Porto Alegre, July 25, 2023 – The week had expectations with two fundamental factors: the weather progress in the US Midwest in this critical period for the decision on corn and soybean production, and the Russian decision on the export corridor of Ukraine. With a strong heat wave and little rain in the second half of July, the market accepted some upward movement. Russia’s decision brought a strong, natural movement for wheat and soyoil, helping corn in parallel, besides the fact that Ukraine exports 20 mln tons of corn. Structural or momentary movements? If there is any pollination loss in the US crop, the market will only know the results next month at harvest. Ukraine has announced it will look for another way to sell its products, and the effect of the situation in comparison with 2022 is much smaller and there is less panic.
NASA is pointing to the hottest July in history, or at least on record. And this is one of the sensitive points of the climate in the second half of July in the US Midwest. Extremely high temperatures are reaching the region during a phase of pollination and silking, decisive for corn. With rain, this picture would not be extremely serious. Last week, the rains were quite restricted to the south of the region, with few occurrences in Iowa, the main growing state.
The effect of a loss in pollination due to heat is not visual, therefore, only in August and at harvest will it be possible to assess whether this combination of little rain with strong heat was really enough to affect the potential of crops. In the first 20 days of July, the rains were enough to recover the conditions deteriorated in June. But, from now on, only the resumption of rain will save this US crop from a significant failure. The forecast for the next ten days started to show a trend of above-average rainfall and maintenance of high temperatures. If the rains really return in the next few days, it will be the necessary relief for this 2023 crop in its critical phase.
The market had already begun to price in this climate risk situation for the second half of July. However, things were aggravated last week by the Russian government’s refusal to renew the Ukraine export corridor agreement. The fact is that negotiations in this environment seem to have been eliminated, with Russia bombing ports in Ukraine and the Black Sea being closed to commercial shipping by both sides.
The main commodities involved on the Ukrainian side are: wheat, corn, and sunflower oil with an effect on soyoil, in this order. We can add some fertilizers due to the outflow channel. Markets had their natural initial reaction, recalling the 2022 episode of the beginning of the war. But at that moment, other indicators were involved, mainly the way out of the pandemic. Owing to the sanctions imposed on Russia, oil went up to USD 110/barrel, wheat to USD 14/bushel, corn to USD 7.80/bushel, and soybeans to USD 17.50/bushel, mirroring soyoil. Perhaps the market was expecting such a move again.
However, oil barely changed its level of USD 75/barrel, which does not provide much ballast for commodity prices in general. Soyoil also sought its rally as a reflection of the difficulties that may arise with the Ukrainian exports of sunflower oil. Ukrainian wheat undoubtedly weighs heavily on the Black Sea. The main beneficiary of difficult exports by Ukraine is Russia itself, the biggest exporter.
In the case of corn, the movement seems to be more regional and spotty and has little effect in global terms. Why this assessment? Ukraine sent an official letter to the UN maritime agency that is expected to establish a temporary sea route through the territorial waters of Romania and Bulgaria in an attempt to maintain grain shipments through the Black Sea. After Russia canceled the permission for Ukrainian exports, which took place in the UN-supported sea corridor, Ukraine decided to change its route to continue shipments and have more security.
Of course, it is not known whether these two neighboring countries will collaborate with the transit and whether this will compensate for the volumes not shipped in the Ukrainian ports held by Russia. Germany said it will help Ukraine logistically with the flow of goods through other land channels. So, it seems that some volume of commodities in the 23/24 cycle will be exported by Ukraine, but it is not possible to define it at this moment.
So, out of the 20 mln tons that would be exported by the country in this 23/24 cycle, a good part can be offset by Brazil and the United States. In the first half of 2024, Argentina will resurface for exports with high volumes due to the difficulties of Ukraine. Perhaps it is more difficult for some traditional buyers such as Egypt and the whole Middle East, part of Europe, and even China. This can help premiums among the exporters. In addition, Russia will have a record wheat crop this year and can neutralize upward price movements by taking part of the Ukrainian market.
If for corn this can be rebalanced through other exporters, the situation in the region seems far from being resolved. Losing negotiating power from the Ukrainian corridor, Russia could take to the negotiation table another commodity that raises great concern: oil. The country is the second-largest exporter, as well as a major supplier of gas to Europe. If the negotiations go to this environment or the war gains greater dimensions, of course, the environment for the commodities market will be structurally changed.
Within the two variables, climate and the Black Sea, events can indeed bring novelties later on. However, it still does not seem to be the combination for a complete reversal of the downward bias toward international prices. Attention to the weather until the end of August as well as the new episodes of the war will likely set the price trend from now on in the international market.
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