching its lowest level in October not seen in over two years. Market expectations reflect a forecast of more than 100 basis points in U.S. interest rate cuts next year, along with approximately 100 basis points in ECB rate cuts by the end of 2024. This contrasts with recent comments from ECB President Christine Lagarde, who indicated that interest rates should remain restrictive for several quarters.
On global markets, oil prices have fallen for the fourth consecutive week, at one point diving to their lowest levels in four months, due to market concerns about weak demand in the world’s largest economies. The weekly price drop would have been even greater had prices not jumped about four percent on Friday, mainly due to a correction following sharp declines in previous days.
The price of Brent oil fell 1.05 percent last week. The new week, however, begins with trading in the green, at a level just below $82/bbl. The same trend is seen in the U.S. oil market, where last week WTI oil fell 1.65 percent. Like Brent, trading in the new week is in the green, around $77/bbl. The market was somewhat surprised by data showing an increase in U.S. inventories in the previous week by 3.6 million barrels, much more than analysts expected.
Production has remained at a record 13.2 million barrels per day. This drop in crude oil prices contrasts with OPEC and IEA estimates that forecast tight supply in the last quarter and consequently rising prices.
We can conclude that prices are currently falling despite seemingly favorable conditions, as the market simply does not believe the estimates of rising demand. As demand is not expected to strengthen due to economic weaknesses, oil prices in the short term can only be supported by a reduction in supply, i.e., production cuts by OPEC.
Futures prices for natural gas in Europe at the beginning of the new week are around €46/MWh. A bit of unrest at the start of the week was brought to the market by the news that Yemeni rebels, the Houthis, claimed to have captured an Israeli cargo ship in the Red Sea. This news further fueled concerns about possible supply disruptions due to the conflict in the Middle East.
At the same time, colder weather is expected to arrive in Northwestern Europe this week, which could increase heating demand. However, gas storage is filled to the brim, putting pressure on prices to fall. Last week, natural gas prices fell 3.3 percent, marking the fifth consecutive week of declines and are on track to end the month with lower prices.
Wheat Needs Some New News
Wheat on U.S. exchanges has fallen significantly on a weekly basis (CBOT Dec contract at the beginning of the new week below $5.5/bu), with some contracts reaching their lowest values. Weekly sales were below the weekly pace needed to meet USDA estimates, crop ratings remain the best since 2019, and the price of physical EU goods continued to slide downwards with no spark to prompt funds to buy futures.
BAGE has reduced its estimate of the Argentine crop to 14.7 million mt due to frost, with the current harvest at 20 percent completed. In Australia, a harvest of about 24.5 million mt is expected, significantly lower than last season. MATIF Dec contracts have fallen to their lowest level in 23 months (at the beginning of the new week at €225/t), despite rain delaying planting in France (71 percent completed compared to an average of 89 percent).
EU exports officially lag 20 percent behind last year, but private estimates suggest that number is closer to five percent. Russian export margins continue to fall, and exports are slowing. It is too early to assess the impact of new export controls and insurance contracts on the supply of goods from Ukraine, but the market showed little reaction on Friday when a ship hit a mine. Overall, wheat needs some new news to push the market upwards; otherwise, we remain at these levels.
Corn also ended last week down, continuing the downward trend despite supportive exports from the U.S. and current weather conditions in South America. Weekly sales in the U.S. increased by 33 percent, while Brazil remains too wet in the south and too dry in the north, which continues to delay soybean planting with corresponding consequences for the start of the second corn planting (the so-called safrinha).
In Argentina, BAGE has already shifted 200k ha from corn to soy in its estimates, but the crop has so far remained unchanged at 55 million mt. The first planting (25 percent of the total corn crop) is now complete, and the condition of the crop rated as good/excellent has increased to 29 percent (vs 11 percent last year). MATIF ended the week unchanged, with French corn prices on FOB continuing to be less competitive than Polish and Ukrainian corn.
Total EU imports remain about 40 percent lower than last year. Currently, four panamax ships are being loaded in Ukraine for China. Overall, although concerns about the second corn crop in Brazil are rising, the weather in December is crucial for the yields of the first crops in Brazil and Argentina. Global trade flows continue to be disrupted by weather conditions and logistics.
The price of soy has fallen on a weekly basis on the exchange despite facing weather (un)favorable conditions in Brazil, Chinese soybean purchases, and record levels of soybean processing in November in the U.S. Meal has reached nearby contract maxima, and the spread between nearby and later deliveries has further inverted.
Increasing discounts for deferred positions indicate still hopeful expectations for recovery/increase in meal stocks in Argentina and the U.S. by mid-2024. Weather in Brazil raises increasing concerns as traders lower their production estimates due to further planting delays amid ongoing heat and drought in the north and excessive rain in the south.
The expected recovery of the crop in Argentina compared to last year keeps the overall South American crop at record levels. Weather remains a key factor that will determine the fate of soybean crops in South America, and consequently, price movements in the months ahead.
China and the U.S. have agreed to triple global renewable energy capacity by 2030. We will need a lot more copper and silver!
