The news from the US of increasing inflation and soaring Covid cases, combined with limited further economic stimulation and low consumer confidence is allowing the US dollar to weaken against other currencies. In Europe inflation is also on the increase with problems in the blocks two major economies. In France inflation is above the blocks target rate and in Germany, factories are operating below pre-Covid levels, with car manufacturing particularly badly hit. Germany also has a political transformation coming with the end of the Merkel era within the month. The new chancellor will have to manage a surge in inflation combined with a drop off of demand and decide if this is simply a delay in demand or business lost.
In the UK the pound seems to be weathering the latest Covid policy and increasing costs reasonably well, perhaps due more to the US dollar weakness too. But overall, August was a quiet month for FX volatility.
FX Monthly movement
- US$/ £ 1.37
- US$/ € 1.18
- £/€ 1.16
The key issues, as last month, is the impact of supply chains on all goods. This is two-fold, firstly it slows down the flow of goods and suppliers’ ability to react to changing demand. The supply chain is multifaceted. Starting with getting goods to the processor, then to the port and onto a vessel. The voyage time is extended, the discharge procedure delayed for a variety of reasons, and then there are no trucks to deliver goods to warehouses, who have no people to unload the containers. So, some goods are taking 100% longer to transit this chain than twelve months ago.
Next the cost! As reported freight from some regions is up 1000%, lorry costs are up at least 10%, quay charges being incurred due to delays caused by Port Health, or lack of transport are adding 2-3% to most items. All this can easily add 20% to the base cost of some raw materials.
Organic supplies are the other major concern. The tightening of EU regulations and analysis has deterred many suppliers from wanting to be involved, and there is a genuine shortage of all organic seeds going forward. The management of testing protocols from country to country also complicate this situation along with an ever-changing list of pesticides for analysis. The business is becoming almost unworkable.
We are right on harvest time in China, but with travel restrictions in place it is impossible to conduct a good crop survey. So, we are swimming in the dark a little on crop forecasts. Of course, this is a season of change too. Fundamentally the major growing region, Xinjiang is off peoples supply base, so we are looking to older traditional supply regions, where there is less availability, and it is harder to assess the crop areas. In recent days we have seen this uncertainty firm prices as local processors assess their specific situation, and this has led to some local speculators seeing a tight supply situation. The shine skin situation is looking more serious since local demand is strong for this grade. It is likely to spill over into GWS where we have some concern that the growing areas has continued to shrink.
Last month we suggested cover asap, what has happened confirms this recommendation. Prices are up, and in fact material is virtually impossible to get hold of. The supply situation in Kazakhstan is severe, and we are very concerned. We have seen defaults on contracts already out of Eastern Europe. The situation in Canada is no better. No new crop offers for harvest, November, are available.
This situation could easily deteriorate now, and of course product quality is going to be negatively impacted. The situation is the same for brown & golden although supply bases are slightly different.
Well, here we go again. The last year has created havoc in sesame supplies, and 2021/22 is likely to be no different for more conventional reasons. Prices have lifted off the bottom with a vengeance in some areas of the world. Of course, the change is due to material being undervalued for twelve months since the EU imposition of ETO/pesticide analysis. So, seems more severe consequently.
India is worried. Late rains in MP & UP have disrupted sowing patterns, and the crop is going to be small and late. In Gujarat things are better, but this region is more intensively farmed; read- Pesticides. Where India relies on Africa for ‘top up’ supplies, there is a poorer crop and supply chain costs make this option expensive. Port Health costs for analysis are increasing base costs too, since these inspections can hold containers for one month or more adding excessive charges, on top of the 1000% freight increases.
India sees domestic demand immediately on harvest due to its festivals in January. For EU shipments, only a few suppliers are capable of consistently performing quality wise, others are bending the rules by shipping via Sri Lanka or Pakistan whose material is not picked up by EU authorities for ETO/pesticide testing.
South America, Brazil & Paraguay’s crops were poor earlier in the year, China had a smaller harvest once again too. So Central America is next, but this already small crop is under pressure with competition from maize and sorghum, but until planting is completed, we will not know the full impact.
The other concern from American origins is the availability of containers due to a slow down in imports from China because of the escalating freight rates. It has taken longer to reach these regions, but the impact will be no less severe we feel.
It is hard to see a decline in sesame in the coming months.
This commodity has been slow to react to the issues coming out of Southern Europe regarding weather. We are not sure exactly why prices have remained stable but can’t see it lasting. Processors are becoming nervous. The sluggishness may be due to the planting areas gravitating Northwards over the recent years away from the Crimea to new areas. The USA/Canadian crop is hit by dry weather, just like the flaxseed, so this source will not reappear this season, and Poland is having a wet harvest.
Would be surprised if next month we are not reporting a significant increase.
So, processors ran out of old crop and have tried to push supplies forward into their new harvest, which is just starting now. This has created a supply vacuum which will be felt by consumers in September. Otherwise, prices are going up again, although we do not expect this rally to be as severe as last year. The market does react not only to demand for kernels, but also to the vegetable oil markets, and the next major event here will be Southern hemisphere crops in January/February 2022. So, it is possible prices could weaken, but not significantly.
As we have been stating for some time now, we see the 2021/22 supply season being in deficit for material. The market is not reacting currently due to slow call off from contracts, but seed will be in short supply at some point, and this situation will remain through until 2023.
Pressure on alkaloid levels continues too, further challenging the availability of suitable material.
Prices are remaining stable, and supply problems are based over availability of containers as mentioned in the sesame commentary. This is a two-tier market of suitable EU material and rest of world supplies. Due to no inspection on importation the rules do get broken and there is widespread importation of material outside EU pesticide regulations, since the price differential can run into several hundred Euros per metric tonne. It reminds us of the Indian sesame situation, but the consequences are greater since unlike sesame quinoa tends to be eaten directly as a rice alternative and in larger quantities.
Concerning situation, Brazil & Paraguay harvest have been severely hit by bad weather. Offers are more or less nonexistent and all supplies have been taken up to Mexico to relieve their situation or bought by China. There will be new availability from Central America in January 2022, but pressure on this relatively small area will not permit a price drop. Some new origins are coming to market, and we will have more news of these shortly.