The Markets This Week — Rebounding Opportunities?

Grains this week fell significantly as harvest pressure starts to hit full tilt in the North American markets. Most of the northern half of North America and parts of Australia are experiencing some cold weather, which has the bulls frothing to see prices move higher, but the trend continues to head lower as bears are looking at the big, overall crop expected to come off.

On the weather side, the growing season looks to be over in the large majority of places, probably most evidenced by snowfall in Alberta earlier in the week. According to Drew Lerner of World Weather Inc., following these few days of cold weather, temperatures are expected to pick back up, providing an opportunity to get some real progress done in the field. Simply put, the last few weeks have not been all that friendly to Canadian Prairie fields, between the violent storms and declining temperatures. According to this week’s Saskatchewan crop report, only 14% of the crop off is off in the province, well behind the 5-year average of 26% and closer to 2010’s slow pace.

On Thursday, September 11th we got the USDA’s installment of the world agricultural supply and demand estimates, which showed a big crop is getting bigger all over the world (surprise, surprise). In the U.S. alone, the USDA is projected record corn and soybean yields at 171.1 and 46.6 bushels per acre. This translates to 14.395 billion bushels of corn crop and 3.913 billion bushels of soybeans, ultimately leading to corn ending stocks of 2.02 billion bushels and 475 million bushels of soybeans. As for wheat, global production estimates were raised again to 720 million tonnes (also a record). Accordingly, wheat prices took the hardest hit over the week with Chicago, Kansas City, and Minneapolis all down more than five per cent for the week. While lower prices have certainly created new demand in feed, export, and domestic categories according to the USDA, the supply side is just too strong for major crops to suggest prices will rebound in the near-term.

However, if you have the quality this year, you should be able to secure a bit of a premium for you grain (knowing what you have in the bin helps!), especially with pulse crops. Despite rains improving in India over August and September, and the threat of El Nino diminishing, it looks like a smaller pulse crop will be taken off there this year there (it’s been suggested up to 15 per cent lower but I believe that is on the high end). On the flipside of the trade equation, demand is expected to stay strong, intuitively suggesting higher imports. Between this poor crop outlook and variable quality coming off in the Canadian Prairies, the crops mostly likely to benefit from this decreased-output, sustained-demand would be yellow peas and red lentils. A price move of more than 15-20 per cent above early September levels should definitely be considered if you’re looking to sell something, as “hoping” for more is not a solid strategy (hope is not a risk management process).

It’s been suggested recently by U.S. ag lenders that if another big crop comes off in 2015, it would purge the ag industry. A third straight bumper crop would create the scenario of low grain prices being the new normal, and essentially forcing out those farmers who will say “enough is enough” and those who haven’t built in enough equity (young or old) to stay in the game

Potash-makers may be digging themselves their own grave – at least on the financial side of things. While the dangers associated with the industry continue to be plentiful (i.e. this week’s fire that left 100 workers trapped in Potash Corp.’s Allan, SK mine – all got out safely, FYI), more mines opening up around the world pegs production in 2014 at 82 million tonnes. Conversely, demand is only 57 million tonnes, albeit still a record but it certainly leaves a glutton of supply on the table, even with more mines currently in development. The existence of most potash companies (and their growth) hinges solely on strong prices, but with lower grain prices, fertilizer applications can be one of the first crop inputs to be downsized when margins are tight, especially in the U.S. corn belt. Therefore, fertilizer price increases look limited in 2014/15 although some analysts remain optimistic.

It’s been suggested recently by U.S. ag lenders that if another big crop comes off in 2015, it would purge the ag industry. A third straight bumper crop would create the scenario of low grain prices being the new normal, and essentially forcing out those farmers who will say “enough is enough” and those who haven’t built in enough equity (young or old) to stay in the game. With record ending stocks already projected this year, another big year of production would certainly hurt the balance sheet.

Ultimately, there’s no better time like the present to re-evaluate your marketing strategy. This means adding in new costs and having 3-, 6-, and 12-moth cashflow projections (so that you know when you should be making grain sales and not being forced to do so. Further, trying to “hope” for grain prices to continue trekking higher for certain crops isn’t good risk management process. Right now, higher quality pulses and cereals have spread above significantly from the bottom end of crop quality. Depending on your aforementioned cashflow situation, selling 50-70 per cent of the crop when prices move up anywhere between 15-30 per cent above recent levels can be a solid strategy. This leaves some grain on hand to sell IF prices continue to go higher but also locks in some of the price risk.

 

Brennan Turner

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, he spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email ([email protected]) or phone (1-855-332-7653). @FarmLead

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