Since the beginning of the year the US$ has strengthened slightly but largely rates have stayed stable. It is well established that interest rates will increase during 2022. In the USA the Federal reserve advised they expected to implement three increases through the year, and the EU/UK banks will almost certainly follow suit. Indeed, the Bank of England has indicated rates will go up first week of February.
The spectre of high inflation staying around for some time, energy cost increases and tax rises to pay for the pandemic in all economies is going to influence financial markets for sometime.
The issues in Ukraine do not help the situation, introducing further uncertainty and inevitably strengthening the safe haven currencies, in particular the US dollar.
Finally, there is no doubt that the UK political situation is bad news for the pound. Constant speculation surrounding the stability of the Prime Minister will have a negative impact on Sterling until the associated issues are settled.
FX Monthly movement
- US$/ £ 1.34
- US$/ € 1.12
- £/€ 1.20
The supply chain continues to take the brunt of the issues in the flow of goods. In the last few weeks the major shipping lines have all announced huge profit numbers due to the high freight rates, and can only be encouraging themselves to keep the market trading at levels 1000% higher than twelve months ago. Sadly there is little anyone can do since they are totally in control of the supply of vessels to carry cargo. The delays in some regions are ridiculous with containers in South America waiting 5 months for a transshipment space, 60+ vessels queuing to unload on West coast USA Ports and transit times from some Far East regions increasing by 75%.
Furthermore the strong published performance of supermarket profits over Q4 of 2021 indicate the supply chain costs have not yet been borne by the retailers. Since cost increases have also been limited, the conclusion is that the service providers in the supply chain are bearing the cost rises. This will put significant financial strain on many.
We would also like to remind clients that the price of material reflects a number of factors making it increasingly difficult to run straight comparisons these days. Apart from the usual timing issues of comparative offers we now have to consider technical differences that are not apparent in specifications, GFSI grading, supply chain variations and future legislative changes. So for instance with a small line such as kalongi we source a Heat treated, triple sortexed type. Which has a similar physical specification to less qualities, but performs for our clients, hassle free but at a premium of $ 400/mt.
The market drifted lower in China as Covid concerns globally tempered demand prior to the Chinese Spring Festival which started last weekend. Factories will remain closed now until mid February when workers return from travelling home and have served any local isolation regulations being stringently imposed as Beijing builds towards the winter Olympics.
There is a strong feeling that after the holiday period prices will rebound as demand surely returns to the market place from EU/USA buyers. The market fundamentals remain, tight GWS supply, some old stocks of Shine skin available of questionable quality, plus shipping issues. It is hard to see any significant advantage of being short for 2022, but many reasons to be covered.
The unstable political situation in Kazakhstan has led to continued supply issues, and new offers are tending to be for close by supply. Otherwise prices have stayed stable. Golden linseed is becoming increasingly short and increasing in price. We have heard some clients adjusting formulas due to the growing price differential.
We would suggest covering golden now, whilst it the argument to buy brown is slightly less convincing, not that we are implying weakness.
Whilst demand from India has increased, it is still about 30% down from before the ETO/Pesticide issues of 2020. The situation will be helped by the EU relaxing the testing regime on arrivals from 1st January 2022, but this does not help the supply situation. As we all know the crop was poor in India, and Africa did not fare too much better being also hit by extreme logistical issues and political instability in Sudan and civil war in Ethiopia.
India is currently planting its summer crop, it is too early to be certain, but the feeling is that sesame is not being favoured by farmers due to the troubles of the last 18 months despite the IOPEPC trying to encourage increased production for this period.
South America has currently run out, and about to harvest. We believe the crop looks good, but supply issues, especially from Paraguay are going to make supply difficult. As we know China will be looking to Brazil for large volumes upon harvest. Whilst Japan will switch interest from Central America to Paraguay, if shipments can be guaranteed. We must remember that South America has had a severe drought, again, which has impacted crops for sure.
Central America had a small but good quality harvest. There was some short covering required by processors, particularly in Mexico, but otherwise the situation is stable.
Daily we read about increased tensions between Ukraine & Russia and this is of obvious concern regarding supplies from this region. This would be a Force Majeure situation from this region. The problem is further compounded by a shortage of available containers in Ukraine, delaying exports considerably. We are experiencing around a 4 weeks delay on shipments. Poland had a poor harvest and relies on supplies from Russia as usual. Obviously if EU sanctions are put in place, we could see an issue develop from this source. The market is slowly increasing, but so far not really reacting to possible issues.
Globally the oilseed situation remains tight for both, particularly for rapeseed and soya. Production of rapeseed in North America has been lower than forecast and the drought in South America will impact on soya production. Sunflower production has been less impacted globally which probably accounts for the difference in market movements. Whereas soya and sunflower prices have nearly doubled sunflower has increased around 50%. So there needs to be a correction at some point. Currently there is little sign of weakness in vegetable or mineral oil prices, so one might expect sunflower to remain firm or even increase, despite the good availability of European material.
Of course increasing energy prices play a factor in the price too, both for processing and sales into the biofuel market.
Quite a challenging and changing market scenario at present which is not really being felt in the market place. The changing EU legislation in 2022, combined with the huge decline in demand for alkaloid due to the global reduction in elective surgery is changing the supply picture. Plantings for 2022 are going to be down globally, with financial constraints also impacting on the large pharmaceutical suppliers. These companies have huge supplies of raw material and finished product in stock, impacting their cash flow situation significantly. Already we have seen one voluntary administration caused by this. The sector also has large finished product stocks further down the supply chain. But this is of poppy straw, where the seed has been separated and sold. So there is no appetite to grow much poppy for the main use, thus there will be less by-product, the seed!
The major source of confectionery poppy, Czech Republic, is always expensive with limited suppliers certified.
The major issue from South America currently is freight. Container availability and vessel space is really challenging leading to lengthy delays. This is coming as demand is pickling up as the USA & EU learn to live with Covid.
New origins are coming to market with both Canada & India offering material. Canada in particular has competitive pricing on red & black varieties. In India it is a new crop and we need to make sure there is control of allergen contamination and GFSI certification.
Although the harvest was poor, there is material available because of the supply chain issues. So you can buy it, but can you get it?
New crop in May & June along with weak demand has seen prices for what available stock there is decline slightly in the origin. But as per Quinoa, getting it to destination is difficult. We have had two containers stuck now in Argentina for five months during transshipment issues at the behest of the shipping line.
Cash flow problems are blighting processors too, who look for payment in advance, partly due to the shipping problems and the financing challenge of an impossibly long supply chain.
We suggest you buy your requirements for the next three months now whilst there are stocks.