In recent weeks, short positions in U.S. grain futures have built up on the back of plentiful supply forecasts. Karen Braun, in her recent column for Reuters, dissected this theme and noted that in the week ended November 21st, “money managers’ combined gross short positions across CBOT wheat, corn, Kansas City and Minneapolis wheat futures and options surged 8% to 645,074 contracts, the highest since May 2019.” With speculative money backing lower prices, it is worth looking at the reasons why, alongside some other factors worth watching in these markets.
The Role of Speculators
Money managers and speculators significantly influence grain markets, such as those for corn and wheat, impacting various market dynamics. They contribute to price volatility by trading based on future price expectations rather than just supply and demand fundamentals, leading to rapid and sometimes unpredictable price changes. However, their activities also enhance market liquidity, making it easier for other participants, like farmers and processors, to hedge risks and stabilize their incomes. Speculators play a crucial role in absorbing risks that hedgers seek to avoid, facilitating the smooth functioning of futures markets. They are also instrumental in the price discovery process, helping to determine fair commodity prices through their analysis of market signals and future scenarios.
The Bearish Outlook
As shown in the graph above for CBOT wheat futures, the net-short ratio of aggregated non-commercial positions has expanded significantly since the summer. A similar story can be seen in the graph below for the CBOT corn report. Karen Braun noted in her analysis that, when examining the positions of money managers, this constitutes funds’ most bearish corn stance since June 2020.
There are several key reasons for the bearish outlook of speculative money on grains markets at present. The fundamental outlook for corn is good at the moment; the US has harvested over 95% of its record corn crop for this year, while WASDE Ending Stocks in November were higher than in each of the last 5 years. In wheat markets, Russia’s bountiful crop last year has continued to enter the global market and suppress prices. Recent WASDE reports have also shown consecutive increases for estimates of US Ending Stocks and Production, further contributing to the supply surplus narrative.
Hog Prices and Herds Declining
Another factor to keep an eye on is declining prices for hogs in both China and the US. In both regions, prices have been dropping since early August. The markets for corn and hogs are connected through the use of corn as a major component of livestock feed; indeed, about 40% of total domestic corn use in the US is driven by animal feed production. The relationship between corn and hog prices is sufficiently established that the ‘corn-hog’ ratio is used to determine the profitability of raising hogs, with corn being the primary type of feed used in hog production. With hog prices dropping, herds will decline in numbers and therefore reduce the demand for corn in feed, so it is certainly an area to watch.
Milei’s Economic Overhaul
An interesting factor to watch over the coming months will be the development of Javier Milei’s economic reforms in Argentina. The recently elected libertarian President made the dollarization of the Argentine economy a cornerstone of his campaign, but the man who had previously been touted to oversee this transition, Emilio Ocampo, has already parted ways with Milei’s team. Argentina’s currency has been decimated in recent years, with annual inflation standing at 124% in August, since when the official exchange rate to the US dollar has been fixed at 365 pesos. However, as noted by the Financial Times, black market exchange houses within Argentina have reportedly been charging as much as 945 pesos per dollar.
The currency situation in Argentina is potentially significant for two reasons. Firstly, Argentina is a major exporter of several agricultural commodities. According to OEC trade data, in 2021 the nation was responsible for 29.3% of global soymeal exports and 17% of global corn exports, making it the first and second largest exporter of each respective commodity. The second key reason is that since September 2022, the Argentine government has had to implement 4 separate ‘soydollar’ prices to encourage farmers to export their products. The scheme offered producers a guaranteed price for their crops amid a climate of rampant inflation. This therefore offers a recent precedent for Argentina’s agricultural industry withholding exports to secure greater profits, and if there is a potential overhaul of the peso on the horizon, the nation’s farmers may again choose to wait for better returns.
While corn prices have fallen steadily since the summer, it remains to be seen whether the downward trend will continue in 2024. Certainly the risk of El Nino weakening output over the next year could provide a source of upward momentum for prices. Storms stemming from the warmer weather pattern have already begun battering the crop-growing regions of Australia, with significant quantities of wheat likely to be downgraded from milling to feed quality as a result, according to Reuters. The futures curve for both CBOT Corn and Wheat has the December 2024 contract priced approximately 50 cents higher than the current price, while for CME Soybeans the market expects prices to rise in H1 2024 before declining in the latter part of the year.