Updated: Feb 7
Thought of the week
Even if January is not the most exciting period for the global wheat market in terms of harvesting or planting, we share our seasonal weather outlook in view of the forthcoming Spring wheat planting campaign.
Naturally, we begin with our SSTs outlook. With respect to our last update, the forecast for SST anomalies in the central/eastern Pacific is pointing to even warmer conditions for the next three months, with the ensemble mean SST anomaly slightly below the La Nina threshold. The cold anomaly in the Pacific is predicted to reduce also in terms of the extension.
The Indian Ocean dipole (IOD is still predicted to be neutral. Therefore, it is not expected to play an important role in the rainfall pattern of this region. A dipole pattern in the South Atlantic (cold/warm SST from north to south) is still predicted to be present and is influencing the rainfall anomalies over South America (see the next page). The long-term probability forecast is suggesting neutral/La Nina conditions for the next three months. Neutral phase of ENSO should be the most likely scenario for most of the year, until October at least.
As a result, our rainfall anomalies outlook for the Western Hemisphere indicates wet Amazon basin and Central Brazil but dry Southern Brazil. The impact on the South-East of US and the plains is expected to be towards wet conditions.
For the Eastern Hemisphere, our proprietary climate model is suggesting wet North-West of Europe and southern Scandinavia but dry South-West Europe. Our temperature anomalies outlook for February/March/April points to a warmer than average North and Central Europe while Russia and Scandinavia are expected to be cold.
Figure 1. Source: Marex Research
Short-term Fundamental Market Conditions
The surge of wheat exports should come as no surprise due the seasonality of this commodity. Our data, displayed in Figure 1a, revealed that Ukraine and not Russia was by far the most important supplier of wheat with >60% market share during the main export season (Aug-Nov).
The data is volatile WoW as we saw Russia leading only few weeks back. The dominance of these two origins was, and still is, justified by the attractive import arbs discussed in the Demand section below.
Key wheat exporters: nominal volume and market share
Figures 1a&b. Source: USDA, UkrAgroConsult, ALPEMAR, Marex Research
We calculate the “Import Arbitrage” (Figure 2) from the difference between domestic grains price at key import regions (Med for wheat) and the CIF prices originating in key export regions (export origin labeled next to lines). A positive number implies an incentive to import seaborne grain, which in turn creates the demand-pull for the relevant trade flow. Evidently, and following the recent increase in transportation costs on the international market the Americas (North and South) origins are not pricing competitively on the key Med market. The traditional Black Sea and French origins, on the other hand, are present.
Wheat Import Arbitrage
Figure 2. Source: Bloomberg, Marex Research.
The structural link between credit and price held well in previous years. Unfortunately, we registered some disconnect between credit creation and wheat prices for parts of 2021– see Figure 3.
We qualify the divergence as “negative”, e.g., contracting credit and rising prices, based on the assumption that short-term credit facilitates importers’ demand. The situation has improved markedly during weeks #44-47 when we saw credit flowing back to the marketplace again which sent positive signals to price – see gray area. Contraction of credit in December was also noticed and the price response was therefore largely anticipated.
Short-term credit vs. Wheat price
Figure 3. Source: Bloomberg, Reuters, Marex Research