Sentiment keeps swelling global grains prices, but uncertainty remains

Commodity markets continue to watch US inflation data closely, while Asian oil refiners wait for developments in US-Iran talks that would allow a resumption of the latter country’s crude flows. Plus, UK nuclear power and winter capacity, and South American soybean oil prices.

1. Energy markets mull inflation trend: COVID phenomenon or a structural shift?

What’s happening? The US Bureau of Labor statistics released their consumer price inflation statistics for May which indicate a continuing acceleration of inflation. Overall inflation rose to 4.9%, while core (ex-food and energy) inflation rose to 3.8%, but from a low base due to pandemic impacts. More telling, overall inflation showed acceleration to 6.9%, annualized, on a 3-month over 3-month basis, while core accelerated to 5.2%. The acceleration was beyond expectations: it indicates inflationary pressure is continuing to build.

What’s next? The US Federal Reserve has already indicated it sees these inflationary impacts as “transitory”, and has outlined a framework for allowing inflation to remain elevated and focus on “average inflation” and sustainability against its 2% target. The rise in implied inflation has been constructive to the continuing rise in commodity prices. The debate is whether the rise in inflation represents the cyclical impact of coronavirus, or structural shifts in labor markets and supply chains. If the impacts are more structural, it would prompt the FED to pull forward their timeline for tapering and rate increases. These are currently outlined by them as 2022-2023, but the market appears to be anticipating action sooner.

2. Return of Iranian crude could displace Mexican, Russian grades in South Korea

What’s happening? South Korea completely halted imports of Iranian crude and condensate since May 2019, and refiners including SK Energy and Hyundai Oilbank were since then raising purchases of Mexico’s Maya crude and Russia’s Urals Blend as alternative feedstocks to Iranian Heavy and Forozan crudes.

What’s next? South Korea will likely alter its crude oil procurement and trading strategy if the sanctions on Tehran are lifted, with Mexican and Russian suppliers poised to lose a big portion of their market share in the world’s fifth largest crude importer.Major South Korean refiners said Maya and Urals could lose out when Iranian oil returns to the international market. The country’s refineries were all primarily designed and configured to process Middle Eastern sour crude, hence it is a lot more effective in technical terms to feed the systems with Iranian oil rather than crude from the Americas and Europe, industry and refinery sources said.

3. Another hit for UK power generation as Dungeness B closes early

What’s happening? UK nuclear generator EDF Energy closed its 1.25-GW Dungeness B nuclear plant with immediate effect June 7, throwing in the towel on efforts to keep the ageing plant going to 2028. The duel advanced gas-cooled reactor (AGR) power station in Kent had been offline since September 2018 due to “significant and ongoing technical challenges.” In particular, changes to the condition of hard-to-access boilers within the reactors themselves contributed to a final decision to close the site.

What’s next? While market players said Dungeness B’s absence had been priced into winter 2021-22 contracts, its closure adds downside to the UK’s deteriorating dispatchable plant outlook. Adding the early closure of reactors at Hunterston B and Hinkley Point B by the middle of 2022, UK installed nuclear capacity will have fallen by a third from current levels to 6 GW by end-2022. “With Calon’s gas fleet expected to be out of action this winter and the Drax and West Burton coal plants only available in extreme conditions, we are likely to see a repeat of last winter’s extreme prices (see chart) in the event of cold, still weather, particularly if power demand recovers from the lockdown-limited levels seen last winter,” said S&P Global Platts Analytics‘ head of European Power Analysis, Glenn Rickson.

4. South America soybean oil basis plunges as Chicago futures remain supported

What’s happening? South American soybean oil FOB differentials or basis to correspondent Chicago Board of Trade futures have plunged to considerable lows due to a combination of surging CBOT contracts and limited export demand, with outright prices in Argentina and Brazil still at historical high levels. The Argentinian FOB Up River basis dropped by 1,100% year on year, while the Brazilian FOB Paranagua basis fell by 837% over the same period.

What’s next? Despite lower FOB differentials or basis, outright USD per metric ton prices in Argentina and Brazil remain at high levels because of the current CBOT futures levels. Market analysts say Chicago’s contracts should remain supported by expected tight global stocks and prospects of growing biofuels demand in the US as the country recovers from coronavirus-related economic impacts.

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Planting across the European continent all but concluded by the end of May, with dry weather concerns and expectations of shifts towards greater Indica production abounding in some markets.

Across the continent, output is expected to increase in 2021, with the US Department of Agriculture (USDA) projecting harvested area to expand by 0.7% on year to 423,000 hectares and milled rice production also to increase by 1.4% on year to 2 million mt. Most of the expansion in area is expected to be driven by Italian and Portuguese farmers.

Ahead of the start of planting operations in Italy, Ente Risi Nazionale (ENR) projected total planted area at 229,300 hectares, up by 0.9% on year. Initial indications suggested that 2021 round grain planted area will contract by 13% year on year to 58,700 hectares. At the same time, ENR also projected that Indica planted area will expand by 14% to 48,000 hectares.

However, with this survey taken in February before Indica reached its price highpoints amid continent-wide shortage concerns and with farmers yet to buy seeds, it is generally expected that the round grain decrease and Indica increases will likely be starker that what was initially projected. Approximately 20% year on year increases for the risotto varieties – Arborio and Carnaroli – are also anticipated.

While no major concerns were raised during planting, one major mill raised concerns about dry weather in April and a broker reported below-average temperatures and windy conditions causing problems and delays throughout. However, assuming a normal summer, this broker projected a start to the harvest around Sept. 20-25, only slightly delayed from the usual mid-September start.

