Grain prices continued to slide on the futures boards through the middle of January as the complex continues to sort through supply and demand tables (the former, supply, being more plentiful at this point in time). Mostly, grain markets are feeling the effects of a strong U.S. dollar, while other currencies are suffering due to lower oil prices and geopolitical risk. This is why prices for grain in other countries are higher than a year ago, when priced in their own currency.
Russia is considering a total grain export ban (currently they’ve just limited exports to certain places & certain qualities) but the Ukraine said an exports ban won’t happen on their side of the border. Thus, with strong export markets suggesting world demand is available, the picture of less global wheat acres in 2015/16 isn’t entirely accurate despite them being lower in the U.S.
The International Grains Council (IGC) released their estimates that at the end of the 2014/15 marketing year, 196 million tonnes of wheat will still be available. This comes from a 2015 production number of 701 million tonnes, or 16 million tonnes less than last year’s record crop but still about two per cent higher the five-year average. Acres will likely grow in Canada this year (mainly thanks to durum prices) but fall in Russia. Specifically, the IGC noted some concerns for the incoming Russian winter wheat crop (winter kill problems) and the country’s “deteriorating” economic situation. The situation is making it harder for farmers to absorb higher input costs, thanks to a devalued ruble.
While the Russians have started to limit their exports, they do tend to slow their sales down in the second half of the marketing year, plus there’s still a lot of wheat available in Europe. Conversely, if the winter wheat crop in Former Soviet Union states emerges poorer than expected, you may see other governments (namely Ukraine) look to keep more of their production at home.
Canola is the hypocrite of the complex, staying elevated above $450 per metric tonne ($10.20 per bushel) thanks to a suppressed Canadian Loonie. Yet, moving basis levels are creating opportunities to make sales if you still have some of the oilseed in the bin. This past week, the Bank of Canada (BOC) shocked the markets by cutting the interest rate by 25 basis points to 0.75% in attempts to limit the effects the oil price collapse will have on the Canadian economy and its growth. The large majority of the market was expecting the BOC to hold interest rates at current levels and then increasing them later in this year or early 2016.
Simply put, the game in front of us has changed. With interest rates remaining low, it will remain cheap for businesses (& to a lesser extent, people) to borrow money, which is a bit concerning because the average Canadian is already one of the most over-leveraged consumers among major developed economies. Overall, the interest rate cut will keep the Canadian Loonie lower, which intuitively supports exports, like grain (explaining why canola prices remain elevated on the futures board).
Speaking of exports, Canadian grain movement continues to look positive, as marketing-year-to-date (through January 15), total exports have been 18.33 million tonnes. That’s 13.6% higher over the same period last year. Russian grain exports over the same period totalled 21.6 million tonnes, including 16.85 million tonnes of wheat.
We’ve only seen a bit of the same ridiculous cold temperatures we did last year but it looks like the railroads do have a better handle on movement thus far, despite their recent $100,000 (CN), $50,000 (CP) fines from the government for not meeting weekly mandates.
On the domestic side of the demand table, low grain prices increase buying opportunities for the end-user and feed markets. However, on the ethanol side of things, stocks are starting to build as refiners are refusing to blend it. Accordingly, ethanol plants are forecasted to start losing money from January through the summer when oil prices are expected to rebound and U.S. corn stocks tend to be lower.
Nonetheless, corn-for-ethanol demand should remain strong. However, despite the disputed corn MIR162 variety from Syngenta being approved for import by Chinese officials, it’s unlikely that floodgates have opened up for U.S. shipments of the product. The reason is two-fold: while the Vipterra variety has been approved, the other popular Duracade variety has not. And, private companies can only get permission/licenses to start buying foreign corn and they’ve bought and taken delivery of government-stockpiled and auctioned grain. Conversely, dried distillers grains (DDG) imports have started to pick up a bit but financing requirements are limiting volumes.
As for the soybean market, China has cancelled almost 500,000 tonnes of U.S. soybeans they bought, with many analysts suggesting more cancellations are on the way. The price gap between U.S. port and Brazilian port prices for soybeans continues to narrow with the former soybeans currently being about 13 cents per bushel cheaper. However, as the combines start rolling on the southern side of the equator, it’s more than likely that with record available supply coming out of Brazil, this price gap will go the other way (as in Brazilian beans will be cheaper). Further, it will also drive down global market prices, meaning that picture is starting to change colour and that if you have some still left in the bin or you’re looking to lock in some new crop, these are the few reasons you should probably do it sooner than later.