The Markets This Week — Harvest Ruts, Hedge Funds and Higher Yields



Grain prices are in that seasonal rut thanks to #harvest14 selling pressure and favourable planting conditions as South America starts its seeding season.

On the speculation side, hedge funds are starting to increase their optimism that grain and oilseed prices will begin to rise. That being said, in the last four decades, an ounce of gold has never been worth so much corn! As such, it’s suggested when this sort of relative value drops to historical levels, a correction is due. Further, another significant correlation is that the feeder cattle-to-corn ratio is at a record high (should we all get back into owning livestock?) Despite the USDA already forecasting record global consumption levels of 970.7 million tonnes, there’s obvious hope out there that corn worth $3.30 per bushel will spur even more demand. End all, be all? I wouldn’t expect corn to go down much further, but given record supplies available, it’s hard to see a significant correction, at least in the six-to-nine month term.

The market consensus seems to be that wheat will be the first market to bottom, followed by soybeans and then finally corn. Pulse prices have improved dramatically, especially if you have a higher quality available. Premium spreads aren’t just widening in the pulses though – it’s the same dynamic in the cereals market as we get a better understanding of exactly what is coming off the field.

For example, in North Dakota, 15 per cent protein wheat is earning three dollars per bushel more than 13 per cent protein wheat. That being said, with feed supplies clearly becoming plentiful as more damaged/sub-par cereals come off, if you’re looking to make some bin space, it may be worthwhile to sell some of that lower protein stuff that you’re taking off right now (there are plenty of pricing opportunities on the Marketplace – give us a call). In the oilseed market, canola prices have declined with the soybean drop but you might see some basis levels improve towards the end of 2014 but that will likely depend on rail service (and the temperatures, according to the railroads) again.

Interestingly, CN Railroad is crying foul over the penalties that the Canadian government is imposing if the railways don’t move the required 536,250 metric tonnes of grain (or 5,000 railcars) each week (which CN failed to do a few weeks ago). CN could be fined up to $100,000 CDN for not meeting the mandate but say that it’s not their fault as harvest has been delayed, and there’s simply not that much grain for them to move. There may be an argument for decreasing the volumes below 500,000, but you also have to remember that the revenues that major North American railroad earned hauling crude oil went from $25.8 Million in 2008 to $2.15 billion in 2013. Given the chance, it’s clear rail companies would move more oil than grain (shareholders > customers), which is why the government will have to continue to play a role in making sure the grain gets moved, whether here in Western Canada or across the border in northern U.S. states’ Baaken-stronghold!

UkrAgroConsult is reporting that Ukrainian producers will harvest 57.4 million tonnes of grain this year, 4.3 per cent below the Ukraine Ag Ministry’s official forecast of 60 million tonnes (which was actually just reduced by three million tonnes). The revision lower is mostly due to lower production in eastern Europe where fighting between pro-Russian separatists & Ukrainian government troops have decimated fields (another reason to be thankful you farm in North America?). Specifically, the corn crop was downgraded by 1.1 million tonnes to 25.9 million tonnes as 25 per cent of acres in the Donetsk region and 30 per cent of acres in the Luhansk region are unsuitable for harvesting (remember, this is the breadbasket of Europe we’re talking about!) Further, corn yields are, on average, 13 per cent lower than last year. Thus, it doesn’t look like a country that was the #3 exporter of corn in 2013/14 is going to fare as well in 2014/15.

Finally, the buzz is building for higher US soybean yields as the first few fields to come off in the Midwest are looking real good. While even 50 bu/ac national average is being thrown around, it’s that time of year where it’s a lot “I heard this” and “I heard that” so there’s quite a bit of noise. Reality is that the soybean market (and the canola market somewhat too) will swing back & forth a bit until Oct. 10th’s W.A.S.D.E. report when we’ll see some real numbers. The same theory is applicable here in Canada as quality and quantity varies region to region. Ultimately, while the buzz continues to build about a bottom being found, the reality is that it’s going to be sticky bottom as things are likely to trade sideways for a while versus actually making a significant bounce higher (at least in the major crops).

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