While no official information was available in late May, a Portuguese mill reported that planting started early and “generally went quite well” amid favorable weather conditions. In 2020, the country suffered from water availability issues which constrained domestic production significantly. However, the mill stated that “most” of these issues have been resolved – “only a small area in the southern region had some minor restraints, but nothing relevant.”

The Portuguese mill also noted that there is likely to be a “considerable” shift away from Japonica production due to the high prices farmers were able to achieve within Europe for Indica paddy this year. While Indica production in Portugal typically accounts for around 5% of total output, this source projected that between 20%-30% of planted area was Indica this year.

A Greek mill similarly reported that planting was ongoing in late May “but without problems.” As in other countries, a shift towards greater Indica production is anticipated. The mill reported that this shift is “not so big, about 10%”, with approximately 80% of the Greek crop still anticipated to comprise Japonica.

Despite reports of a broadly unchanged year-on year crop by the USDA, a major mill in the Spanish heartland of Seville reported that “the situation is really bad.” In some areas in the region, water is only available to plant 30% of the crop and at best, the region will plant 50% of fields. While the region is more known for producing Indica than Japonica due to climactic conditions, the mill added that “almost 100% will be Puntal long [grain] rice.”

A European broker agreed that reduced rainfall in recent months is likely to limit planting in the south of Spain, projecting that some areas would only plant 30%, but this could expand if rains pick up. The source added that the rest of the country will plant as normal, “just a bit late (about 20 days),” with no major shift in production around Seville or in Valencia between Japonica and Indica anticipated.

In Europe’s four main rice producing countries, a mixed picture has emerged for planting. In all countries bar Spain, a substantial shift towards Indica production at the expense of Japonica has been reported – especially for Portugal and Italy. And while some planting inconveniences have been reported in other countries, it is only Spain in which major production decreases could be recorded, specifically in the south of the country. However, with three months until the start of harvesting on the continent, there is a lot of time for fortunes to change.

India’s imports of crude palm oil in May were up 10% month on month to a four-month high at 769,602 mt, data released by the national trade body showed, helped by a gradual reopening of lockdowns and palm oil’s price advantage over other edible oils.

India’s May CPO imports were slightly above industry expectations of 750,000 mt, and meant imports during the first seven months of the marketing year (November-October) were up 39% to 4.44 million mt due to the higher spread between soft oils and palm oils, the Solvent Extractors’ Association of India said June 14.

India, the world’s largest buyer of palm oil, purchases about 8 million-9 million mt per year. However, imports took a hit when a sharp rally in vegetable oil prices and pandemic-led restrictions slowed local demand in the past year.

India has has faced a massive second wave of COVID-19 infections since March, prompting many states and districts to enforce local restrictions on movement, social gatherings and the hotels, restaurants and catering sector.

“Local demand will be down 3%-4% in the first two weeks of June. But, overall, this month will increase [imports] on a month-on-month basis,” Marcello Cultrera, institutional sales manager at Philip Futures, said about the demand outlook.

“Over the past six sessions, BMD prices reversed by 960 points (230 dollars). Each time we have seen strong reversals over the past six months, demand always improved,” Cultrera said.

Taxes deter buyers

Malaysia continued to be the leading importer of CPO to India, with Indonesia in second position as the country’s $255/mt export levy gave Malaysian palm oil a big price advantage, according to SEAI

Both Malaysia and Indonesia — which account for 85% of the world’s palm oil supply — have set progressive tax slabs on CPO exports which increase incrementally as reference prices of palm oil cross per-determined thresholds. However, Indonesia has tagged an additional export levy to subsidize its internal biodiesel mandate

Malaysian imports grew to 2.34 million mt in the seven months to May, while Indonesia’s imports were at 1.95 million mt, SEAI data showed.

Palm oil prices have risen sharply over the past year, tracking higher soybean oil prices with which it competes for market share in the commodity markets. The average CIF India price of CPO was $1,250/mt in May, versus $558/mt in May 2020, according to SEAI.

Meanwhile SEAI data showed palm oil imports from Thailand crossed 100,000 mt in May. While India imports very little-to-nil palm oil from Thailand, imports zoomed in May as Thai-origin palm oil was $10/mt cheaper than larger rivals, industry watchers said.

Corn exports from the US for the 2020-21 marketing year (October-September) were seen rising by 3 million mt from previous estimate to a record high of 73 million mt, reflecting continued strong foreign demand and limited supplies in Ukraine and Brazil, the US Department of Agriculture’s Foreign Agricultural Service said in its World Market and Trade report June 10.

The previous record was of 63.7 million mt exported in 2017-18, the report said.

“For the first half of the current trade year, the export pace was well ahead of previous levels with large volumes to China and many other destinations,” the report said. “US corn exports are expected to be robust for the remainder of the year, with large sales on the books,” it added.

Total commitments for US corn – cumulative exports plus outstanding sales – were reported at 69.298 million mt for 2020-21 marketing year (September-August) on June 10, according to the USDA. The yearly total was 68% above the year-ago volume during the same week.

Global market share

Corn exports to China from Ukraine — traditionally the leading exporter to China — have more than doubled from a year ago despite smaller available supplies, the FAS report said. “This has left countries in North Africa, Middle East, and Asia to look to the US for corn,” it added.

For Brazil, exports were lowered this month, reflecting persistent dry conditions in several states where the second-crop corn is produced, the report said. The second-crop corn, particularly in the Center-West, is primarily destined for overseas markets.

The agency sees Brazil’s corn exports for 2020-21 at 32 million mt, down 2 million mt from previous estimates.

The global corn market is supplied primarily by four countries – the US, Brazil, Ukraine, and Argentina. Combined, these countries account for nearly 90% of global corn exports.