Rabobank analyst: Grain market to be based on fundamentals

KANSAS CITY — A Rabobank analyst said the war between Russia and Ukraine has caused the global grain market to rally sharply, first surging toward record prices at the start of the war and then dropping sharply on rumors that the two countries would sign an agreement allowing Ukraine to ship grain out of its southern ports, which had been blockaded by the Russians since the start of the war in February.

Steve Nicholson, global sector strategist for Grains & Oilseeds at Rabobank, told World Grain that if the deal, signed July 22, holds — and there’s legitimate concerns that it won’t after Russia fired missiles at the Port of Odesa less than 24 hours after the agreement was signed — he believes price movement on the grain market will be based more on fundamentals, meaning the basic concept of supply and demand, and less on fear-based psychological factors.

“If you think about it, the market went sharply upward at the start of the war and then has come back down close to where it was before the war,” he said. “That gives some indication that about 75% of that was all about psychology and maybe 25% of it was based on fundamentals.”

Steve Nicholson
Mr. Nicholson added: “I hope we can come back to the fundamentals and set the war and negotiations, and all the confusion around that, aside for now. I’m not saying we can put it to bed, but perhaps now the markets will have to come back and focus on the fundamentals.”

Taking the war out of the equation, Mr. Nicholson noted there are concerns, particularly regarding some weather-related supply-side issues for the 2022-23 marketing year, that could precipitate some upward price movement. Dryness in key production regions in North America, South America and the European Union, could lead to smaller corn, soybean and wheat crops in the coming months, he said.

“We’ve got weather issues all over the world,” he said. “We’ve got La Niña still hanging around, which is impacting weather in the US and South America. We have had favorable weather in Australia for record wheat crops, but they don’t have the port capacity to move a crop that large.  It’s been extremely hot in Europe, and they were talking a week ago about a 5% decrease in the EU wheat crop, which may be optimistic.”

However, Mr. Nicholson said grain producers, processors and transporters have performed admirably during the past two years in meeting global demand despite dealing with the COVID-19 pandemic, the supply chain issues related to it, and the Ukraine war, which has caused abrupt changes in trade flows.

“They mostly have gotten stuff where it needed to go,” Mr. Nicholson said. “You’ve got to give Ukraine credit for the old college try in attempting to move as much grain as it possibly could outside the port system. Was it perfect? Did everybody get what they wanted at the price they wanted when they wanted it? No. But the system has proven to be pretty resilient.”

After dropping sharply on the day of the agreement, grain prices have pushed higher, in part because the deal appears to be on shaky ground following a surprise missile attack on Port of Odesa and other concerns about the agreement.

Even if the deal remains intact, the logistical challenges, such as getting enough ships to carry the grain, ensuring a safe passage through a mined sea, and setting up inspection teams for incoming and outgoing shipments, will be significant, Mr. Nicholson said.

“They’re saying they hope to ship 5 million tonnes of grain out immediately,” he said. “That seems pretty optimistic. They need to ship out 20 million tonnes over the next six months and that also seems like it’s a heavy lift.”

Regardless how the situation in the Black Sea plays out, Mr. Nicholson said there likely will be a change in how countries and companies do business forward.

“Despite higher prices and higher interest rates, one thing I think they’ll consider doing is hanging on to a little more inventory,” Mr. Nicholson said. “Just in Time will become more Just in Case. I think COVID-19 and the war (in Ukraine) put them in a situation where they were a little uncomfortable.”