The Week in Markets — We're Talking Currency and Oil!



Wheat markets were up about four percent in the post-Canadian Thanksgiving rally as the grain markets all headed higher on quality and harvest progress concerns. That in mind, because of the delayed U.S. harvest, there could still be a lot of grain that doesn’t have a home on the farm and so will be sold off the combines into the cash market. What’s certain is that the crop will eventually get taken off, something that South American producers are a few months away from as they’re just starting to plant their fields with corn and soybeans. For the latter crop, many Brazilian producers could be operating in the red as input expenses have increased dramatically relative to the sale price, costing about $8.55 per bushel to produce a soybean field in Mato Grosso versus the March futures contract of $9.75. Keep in mind that this doesn’t include freight costs to the port, which are usually another $2-$3 per bushel.

How does this affect the canola market? If another big soybean crop comes off in South America, it would add downside pressure. However, the neonic pesticide ban in Europe is already showing significant negative effects on the winter rapeseed crop planted there. Thus, because of severity of insects doing damage, Europe is most likely the only catalyst to bring canola prices back above $500 per metric tonne in the next six to nine months.

Heading into Eastern Europe, Russia’s Economic Development Ministry says Russia’s grain exports this marketing year could reach a record high of 32 million tonnes. The Ministry forecasts that production from their comrades could grow to as high as 108 million tonnes with average exports running 31-33 million tonnes a year, well above the previous record set in 2011/12 of 27 million tonnes. With production topping 100 million tonnes this year, there’s clearly ample supply coming out of the Black Sea but with current western economic sanctions in mind, Russia may be more inclined to keep more of their output for themselves. That being said, turmoil in Eastern Europe and devaluation of not only the Russian ruble, but also the Ukrainian hryvnia is making things financially difficult for both individual and corporate farms.

One positive thing, potentially, for farmers everywhere is that oil prices are at four-year lows as production has remained relatively high despite demand softening. With the U.S. producing as much oil as it did 30 years ago (remember 1986 when oil prices dropped 70 per cent?), OPEC may be more interested in letting the price to continue to fall in order to get more Asian business. That being said, a few major banks see oil prices holding the $80/barrel level (I think it could run to $75) after they’ve dropped 15 per cent in the past month. Therefore, the question ultimately becomes after this significant downside pressure recently, which countries will have to cut back on production since it is no longer profitable? Canada could be considered in this mix – just recall 2008 when prices dropped significantly (Fort McMurray was at a standstill!). Obviously this will affect the Canadian Loonie, which itself has dropped three per cent in the past month to the 88¢ level (most calls are for the Loonie bottoming around 85¢). Ultimately, a lower Loonie correlates with lower oil prices, and with Canadian grain being cheaper in relative terms, there is potentially more demand coming to the Great White North.

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