The rapid rise in the price of major agricultural commodities came to a grinding halt towards the end of last week, especially on Friday, as grains such as corn almost hit their limit down on the futures market.
It wasn’t only corn that saw major declines, wheat also followed, and so did soybean which saw it’s biggest weekly decline since mid-2019.
You may remember a report we covered from the UN Food and Agriculture Organization a couple of weeks ago which showed food prices rapidly increasing around the globe. The trio of grain prices we just saw shows that was continuing in January, at least until last week.
There were various reasons for agricultural prices rising. There was increased demand from China, harsh weather conditions in Argentina and Brazil, and tariffs and export restrictions from Russia and Argentina.
Basically, there were supply concerns in South America, and heavy demand from China.
So, why the sudden decline in prices?
US government data shows hedge funds cut their net-long positions in corn and soybean, with March corn futures declining by 4.5% throughout the day. March soybean futures fell 4.3% and wheat fell 4%.
The decline coincided with the start of the Brazilian soybean harvest, the biggest producer in the world. It’s anticipated that this year will be Brazil’s record harvest due to good weather conditions, up *6% from last year.
The forecast in Argentina next week, shows an increase in rain in the north of the country, which is improving the outlook for grain yields, and leading some analysts calling it a “weather market”.
So, better weather conditions may continue to have a negative impact on the price of some grains. However, weather forecasts are not always accurate, so harsher weather conditions could make the downturn in the price a short-term fluctuation.
Chinese demand was also part of the reason for high prices. Corn and wheat imports doubled this year compared to last year. But, the virus is spreading again in China, which has triggered a lockdown, and weakened the outlook for Chinese demand.
Despite these negative price factors, there are still reasons this downwards price spiral might be limited.
For a start, Chinese demand for soybeans and corn are likely to increase as the price declines. This is due to the country rebuilding its domestic hog market, which was almost decimated by African Swine Fever in recent years.
There are also export restrictions on some products such as wheat and corn from Russia and corn from Argentina. And although some South American countries are expected to get rain, they haven’t completely recovered from the unfavourable weather conditions.
The USDA report late on Friday showed there’s still strong demand, particularly for corn and soybean. So, perhaps the sell off was a knee-jerk reaction with some profit taking, but with the Brazilian harvest underway and better forecasted weather conditions in South America, reaching higher prices may get tougher.