Opinion
Grain markets ended the month of January well below where they started, despite volatile currencies, weather, and geo-political risk keeping prices off the lows. Managed money continue to drop their net long positions in the agricultural complex recently to its lowest levels since October, mainly thanks to the strength of the U.S. dollar. Investors in soybeans have actually flipped their position to net short as more players are recognizing the big South American crop headed to market.
China cancelled another few loads of U.S. soybean purchases in order to switch commitments over to South American beans, putting Allendale Brokers to be the first to say that U.S. soybean sales may not reach the USDA’s 2014/15 targets of 1.78 Billion bushels. Some headlines are discussing a terrible dry-spell in Brazil but it’s only hitting mostly urban areas, so the large majority of crops should be okay (translation: there’s still a big crop coming).
The lack of rainfall in southeastern parts of Brazil is concerning to some investors as it could lead to some yield damage. In more south central regions, oilseed analyst Oil World says that “urgently-required” rains need to fall in the next 7-14 days, or losses will be significant (rain is forecasted for a few areas throughout the rest of the week in Brazil though). Already we’ve started to some downgrades in total production estimates to between 89 and 95 million tonnes (just so you know, anything in between is still a big crop). The drier conditions has allowed producers in the largest-producing area, Mato Grosso (in the north), to start soybean harvest early and make some good progress, already ahead of last year’s harvest pace.
Although it’s expected that 27 ships will be lined up in Brazilian ports at the beginning of February looking to receive grain, one thing positive for American soybean sellers is that a major waterway in Brazil, the Tiete-Parana, is not reopening like it was supposed this month. The channel serves as a major transport route for many bulk goods (including grain) and has been closed since May. Thanks to significantly below-average rainfall in the southern regions of Brazil, reservoir levels have dropped, limiting water availability for hydroelectricity generation and people, and thus, the route hasn’t been reopened. Why is this significant? The route is responsible for the transportation of some eight million tonnes of goods annually, including 2.5 million tonnes of corn, soybeans, and other soy derivatives that come from central and northern Brazil. Basically, it’d be the equivalent of the St. Lawrence Seaway shutting for a few months out of the year.
Unseasonably warm winter weather in the U.S. Midwest, Canadian Prairies, and parts of the E.U. are increasing concerns over the condition of the winter wheat crop as declining snow cover could equal trouble when cold temperatures return. While this is providing some support, fundamentals remain poor for U.S. wheat for the next month as European traders continue to win tenders against a stronger U.S. dollar. However, on the feed side of things, wheat prices continue to remain elevated and should be seriously considered to help the bottom line as 2015 crop input purchases near.
On the corn side of things, there are a few issues that are keeping prices suppressed. First, with lower oil prices, it’s hard to see ethanol being that big of a consumer of the coarse grain. Similarly, the cattle industry isn’t likely to increase its consumption significantly. And finally, if soybeans can remain above a $9/bu handle, it’s likely that corn acres could drop below 90 million acres this year in the US, but it’ll more than likely be a game-time decision in the spring. In China, the price of domestically-grown corn remains about 40 per cent more expensive than global prices, despite state reserves growing to 120 million tonnes by the end of the 2014/15 crop year (inventories continue to grow since a state grain procurement policy was introduced in 2008!
Agriculture and Agri-Food Canada says that wheat inventories here in Canada will be at a 25-year low of 4.8 million tonnes by the end of the 2015/16 crop year, a drop of 1.4 million tonnes from what they’re forecasting this year’s carryout to be. A.A.F.C. expects a slightly bigger wheat crop in 2015/16 though, as Canadian farmers are expected to seed almost 25 million acres (+3.2 per cent above 2014’s acreage), producing 30 million tonnes (+2.5 per cent above 2014’s output). Although winter wheat acres are expected to drop by a third, an increase of spring wheat acres by four per cent more than offsets the loss. Overall, A.A.F.C. forecasts average wheat prices in 2015/16 to come in between $5.70-$6.50 per bushel. On the canola side of things, acreage is expected to increase by 3.4 per cent to 20.75 million acres (high in my opinion), equaling a production of 16 million tonnes (or almost three per cent above 2014’s crop). Canola prices are expected to stay below the magical $500/MT level (as we’ve discussed a few times recently) but sway between $9.75 and $10.90/bu as ending stocks for the 2015/16 season are seen at 1.4M tonnes.
Outside of weather, traders are also watching the situation in Europe, as recently the anti-austerity, left-wing Syriza party won the general election & they’ve already moved to form a coalition that will work to reverse years of austerity measures imposed on Greece as part of their E.U. bailout conditions. While the recent EU quantitative easing programs starts to roll out, the EU & US are looking at tightening their economic sanctions on Russia as fresh battles in Eastern Ukraine continue to stir political headwinds, but ultimately continue to downside pressure on the Russian ruble. The geopolitical risk that Vladimir Putin is building up creates more havoc for most businesses that play in a globalized market. Nonetheless, Putin continues to be a savvy politician though and wade through the risky waters, recently brokering a deal with Argentina to trade Russian fighter planes for beef and wheat. With fighting in Eastern Ukraine unwavering, battles increase every time Ukraine reaches out to the West for more aid, the question really becomes, is this the new norm?
