Summer Volatility is Here

May 28, 2021

Summer Volatility is Here

Grain markets were all over the place this week, led by corn with sharp moves up and down. An early week washout on fears of China cancellations quickly recovered on an export sales report that showed old crop corn demand much stronger than expected. Longer range weather forecasts suggesting the hot and dry conditions will be returning to the northern plains and upper Midwest restored the bulls’ confidence in the uptrend.

Wheat tagged along with corn, something it will do as long as corn supplies remain this extremely tight. But it does have its own fundamentals that are enhancing the moves. Wheat is mature across the south and the upcoming harvest is casting a bearish tone near term. But widespread rains are creating a slow start to the harvest season and high humidity is stoking fears of disease and potential quality decline, thus offering support to the market.

In the north, spring wheat is facing a return to the hot and dry condition that plagued the planting season. Recent rains in small regions will help the crop along, but the underlying drought has been present since last fall and subsoil moisture is all but nothing. Crop stress could easily soar if the forecast verifies.

Minneapolis wheat futures were well supported through the week, gaining 30-cents on Chicago and 34-cents against Kansas City. I look for that spread to continue to work as long as the drought plagues the north but not the Midwest. If the dry condition return to the northern Midwest, a strong corn market could support Chicago wheat, so that spread could see a correction. That said, longer term, Minneapolis looks poised for more strength against the winter wheats.

For the week, Kansas City lost 11 cents, Minneapolis gained 23 and Chicago lost 7. Corn was down 2 with soybeans up 6.

Weather is, by far, the main fundamental factor the market is concerned about for the next several weeks.

However, we are watching the Russian export program closely for the next few weeks as their new export tax begins June 2. The tax will be 70% of the price above $200/MT. That is the easy part.

Determining exactly what is the cash price gets murky. The government has decided that it will be a 7-day average of export prices at deep-sea only ports and will be published by the Moscow Exchange. Current contract prices are included in the index if the delivery period is within 60 days after the index calculation.

So, it appears that exporters can’t really be certain what the tax will be when they agree on a contract because the tax calculation includes their current contract price as part of the 7-day average. Likely, for the near term, export sales out of Russia will be slow until they become more comfortable with the floating tax.

Louise Gartner,

Spectrum Commodities

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