hEDGEpoint specialists evaluate 2022

Specialists at hEDGEpoint evaluate the commodity markets in the year of 2022, highlighting a 360° view on grains, energy, and others.

January 23, 2023

hEDGEpoint Global Markets

The year 2022 was atypical for commodity markets, as well as for so many others. After two years of being greatly affected by the pandemic – 2020 and 2021 – the last year was one in which COVID finally began to loosen its dramatic grip on business.

However, we can’t say that things have completely stabilized yet, as other events have exerted great influence on the market. These included the war in Ukraine, the election period and political issues in Brazil, and climate change.

Our experts have taken stock of how 2022 was for each commodity. Check them out here.

Energy, by Heitor Paiva

Volatile is the word that defined the oil and gas market in 2022. Oil was traded for $140 a barrel after the Russian invasion of Ukraine. In recent months, the price has gone down to 75 dollars, due to the expectations of a recession ahead.

The war in Ukraine played a fundamental role in 2022’s events, because with the reduction in supply, there was a subsequent increase in the prices of oil, gas, and fuel. For oil producers, the gains were positive. For consumers, not quite so much. Industry investors had never received such large dividends – even at the cost of the company’s own investment in increasing production capacity.

This year, the expectation (and fear) is that there may be a global recession. The rise in interest rates by central banks has made traders and market participants come to expect a retraction in the consumption of oil and derivatives.

Another factor that generates great expectations is the reopening of China, which should return to normal in the second quarter of 2023. This should add demand for oil, derivatives, and natural gas.

Sugar, by Lívea Coda

The sugar market found support in the physical market’s tightening, driven by the Brazilian crop failure in mid-2021. The shortage on the part of the largest supplier of raw sugar led the main players in the northern hemisphere, India, and Thailand, to focus on the production of this quality type.

In addition, due to the war in Ukraine, the price of gas increased, raising the cost of refining in Europe, thus adding even more support to sugar prices. This was especially true for white sugar, and therefore, created support for White Premium. The partial recovery of the 22/23 Brazilian crop (from April-March), combined with the tightening of trade flows—which increased the differential paid for this origin—brought more profit to Brazilian producers.

In the Brazilian ethanol market, the main impacts came from changes in taxation, which led hydrated ethanol to lose competitiveness both at the pump and against sugar. This resulted in a higher sugar mix than initially expected, when hydrated ethanol was at the same level of price as the sweetener.

The weather also contributed to the maintenance of high sugar prices at the end of the second half. Both droughts and excessive rains harmed producers around the world, mainly in the northern hemisphere. In 2023, the climate has been positive, allowing the development of the next Brazilian crop that starts in April, 2023. This in turn has strengthened the expectation of a surplus on the global balance sheet in 22/23 (from October-September).

Cbios, by Yuri Renni

The Cbios market experienced a year of changes with two well-marked periods. In the first half, there was an anticipation of credit purchases that used to be concentrated at the end of the year, closer to the date of target achievement. This new standard led to an increase in credit prices, surpassing the mark of 200 reais.

The year’s second half brought a new fact: the postponement of the date to meet the target, defined by means of a decree. That generated uncertainties and caused a sharp drop in transactions, and in the value traded.

The political factor in Brazil caused instability also. The revision of Renovabio also brought the program insecurity, which is worrying as it drives away new investments in the biofuel sector—necessary to achieve the program’s goals in the medium and long term.

The Cbios market closed 2022 atypically, also due to the postponement of the target achievement date. There was a low level of credits claimed and low trading in the month of December, since the date of the 2022 target’s fulfillment was postponed from the last day of the year to September 30, 2023.

Wheat and Cotton, by David Silbiger

The war in Ukraine was by far the most influential factor in the wheat market, directly impacting the two countries that are major producers and exporters of the commodity.

Argentina, another major wheat producer, also experienced a production drop due to drought. Faced with production cuts and subsequent price increases, the main importers were forced to adapt.

On the other hand, high production levels in Brazil, Russia, and Australia brought more relief on the supply side, as did the Grain Corridor Agreement in Ukraine and its renewal by the first quarter of 2023.

Cotton, on the other hand, faced other factors which guided its fundamentals. The globe’s largest exporter, the U.S., confronted a historic drought that caused crop failure. Meanwhile, other major producers such as China and India also saw their crops threatened by the weather.

In the meantime, Brazil saw its participation in the global feather market increase. The rise in the price of oil also influenced a greater cotton purchase since it made synthetics more expensive.

Another salient point was the U.S. sanctions against Chinese cotton, following accusations of human rights abuses, including in the textile industry.

Coffee, by Natália Gandolphi

In 2022, weather issues impacted the harvests of the main producers: Brazil, Colombia, the Centrals, and Vietnam. That initially painted the market in a bullish tone, mainly due to the deficit in the 22/23 cycle.

However, with the continued war between Russia and Ukraine, a downward impact began, with the market reacting to the movement of risk aversion while pricing in the possibility of a reduction in demand from these countries.

In spite of this scenario, together with the frustration caused by expectations of frost during the Brazilian winter, and the return of rains during the spring, there was an increase in optimism regarding the 23/24 crop in the country. This fact brought the market down in the last quarter. For arabica, prices showed a variation of -30% during the year, while robusta’s variation was -20%.

In the current cycle (22/23), which runs from October 2022, to September, 2023, a deficit of 1.9M scs is expected. In the next cycle (23/24), the coffee market has the potential to return to a surplus of 3.7M scs.

Soy and Corn, by Pedro Schicchi

2022 had already started on an upward trend, given the low level of rainfall seen in December and January in South America due to La Niña, strongly impacting Brazilian and Argentine crop results. With the outbreak of war in Ukraine, corn found another strong foundation of support, given that the country is the fourth largest global exporter of this grain.

Still in the first half, the ban on exports of palm oil (which competes with soy oil) by Indonesia, and concerns about American and European crops due to the dry weather, contributed to an extremely bullish scenario.

However, in mid-June, soybeans and corn entered a corrective trend, which affected commodity markets, largely due to the acceleration of monetary tightening on a global scale, due to high inflation rates.

Higher interest rates tend to impact demand for grains and oilseeds, both in the “real” economy—due to the economic slowdown—and on the financial side, as investors reduce their positions in commodities to invest in less risky assets.

July 2022, also saw the beginning of the Grain Export Agreement between Russia and Ukraine, which allowed the tens of millions of tons of grain stored in Ukrainian ports to ultimately reach the global market, contributing to the downward trend.

After approaching the year’s lows in July, prices have recovered, given the confirmation of the disappointing harvest results in the northern hemisphere, which make the 22/23 cycle another one of tight inventories at a global level.

More recently, expectations regarding the reopening of the Chinese economy, the end of the monetary tightening cycle by the Fed, and lower U.S. exports due to the Mississippi River drought, have also contributed to a relatively more bullish scenario for both grains and oilseeds.

How can you protect yourself from volatility in commodity markets?

With so many variations that affect commodity markets, it’s essential to plan well in order to provide more security and predictability for the future of your business.

Using a hedging strategy is the best option to avoid unpleasant surprises in the financial planning of those who work with the commodity chain. As hEDGEpoint’s specialty, this mechanism operates like a kind of insurance against market price variations, thus reducing transaction risks.

hEDGEpoint combines the knowledge of specialists with risk management solutions through technology, and customized consulting, to always offer you the best experience in futures operations.

We’re globally present, and always prepared to serve you at any time, in any place. Get in touch with a consultant today to learn more about how to use this instrument to favor your business.

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