Opinion

Grains started to trek higher this week as we head towards the end of the month, mostly due to international market prices picking up pace. However, by Friday, October 24^th, it appeared that the rally was short-lived as the market dropped well below its monthly highs. Specifically, canola almost made it up to $420 per tonne before soybeans dropped back below $10 a bushel and news of a fire/explosion at the Louis Dreyfus crusher in Yorkton, Sask., hit the airwaves. Overall, the rally was primarily due to a poor start to the crops getting planted (South America and winter cereals in Europe) and a delayed harvest in the north hemisphere (mostly just North America now) leading to quality concerns.

Case in point, the Ukraine Ag Ministry says that while wheat production increased 6.3 per cent year-over-year to 23.7 million tonnes, the percentage that met milling spec is down to 54 per cent from 75 per cent last year. Looking forward, SovEcon is suggesting that wheat production next year in Russia will fall by about 15-20 per cent (from this year’s output) to below 50 million tonnes. The Moscow-based analytical group says that the fall-planted crops are in extremely weak condition, giving the crop the lowest rating in the last five years with poor soil moisture conditions the biggest variable. That being said, more producers may be more inclined to save their driest land for spring seeding and opting for a different crop like corn (acres of the coarse grain continue to grow in the Black Sea).

However, the Russian ruble fell to an all-time low against the U.S. dollar of 42 this past week which really has two effects: First, the crop inputs that producers bought last year from western supply companies will be 20-25 per cent more expensive and secondly, cheap Russian grain will get even cheaper for international buyers! On that note, Egypt bought 180,000 tonnes of Russian, Romanian, and French wheat at an average delivered price of $255.50 per metric tonne, four per cent higher than their last purchase on October 10^th. With depreciated currencies to source from, it’s hard for Egypt to NOT turn the engine back on and drive down the road, purchasing boatloads of product along the way.

Wheat prices also have seen a solid pick up in price recently (this does not include durum because it’s on another planet right now) but the overall picture continues to be neutral-bearish. The main forces driving the bull argument is drier weather in Australia dropping the production from the current expectation of 24-25 million tonnes and up to one million tonnes of production potentially lost in Brazil because of disease. This may open the door for more North American exports to Brazil (as was seen this past year) but with wheat acres increasing in Argentina, the Brazilians will likely choose to source next door instead. Another bullish indicator could be the slow-developing winter crop planted in the Black Sea as dry conditions has led to “stalled wheat germination”. With winter temperatures coming as early as this weekend in some areas, it may be difficult for the crops to survive the winter without big losses but the region has produced above-average crops the last few years. On the bearish side, the soil moisture profile for planted U.S. winter wheat crops appear to be the best in the past three years as well as the aforementioned cheaper sources.

There’s an argument being made that the increasing number of call options being bought in the corn market since it hit its 2014 low of $3.20 at the end of September, is indicating that the market is expecting prices to rebound in the short-term. While long-term sentiment seems to be neutral-bearish, notable signs for a correction include livestock prices remaining near record highs and U.S. ethanol production picking up steam in the Q4 in three of the last four years. Further, thanks to its current $70 per metric tonne discount to soft red wheat in the export market, corn may take a larger portion of U.S. grain in international feed markets. Ultimately, with more than two-thirds of the U.S. corn crop and about half of the soybeans still left to come off, there will definitely be some pressure in the cash markets (especially considering individual storage capacity), but there is a glimmer of light a few miles (er, months) down the road.