(Bloomberg) — Agricultural commodity traders rushed to adjust positions as the conflict in Iran escalates, which threatens to disrupt supply chains for corn, soybean meal, fertilizers and sugar.
President Donald Trump has said the US bombing campaign against Iran could last weeks. The conflict is already reverberating across the Middle East and putting pressure on the Strait of Hormuz, a strategic route for global trade in oil and other commodities.
On Monday, soybean oil soared as much as 3.9% to its highest level in two and a half years, following strong gains in crude oil, which are expected to make biofuels produced from agricultural feedstocks such as soybeans and corn more attractive.
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“It’s something of a perfect storm for soybean oil, with rising oil prices increasing demand for biofuels,” Arlan Suderman, chief commodities economist at StoneX, said in a note.
Suderman also pointed to recent moves by the Trump administration to finalize biofuel blending policies and expand the use of gasoline with higher ethanol content, known as E15. There may be more incentive to use this blend if gasoline prices remain at high levels.
“Perhaps the current oil spike will lend some support to legislative efforts to approve year-round E15 sales as well,” Suderman said.
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Military
The attack on Iran also shakes US relations with China, which condemned the bombings. The conflict puts at risk a scheduled meeting in China between Trump and Chinese President Xi Jinping and raises doubts as to whether the Asian country — the world’s largest soybean consumer — will continue to guarantee supplies of the main American crop.
China avoided buying US soybeans for much of the season amid trade tensions. Only recently did the country return to purchasing to fulfill its promise of acquiring 12 million tons this harvest. In recent weeks, Trump has been pushing for an increase in this commitment.
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“If the war with Iran is still ongoing at the end of March, it will be politically difficult for Xi to welcome Trump to Beijing,” AgResource Co. said in a note. “Political ties between the U.S. and China are fraying, which, at a minimum, will delay China’s purchases of American soybeans — and may even halt them.”
soybean meal
Soybean meal fell by as much as 2.7%, the biggest drop since November, as Iran is a major importer of this protein animal feed. Prices are also under pressure “due to increased U.S. production and rising freight rates, which could harm future exports of U.S. soybean meal,” AgResource said.
Fertilizer
The conflict in Iran also threatens to disrupt an important fertilizer production and shipping hub. The Gulf region is home to some of the world’s largest fertilizer factories, and the Strait of Hormuz accounts for about a third of global trade in crop nutrients — with already high prices putting pressure on farmers.
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Wheat
Wheat fell as much as 2.8%, giving back some of last week’s strong gains, as traders waited to see whether grain shipments would be affected by the conflict. Investors had rushed to cover short positions due to the potential for turmoil from a US intervention in Iran.
“Wheat led the way last week, with intense buyback of short positions,” Matt Campbell, risk management consultant at StoneX, said in a note. “Although the impacts on wheat supply and demand in a conflict with Iran are not that high, the money managed preferred to stay on the sidelines while all this happens.”
Corn
The corn market is focused on possible disruptions in exports from Brazil, the second largest global exporter of the grain. Iran is the main buyer of Brazilian corn, accounting for around 22% of shipments last year. Although Brazil has not yet completed planting the larger of its two annual corn crops, a prolonged interruption in trade with Iran could make it difficult to sell all of Brazil’s production, even as the country’s domestic demand is expected to grow.
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Corn futures fell as much as 1.1% in Chicago on Monday.
Sugar
Volume in the sugar market rose as speculators covered short positions, reacting to higher energy prices, according to Mike McDougall, an analyst at McDougall Global View. Sugar is also used in the production of biofuels, and demand can be boosted when oil prices rise.
The premium for refined sugar over raw sugar also jumped. That’s because the raw sugar supply for the world’s largest independent refinery in Dubai passes through the Strait of Hormuz, McDougall said.
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“Energy futures and a number of commodity markets are adding a war premium to prices amid conflict and uncertainty, including its duration and damage to infrastructure,” AgResource said. “The industry will have to get used to trading on military news for a few weeks.”
Prices:
- Soybean oil rose 1.5% to 62.76 cents per pound at 12:50 p.m. in Chicago
- Soybeans fell 0.6% to US$11.6425 per bushel
- Sugar remained practically stable
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