The Market Corner: The Month in Review "Grains"
By Filippo Lecchini
Grains
The whole grain sector has been very volatile as of late. At first it seemed that prolonged droughts were hitting inventories pretty hard. Then the July report curbed some of the concerns, but the sector remains very active whereas other markets seem to be in “summer mode,” also because the US Congress and governments around the world are heading into August recess.
Red spring wheat, a higher protein variety, saw plenty of action lately, making 4 year highs as different shocks are affecting production worldwide. In Europe the crops were hit by heavy rain, which can delay the harvest and lower its quality, i.e. protein content, whereas a protracted drought and hot weather threatened production in the US.
Soybeans have been on a similar trajectory: the dry season expected to last through the end of July has contributed to shortages as well as the acreage planted being less than expected. A similar dynamic has also driven the trend for corn and other products.
The futures market of course has been just as busy following the agricultural commodities action. The Minneapolis Grain Exchange’s hard red spring wheat futures traded 463,739 contracts in June, beating significantly the previous high on record set on August 2015 of 261,349 contract. The rest of the year is tracking pretty high so far too; January and March registered big numbers as well so that 2017 could turn out to be the highest volume year on record. Price action has not been negligible either with spikes over 30% just in June.
Bloomberg’s research shows equally impressive numbers for soybeans, soybean meal, corn, oats and various other products that almost doubled their 100 day average volume.
The volatility in these markets is fascinating to observe even for those who do not have particular expertise as it perfectly exemplifies supply and demand at work. What in this case is driving it all is the weather, and will be interesting to see what developments await for the rest of the summer. A lot of the main actors in the unfolding of these situations are farmers, distributors, all sort of operators and hedgers of course, but also traders looking for opportunities have recently paid particular attention to these contracts. There was a never a shortage of speculative trading in these products, but lack of volatility elsewhere might have attracted new players.
Looking ahead:
The summer is often a quiet time for the markets when people chose to enjoy the warmer weather and take time off. The US Congress and governments around the globe will be in recess for some time (even though the US Senate might try to address healthcare first). Barring unforeseen international developments or random events, not much is on the immediate horizon although an eye should be kept on the employment numbers on Aug 4th because The Fed will be certainly watching. The next meeting is at the end of July, but nothing is expected to come out of it. With no meeting in August, September will be a whole different story, even though the odds of a third hike before the end of the year have decreased significantly in the last few weeks.
RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.