Nowhere to Hide as Conflict's impact spreads to grains and biofuel markets

Following the outbreak of warfare over Iran at the beginning of March, successive waves of destruction, threats and counter-threats led to sharp rises in prices in the energy complex. Prices of soybean oil also surged when markets re-opened after the first weekend's hostilities and again as the White House threatened attacks on Iran's civilian energy infastructure. Bean oil prices rose above $0.70/lb briefly, before falling back in tandem with the crude oil price. Wheat prices also rose dramatically during the early days of fighting while all grain markets with an ocean freight connection to the Middle East appreciated, amid uncertainty over how and when the conflict would be resolved and how long term oil prices could be affected.

In domestic US developments, the USDA's late March update forecast corn ending stocks at a 7-year high of 2.1 billion bushels while finally acknowledging the slow U.S. soybean export pace, cutting forecasts by 35 million bushels but raising domestic crush by the same amount, leaving ending stocks unchanged month-over-month at 350 million. Earlier pronouncements from the White House on increased import commitments of US soybeans by China became secondary influences compared to the evolution of the Iran conflict.

The markets will increasingly focus on new crop developments and weather in particular. Wheat will soon be entering its weather-sensitive period. U.S. wheat remains in demand and export sales are likely to be solid. Additionally, most U.S. imports come from Canada, where the U.S. has just placed import tariffs, so imports from the US' northern neighbor will likely be subdued.

When winter wheat crops around the world come out of dormancy weather becomes increasingly important. Early crop ratings will be all important placing even more importance on spring conditions. Globally, with favourable developments in ongoing peace discussions, renewed supplies from Ukraine could ease global pressure on demand but the Black Sea export situation remains uncertain at best.

In Ukraine, if any peace deal is reached it could still take at least one if not two crop cycles to restore production. Also, and more impactful, is the strong possibility that the Ruble could appreciate if the conflict ends as sanctions are lifted and specifically if the U.S. allows Russian traders back into the SWIFT payments system. If this happens, paticipants can prepare for Russian wheat prices to become more expensive, not cheaper, allowing the U.S. to continue to compete in the export market but raising export prices to US farmer.

Vegetable Oils Developments

Beyond the impact of the Iran war, SOYBEAN OIL prices in the US also rallied in anticipation of higher demand and a bullish renewal of the US Biofuels RVO (Renewable Volume Obligations) mandate, which was confirmed in late March. The confirmation had been delayed by lengthy consultations and policy disputes between oil refiners and biofuel producers over import credits, small refinery exemptions (SREs), and other issues.

Ulimately the decision, according to President Trump, will generate"the highest volumes of renewable fuels in history" while creating rural jobs. At a White House briefing he also said the ruling would "massively increase our nation's energy supply."

While prices of fuel at the pump are set to remain elevated through the current summer driving season, strength in products is helping to elevate biofuel margins – ethanol, biodiesel and renewable diesel. Additionally, several countries are increasing mandates for biofuels to help offset higher energy costs associated with the war. For portfolio positioning, biofuel feedstocks, particularly in more distant expiries along the curve, represent attractive value in the current environment.

The Environmental Protection Agency (EPA) requires oil refiners and importers to annually blend different types of biofuels or buy Renewable Identification Number (RIN) credits with the main uncertainty pending over the size of this year's quota. Traders expecting high quotas had already boosted the price of RINs as well as soybean oil futures to multi year highs in the run up to the decision.

The March 27 ruling includes a record-high mandate of 26.81bn RINs from total renewable fuel blending this year and 27.02bn RINs next year. EPA sets total blend requirements and requires that a portion come from lower-carbon "advanced" biofuel types including biomass-based diesel. A gallon of corn ethanol generates one RIN, while more energy-dense fuels like renewable diesel earn more.

The uncertainty surrounding U.S. policy this year has caused drastic swings in carbon credits and RINs but the bias of trading action has favoured a White House decision aimed at supporting the farm community.

However the Trump administration's future stance on the Renewable Fuel Standard (RFS) and related biofuel policies still leaves room for significant uncertainty in the market. This includes the decision regarding (SREs), which could reduce the demand for biofuels such as biodiesel that utilize soybean oil as a feedstock. Such exemptions, if broadly applied, may lead to decreased soybean oil demand and exert downward pressure on prices.

Whatever happens with the US mandate, U.S. exports could still recover enough to offset renewed weakness in biofuel demand. Although highly unpredictable, the White House may still choose to boost the renewable diesel industry as both big agriculture and big oil have been supportive in recent years. A president whose recent pronouncements in trade and finance have sparked major volatility elsewhere may soon turn his attention to agriculture and energy with unpredictable results.