Global markets were blindsided by Russia in the third week of December as Moscow raised its key interest rates to a shocking 17 per cent, up significantly from the 10.5 per cent level they had been just raised to a few days earlier. Why the rate increase? The ruble has been free-falling this year with their involvement in Ukraine resulting in Western economic sanctions against the Kremlin. This, combined with the fall oil prices below $60 and $63 per barrel for WTI and Brent crude respectively, has forced Moscow to spend more than $80 billion in reserves to slow down a currency that has lost almost half its value against the US dollar in 2014. Those that stand the most to lose with this move are Russia’s major trade partners, China and Germany, which are also two of the largest economies in the world. Further, considering that about half of the Russian economy is dependent on oil and natural gas taxes, the massive interest rate increase is a clear sign of desperation which seriously brings thoughts of ag export bans about, and not just as rumours anymore.
The Russian ruble rebounded slightly thanks to the Russian Central Bank’s aggressive rate increase, showing signs of stabilization. The Russian Ag Minister also said that they’re looking to increase their state grain reserves from 1.4 million tonnes to at least five million tonnes to ensure domestic supply amidst escalating domestic prices.
Food for thought: Russia produced a 104 million tonne crop and they’ve only exported about 20 million tonnes so far this marketing year. Case in point, the Russian government raised its intervention price that it’s paying to its producers for number three grade wheat to over US$164 per metric tonne US, but that’s still about $15 below what exporters are paying.
Canola movement continues to be solid in Canada thanks to both strong domestic demand and better rail movement (compared to last year). Exports are up over 14 per cent year-over-year (current marketing year-to-date) although the government believes only 8.4 million tonnes will get moved total this year, which would actually be a 10.8 per cent decrease from last year’s nine million tonnes exported. Of course things could slow down over the course of the winter (given railroaders don’t like cold temperatures, but who does right?) but the canola market will continue to be driven by soybeans in the near-term and this year’s canola carryout is more than likely to come in above 1.5 million tonnes (which is well above average).
Speaking of railroad movement, per the revenue cap imposed on CP and CN Rail for revenues earned from moving grain, CN is going to be paying a $5 million fine for going above its set entitlement of $667 million for grain movement in 2013/14. All monies will go to the Western Grains Research Foundation (I’m sure their Christmas wishlist just got a bit longer). Comparably, CP was $1.6 million below their revenue cap, a year after being over by $178,000. Overall, I’m optimistic that we’ll see better grain movement this winter after last year’s growing pains.
One bullish headline for the markets is that the Chinese government has approved Syngenta’s MIR 162 Vipterra corn variety for imports, which would dramatically increase the volume of trade to China (only 57,300 tonnes of US. imported so far in 2014/15 versus 1.96 million tonnes at the same time last year). The approval was definitely on Syngenta’s Christmas Wishlist but keep in mind that the Duracade variety still hasn’t been approved so while you can probably expect China to account for a few shiploads from the U.S., it’s not going to break the balance sheet.
On the soybean side, soybean sales have been declining marginally week-over-week for the past month although some big sales were announced to China when they brought a trade delegation into Chicago this past week. The fact remains though that bearish weather is forecasted for South America and that China may soon shift its cross-hairs to the agricultural juggernauts south of the equator.
Simply put, China is the elephant in the room. France is blaming China for relative strength in soybean prices over the past few years and accordingly, are taking measures to protect both their grain and livestock industries. The French Ag Minister said this week that with China dictation of protein feed becoming greater, Europe’s “security of supply is not guaranteed in the long term.” Thus, France is earmarking 49 million euros (or $61 million USD) annually to pay producers a premium for planting and harvesting peas, lupines, or fababeans. France actually already has one of the best self-sustaining protein crop programs with 60 per cent of its crops going to the French livestock sector, almost double that of the entire EU’s 35 per cent rate. Ultimately though, the move by the French government is a positive one for growers and could be a model for others as crop diversification creates a relatively stronger sustainable environment (and soil!) for years to come.
Overall, apart from wheat, one can expect more sideways trading over the next few weeks as we head into the holidays. Case in point, the U.S.D.A.’s most recent long-term price estimates pegging average 2015/16 prices at $5.00 per bushel for wheat (Chicago), $3.30 for corn, & $8.50 for soybeans. This doesn’t mean that all prices will fall immediately on the futures boards, but I’m not confident they’ll remain elevated for too, too long, barring a further escalation of geopolitical risk.