The Market Needs a Black Swan
Geopolitical events, weather phenomena, and other wild cards can impact grain and oilseed prices at any time, as history has proven.
While analysts and experts say they’re not expecting any major events to affect prices in 2016, predicting so-called black swan events is, by definition, almost impossible.
A black swan event is defined as something that happens unexpectedly but has a major impact on markets. Most people will say it was impossible to predict. Others, usually with the benefit of hindsight, will say it could’ve been forecast had people taken a deeper look at certain indicators.
Three such events have occurred in recent years in agriculture: Russia’s invasion of Ukraine that drove up wheat prices, the U.S. drought of 2012 that caused corn and soybean futures to spike, and, more recently, warm weather that caused natural gas prices to plummet.
While a black swan event is almost impossible to predict, analysts and meteorologists believe there are some weather and geopolitical events that bear watching in 2016.
“Unless a currency crisis hits or a weather event happens in South America, it is unlikely that grains need to do anything too crazy in our minds,” says Dustin Johnson, an analyst at E-Hedger in Chicago. “A record amount of speculative bushels held in the bin is never good during a cash crunch, so I would be a little worried if the investment community continues to front-run the farmer and get short before March. If Brazil really grows 100 million metric tons of soybeans, I would be worried about another 50¢ in corn and $1 beans coming out of the market.”
Geopolitical events are usually difficult to predict, and Russia’s invasion of Ukraine in early 2014 was no exception. Vladimir Putin’s troops, without insignia at first and later in full regalia, decided to invade their neighbor, Ukraine. That put wheat shipments from both countries at risk.
Prices in the days, weeks, and months following the invasion jumped amid fears that exports from both Russia and Ukraine – two of the largest exporters of wheat – would plunge. The countries are major suppliers of the grain to North African countries (including Egypt, the biggest importer), leaving traders speculating that importers would turn to the U.S. and Canada for supplies.
Russia and Ukraine form the northern coast of the Black Sea, which is a major shipping route for energy and agricultural products. The unrest occurred in the Crimean Peninsula, which is home to Russia’s Black Sea naval fleet and home to several shipping ports from which about 10% of Ukraine grain is exported.
While fears that exports from Russia and Ukraine were mostly unfounded (even Putin understands the importance of the countries’ grain trade), the impact from the event lasted throughout 2014.
No such event is in the works this year, but Russia is always good for some political tension. Turkey recently shot down a Russian fighter jet, leading some to believe Putin would order attacks on the country, which is a member of the North Atlantic Treaty Organization (NATO), spurring a mandated response from fellow NATO members.
So far, that’s not happened.
“There are a lot of tensions right now with the Russia-Turkey situation, but it’s not affecting trade flows at all,” says Matt Ammermann, the commodity risk manager and vice president for Eastern Europe and the Black Sea region for INTL FCStone. Still, he says, “Putin can do anything, and that will always kind of be a risk.”
Crude oil prices are extremely low, falling in December to the lowest since the recession, which also could spur some geopolitical events in Russia and the Middle East. Weak oil prices have devalued the ruble, which is on its way to a third consecutive annual decline, and Russia has no assurances that it will grow in the next 10 years, economy minister Alexey Ulyukayev said in December.
As with agricultural exports, however, Putin is smart enough to know that oil exports are paramount to Russia’s economy. Therefore, he likely won’t do anything to incur sanctions that would curb crude shipments.
“You could say the Russian economy, with what crude and the ruble are doing, creates risk. So there could be some surprise, but Putin wouldn’t want to do anything too crazy. Russia needs exports to flow and it needs that money,” Ammermann says.
Several weather incidents classified as black swan events have occurred in recent years, including the drought of 2012. The drought, arguably the worst in recorded U.S. history, caused corn production to drop 13% and soybean output to decline 7% year over year.
Futures, in turn, jumped. Corn touched a record $8 a bushel, and soybean contracts skyrocketed to $17 a bushel.
The opposite may happen this year, as global soybean and wheat outputs are expected to touch record highs, while corn production is seen at the third highest ever behind only the prior two seasons.
Near-ideal weather in many parts of Brazil, forecast to produce a record 100 million metric tons of soybeans this year, is improving crop prospects, and little change is seen. Granted, Brazil does tend to get drier as the season progresses, says David Streit, senior meteorologist at Bethesda, Maryland-based Commodity Weather Group, but so far the rains have been beneficial.
“Some drier areas had some issues in the north, and in the south they had some rust issues due to the wetness. Generally, they’ve had favorable moisture in most” growing areas, he says. “They’ve had a pretty decent start across those areas. It tends to go drier late in the growing season, but I’m not sure it’s going to turn dry enough fast enough” to do any damage.
The current El Niño weather pattern, which until the last week of December kept temperatures in the U.S. warm and snow-free, likely will turn into a La Niña system, as it has done in the past following strong El Niño years, Streit says.
The El Niño likely reached its peak late in December or early January, and it will weaken through spring, giving way to a La Niña in the summer months of 2016, which will mean warmer, but not necessarily drier, weather for much of the Midwest.
“There are certainly things that may change with sea temperatures, which could mean drier outlooks for the Midwest. Right now, the wetter outlooks hold the upper hand,” he says. “The biggest problem area for 2016 is down south in the U.S. across the Delta. Prolonged heat and dryness are likely during the growing season.”
Streit says Commodity Weather Group’s outlook for 2016 is generally benign with mostly normal precipitation. Still, he says, temperatures likely will be warmer than normal throughout the summer.
“In the summer months, it’s inevitable that we’ll have above-normal temperatures,” he says. “That’s the feature we’re going to have to watch.”
Several other events could impact corn, soybean, and wheat prices in 2016. Wild cards include the weather in Brazil turning abnormally dry, Russia making a political play in Eastern Europe, and Argentina’s changing policy with regard to grain and oilseed exports.
Argentina’s new president, Mauricio Macri, has already made good on campaign promises to cut export levies for agricultural products and to curb currency controls, two measures that will make the country’s farmers more competitive on the global market. This could make – and likely already has made – an impact as world buyers turn to Argentina in 2016 for soybeans and soy meal.
The U.S. presidential election is also coming in 2016, which likely won’t have much of an effect on grain markets. Still, there is one wild card that could change things, says Lane Broadbent, a broker at KIS Futures in Oklahoma City.
“The big question here is, will Trump win? If Trump wins, there could be 100 different things that could happen,” says Broadbent.