The phrase of the week is one often heard on the financial markets: ‘The sky’s the limit’. One might indeed wonder where the limits lie for decency, truth and, above all, the rise of the markets.
All institutions that attempt to regulate in the broadest sense are being systematically dismantled or stripped of their substance. The latest example is OPEC, which saw the United Arab Emirates leave the oil producers’ association on 1 May – an organisation that has set the tone for global prices for decades. This opens the door and all the windows to a market without rules: “Drill baby drill,” said Donald Trump in the early days of his second term.
But one might ask the same question about the US Congress, which is no longer consulted on any major issue, be it tariffs or war. All institutions are being bypassed, leaving the justice system to hold the world’s largest democracy at arm’s length.
Iran, which has endured a deluge of bombs across its entire territory, is now all too aware of the economic advantage that blocking the Strait of Hormuz affords it by paralysing the global economy. America no longer has much choice: send in ground troops or make a deal with its back against the wall, based on Iran’s ever-increasing demands.
Will the thousand or so ships stuck in the strait take the risk of leaving under US naval escort? It is doubtful that their insurers would back them in such a venture…
The same applies to the agricultural markets; following last week’s sharp rise, the key question is how far this speculative frenzy can go?
- - The sales and shipment figures published by the USDA took many observers by surprise.
- - Persistent rumours of massive cotton purchases by the Chinese reserve (reportedly 500,000 tonnes) during the mid-May meeting between Presidents Xi and Trump; combined with the prospect of India scrapping import duties, these have sent the market soaring to levels not seen for nearly 18 months.
So how far can the market go, and what are the consequences for the sector:
- - Without sustained demand, no recovery is in sight
- - Without the reopening of the Strait of Hormuz, no more gas, no more ammonia and, above all, no more sulphur. Bad times for soil fertilisation.
- - With the persistent warning of an El Niño year, harvests will be reduced.
- - The drought in the United States could lead to a drop in production and weigh on prices
However, the massive rise in the market will encourage all players in the Northern Hemisphere to plant until mid-July. So what will happen if the market turns?
It is unclear whether next week’s WASDE report for May will provide an answer to these issues, leaving producers at the mercy of a market reversal with production costs rising daily.
Source: Mambo