Grain Commodities Jumped In Late 2020; 3 Reasons They'll Be Heading Higher

CBOT wheat futures peaked at $6.6450 last week and were at the $6.38 level. Wheat climbed to its highest level since October 2014.

All of the leading grains were sitting at their highest prices in over six years. 

In South America, dry weather conditions have supported gains in the grain and oilseed futures markets over the past weeks. Increased demand for agricultural products further pushed prices higher.

At the beginning of 2021, the next crop year in the most significant growing regions in the northern hemisphere is only months away. In March and April, farmers will plant grains and oilseeds that feed the world.

The producers are heading into the planting season with the highest prices in over half a decade. They have had an opportunity to hedge future crops at the best levels in years. Meanwhile, Mother Nature will ultimately determine the path of grain and oilseed prices over the coming months.

The most significant risk facing the markets is a drought or any other weather event that causes crop production to fall. After the technical moves to the upside, any supply shortages could cause explosive moves to the upside and new all-time highs in the futures markets.

A continuation of the bullish trends in the soybean, corn, and wheat futures market depends primarily on the weather conditions across the United States’ fertile plains and other critical growing areas worldwide. However, three factors will continue to underpin the agricultural commodity markets over the coming weeks and months:

• The falling US dollar is bullish for all commodity prices. The dollar index settled at the 90.068 level on Jan. 8, within striking distance of critical technical support at the February 2018, 88.15 low. Since the dollar is the world’s reserve currency, it is the pricing mechanism for grain, agricultural, and all other raw material prices.
• China is the world’s most populous and second wealthiest nation. Before the trade war over the past years, the Chinese typically purchased one-quarter of the US soybean crop and many other agricultural products from the US and producing nations worldwide. China has been buying soybeans over the past months as they rebuild their hog population. Soybean meal, an oilseed product, is the primary ingredient in animal feed. Moreover, the incoming Biden administration is likely to reduce trade tensions, leading to even more demand for US agricultural products from the Chinese.
• Finally, demographics always underpin the commodities that feed the world. In Q4, the world added approximately twenty million mouths to feed. In 2020, more people required nutrition than in 2019, and in 2021 there will be even more food product consumers. Production must keep pace with the ever-increasing addressable market to meet requirements. Any bump in the road when it comes to output will push prices even higher.

At the end of 2020, soybean prices were almost 39.5% higher than at the end of 2019. Corn rose over 28.2%, and CBOT wheat futures were up 14.6%. All three grains were near the Dec. 31, 2020 closing levels at the end of last week, with all three rising to new highs over the first week of 2021.

The ingredients that feed the world got a lot more expensive in 2020, and they are continuing to rise in early 2021.