COMMODITY UPDATE
Market Observations: August

With Spring on our doorstep conditions in Victoria are positive with crops overall looking good and at this point on target to be productive. Some unexpected Winter rain across the regions has supported growing momentum with certain districts receiving even more than desired. Wet conditions particularly in the South of the state have made access to paddocks difficult for spreading Urea (availability of which has been tight) and the suppression of weeds. On-farm access to silos and any remaining silo bags have also proved challenging for Farmers wanting to market ex-farm stocks. But for a crop to flourish, logistical challenges across the growing season will usually be a factor.

Farmers have had more confidence during July in bringing their grain stocks to market. Coupled with the aforementioned crop conditions, market prices have held their values providing an ongoing impetus to sell. Victorian ports have been devoid of the consistent exporting activity as seen in the first half of the year, but with the ever-changing Geopolitical landscape in the Black Sea the possibility of grain exports through our ports becomes quite real again.

When it seemed Bulk exports through Victorian ports were done and dusted for the year, late July threw up some market affecting curve balls which had traders across the world shifting their mindsets. On July 17^th, the official period for the Black Sea grain deal to be either extended or scrapped came to an end. Futures markets had already priced in the chance the deal wouldn’t be extended and the fact that other avenues for Ukrainian grain to reach global markets via overland road/rail and the Danube river system helped to quell price volatility. These avenues of course are no substitute for the volume that would normally flow through Odesa ports (the Danube system only being capable of moving around half of the Odesa ports capacity) but nonetheless was working to move a large volume of commodities. International futures markets traded a closer relativity to fundamental factors that would normally drive market prices such as supply and demand, weather, logistical capabilities, etc. The Northern hemisphere harvest had proved relatively successful and so futures markets softened on the confidence of grain flowing around the world in abundance.

Proceeding with the knowledge the grains deal would not be going ahead (at this point) markets were relatively subdued. The Danube river system ports have had significant upgrades on its infrastructure over the last year with the task of subsidizing commodity volumes that would normally pass through Odesa. This equates to approximately 2 million tonnes of commodities, so needless to say it was playing a key role in ensuring Ukrainian grain was reaching a large portion of global consumer homes.

It wasn’t the fact that the grain deal hadn’t been extended that spooked international futures markets, it was the subsequent destruction of Odesa and Danube river system ports that ultimately meant the millions of Ukrainian grain tonnes which were leaving via the Black sea each month would be severely impeded. Chicago’s board of trade futures market responded swiftly when news of the bombings occurred effectively driving the market up to its allowed daily limit. Futures markets settled over the next couple of days only to lift “limit up” again with the extent of the infrastructure becoming clearer to the broader market, the clear and present danger and further certainty unknown. One small saving grace is the time of year that this has occurred. When the initial bombings occurred in Odesa last year, it was February/March. Global stocks were lower and the Northern hemisphere harvest was still months away from completion which meant that old crop grain stocks were vital in the supply to global consumers. Any country that produces and consumes their crop but still has a net annual short of their requirements each year naturally need to import as a top up. At that time of year they would normally be active in the market purchasing commodities to replenish their requirements. Given the timing of the attacks on Odesa last year, global supply struggled to meet demand across the normal trade channels sending prices soaring. As the damage this year to Ukrainian port infrastructure occurred in July, those countries who are net importers annually have had a small reprieve. With their harvest just completed it is believed many countries who produce a little themselves will be able to consume stocks grown on their home soil. However, this doesn’t alter the fact that these buyers will need to engage the market again soon and it doesn’t account for countries that have no grain production – usually the poorest and most reliant on a lower quality and cheaper product to which the Black Sea region offers.

So, what does all this mean for Australian grain growers? Australian grain will be called on again to fill part of the void left by the Black Sea if damage to critical port infrastructure remains inoperable and/or other avenues to market are not possible. If the situation remains the same in the Black Sea, its possible Australian exports could step up within a matter of months. There is no doubt Ukraine have been dealt a major blow with the damage to its port assets as this is the main point of contention that needs to be overcome – finding the pathway to market. A safe passage “grain deal” for the most part without the infrastructure to export is almost purposeless and ingenuine.

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Author

Justin Fay
Commodity Manager