Oct 16
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Pedro Schicchi
Grains, Oilseeds and Livestock Weekly Report - 2023 10 16
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"A conflict typically triggers risk aversion, resulting in capital flight from volatile assets to the dollar and US treasury bonds. In turn, this could impact commodities futures in the short term.
The region's importance in the oil market and its proximity to the Suez Canal may elevate oil prices and risk premiums in maritime freights.
While Israel plays a limited role in the import of agricultural commodities, the broader Middle East, a major importer of various agricultural goods, holds substantial weight in the global market.
The impact of the conflict on the grains market depends on its scale and the responses of neighboring countries. If contained within the current areas, effects on grains may be limited. However, the scenario changes if it takes greater proportions within the region."
What could the Israel-Palestine conflict mean for the grains market?
Introduction
In analyzing the impacts of the escalation of the conflict, one needs to look somewhat coldly at the situation. Therefore, before starting, we would like to acknowledge the terrible losses and damage to human lives and the feeling of sadness with which we see our world enter yet another war in less than two years.
Before we begin the analysis, we need to consider the context. The ways through which the escalation of the conflict may affect the grains market are many and can vary depending on the developments of the next few weeks. To break them down into a few segments we have: impacts on the financial market in general, the potential impacts on oil and freight prices, and, finally, the grains fundamentals and trade flow.
Financial markets
Starting with the broad financial markets, the escalation of a conflict always leads to some risk aversion worldwide and, therefore, a flight of capital from risky assets toward safer ones, the dollar and US treasury bonds in particular. This is especially true this time as the US interest rates were already attractive before last week’s events.
The flight of capital is usually bearish for commodities futures as investors sell their positions in volatile assets. However, it also tends to be a short-term factor, as fundamentals prevail in the long run.
A strong dollar is also usually bearish for commodities prices. That’s because it makes US exports more expensive, and a lot of the main ag exchanges are based in the country. This is especially true in the case of soybeans, which is a more export-oriented market in the US, competing with another export-oriented country, Brazil.
Oil and freights
The region is filled with important players in the oil market that have tense relations with Israel. At the same time, it is close to one of the main channels through which goods flow around the world, the Suez Canal. On top of all of that, this will be the second ongoing conflict in the same corner of the world, which may increase the risk premium built into freight prices in the area.
The bottom line is that it will all depend greatly on if and how neighboring countries respond to the conflict and its consequences.
The number of possibilities of how this could unfold is too many to count, and all speculative. Without getting too much into these other markets (see our energy report for that) and geopolitics, we tend to see mostly support for these two variables - oil and freight prices. The first could be bullish for ag commodities prices, while the second may pressure prices at the origins. It must be said, however, that routes from the Americas to Asia are not likely to see too much change unless the conflict scales much worse levels.
The bottom line is that it will all depend greatly on if and how neighboring countries respond to the conflict and its consequences.
The (usually) inverse correlation between commodities and the dollar
Source: hEDGEpoint, Refinitiv
Recent WTI Oil Prices (USD/bbl) and Baltic Dry Freight Index (USD/NU)
Source: hEDGEpoint, Refinitiv
Fundamentals
Looking at the commodities covered by the USDA, Israel only figures among the top 10 importers of canola meal, canola oil, and sunflower meal. Even then, with less than 3% of world imports in each. A small role, though not unexpected given the country’s area and population. However, looking merely from this point of view is ignoring the bigger picture.
First, the Middle East as a bloc of countries – as varying as this definition can be - is a major importer of agricultural goods, especially grains and meats. The group represents 14% of the world’s imports of corn, 17% of wheat, 7% of beef, 16% of chicken, and 18% of sunoil. Of these, Egypt, Iran, Iraq, Saudi Arabia, and the UAE hold most of the share.
On this matter, we see two possibilities. First, when risk is high, countries tend to stockpile essential goods, food being a common target - Egypt, in particular, may play a key role. Its grain tenders are already market movers and, adding to that, it is the only country other than Israel to share a border with the Gaza Strip. Thus, if it comes to it, Egypt will probably be the channel through which aid (food, medications, and so on...) may enter the area. The increased demand in the short term may lead to higher prices.
The second major fundamental factor to watch is how ag exporters will navigate this geopolitical environment. The US already has a clear alignment with Israel. Others, however, may face a tough diplomatic challenge, in particular Brazil. Almost all of the aforementioned countries figure among the top 10 buyers of Brazilian corn, chicken, and beef. An emblematic case is Iran importing corn almost exclusively from Brazil for many years now.
Finally, Israel is an important supplier of phosphatic fertilizers to the world and has a few relevant production sites. The risks in this case are related to lasting damages to production capacity.
Middle East’s high share of world imports (% of the total)
Source: hEDGEpoint, USDA
Relevance of the Middle East in Brazilian Exports (% of total)
Source: hEDGEpoint, Brazilian Customs
Conclusions
In the end, everything will depend on how much the conflict escalates and, especially, how neighboring countries will respond to it. If it remains restricted to the current areas, it is not likely to have a big effect on the grains market directly, though the impact on the broad financial market and fertilizers may have indirect consequences.
If the conflict takes greater proportions within the region, then the risks are much bigger. There are several important grain and meat buyers in the Middle East, as well as oil producers. Trade flows will definitely see some adjustments, either because of diplomatic issues or because of the direct impacts of the conflict.
Weekly Report — Grains and Oilseeds
Written by Pedro Schicchi
pedro.schicchi@hedgepointglobal.com
pedro.schicchi@hedgepointglobal.com
Reviewed by Victor Arduin
victor.arduin@hedgepointglobal.com
victor.arduin@hedgepointglobal.com
www.hedgepointglobal.com
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