The Fall Markets Review — Mustering Up a Mild Rally or Settling in For the Season?


As we say goodbye to October, colder weather is setting in just as the markets could be warming up.

More than a few analysts are pointing to soy meal as a driver of the sustained rally we’ve seen in the grain markets recently, but the move is now beyond “rational levels”. With an increase in price of 30% in just one month to almost $400 per short ton, supply and demand factors don’t really justify the current levels (i.e. the fundamental glove doesn’t fit). Combined with precariously tight ending stocks, the behind-schedule U.S. soybean harvest has created problems for some crushers, in addition of having to compete with exporters (U.S. soy meal commitments and shipments are up 61 per cent year-over-year in the current marketing-year at 6.25 million tonnes).

Additionally, there’s are more speculators joining the market as managed money increase their bets on a prices rising, which can compound movements as these new players don’t have to hold the physical product. This is all in mind, because soy meal is a high protein feed ingredient, other grains (i.e. corn or wheat) can be substituted but this can also be compromised by the current rail logistical issues in the U.S.. Overall, both domestic and export demand has helped maintain price increases, creating more than just an argument that the bottom has been priced in.

While the U.S. harvest progresses, other bullish catalysts surround seeding – specifically the U.S. winter wheat, Black Sea winter wheat, and Brazilian soybeans. In the U.S., the portion of winter wheat seeded rated good-to-excellent came in at 59%, well below pre-report expectations of 68%. In Russia, the condition of the winter wheat crop is well below the last five-year average but one should keep in mind that the area has had three continuous years of bumper crops. Agrokultura, one of the largest corporate farms in Russia, is saying that 20 per cent of its fall-seeded crops have emergence issues and are “not well prepared to face the winter.” Thanks to drier weather, fall-seeded winter wheat acreage went up by more than 2.5 times from last year’s rain-hampered fall drilling to more than 65,000 acres this year. Analytical company SovEcon has suggested that this year’s winter kill could mirror that from the 2009/10 season, which saw 12.6 per cent of the crop lost. Keep in mind, that the resulting increase in global wheat prices didn’t start to get seen until May/June of 2010. Accordingly, production of wheat may fall below 50 million tonnes in Russia for the first time in two years. And finally, in Brazil, seeding conditions are starting to finally improve after a lack of moisture available to help the crop get a head start on the growing season.

The minimum volume requirements legislation enacted by the Canadian government last spring on CN and CP railroads could possibly be a thing of the past in a month’s time, as grain movement in Canada continues to flow. Despite smaller harvests in 2014, Canada has already exported 3.9M tonnes of wheat and 1.9M tonnes of canola, up 16% and 41% respectively over 2013 but one could easily argue that a lot of that grain exported could’ve been carryover from the 2013/14 season. Louis Dreyfus was one grain company who flexed its muscle against CN railroad, filing a service complaint in May, and the CTA has ruled in favour of the major grain buyer (which contrasts a similar service complaint tabled by the Canadian Canola Growers Association which was rejected earlier this month). On that basis, various grain company industry associations (also known in some circles as lobbyists) still suggest that “rail service continues to be inadequate, uneven, and unpredictable.” This is most evident in the producer car ordering system as cars ordered in “not-easy-to-reach” areas for movement months ago still have yet to be seen or even heard about.

Finally, one macro variable effect that may be in the back of the market’s mind is the general downturn we’ve seen over the past year or so in the overall commodity sector. More market analysts are suggesting a peak has already been reached in the commodity super cycle (usually lasts 20-30 years). Here in Canada, those effects are more pronounced as the Great White North is commodity-rich, export-driven economy. According to a recent MacLean’s article, “the 15-year commodity boom – which gave Canada its Teflon-like strength during the deep global recession and helped make us the envy of the world – has run its course.”

The effects are being felt elsewhere possibly though as it looks like COFCO, the Chinese state grain-buying agency will take a hit of almost $168 million due to soybean prices tanking over the first nine months of 2014. Not to say that commodity prices can’t bounce back, but when economic growth starts to slow in emerging markets, those same markets don’t demand the same amount of commodities/goods/services to fuel their growth. Other countries may look to their central bank to provide “quantitative easing” (that is, providing more liquidity to the market) so as to help propel growth, such as Japan did recently and the U.S. Federal Reserve had done for the last six years up until this month. This all being said, we continue to be advocates of “pencil farming” at this time of year: re-evaluate monthly/quarterly expenses and what sort of monthly/quarterly sales and at what prices you should be making.

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