Grain markets started 2015 out on a bad foot as the first trading day of the year on Friday, January 2nd was all red. But the complex rebounded in the following days thanks to weather concerns and managed-money changing positions.
Oats, corn, (Chicago) wheat, and soybeans continue to hover over some nice even numbers of $3, $4, $6, and $10 per bushel respectively. We certainly have the supply right now so now things become a question of where can demand pick up. China is the obvious first place to start but it’s tough love as there’s more global competition than there’s ever been before (translation: globalization is the new norm).
One thing the markets are also preparing for is the January WASDE report from the U.S.D.A. on Monday, January 12th. Expectations are fairly muted but keep in mind that in the past few years, soybeans have moved an average of 34 cents either way while corn has a range of 24 cents. Translation: volatility is expected. Ahead of the report, this is the time of year where we see managed money review their quarterly and annual goals, leading to a re-balancing of their portfolios as various indexes get re-weighted from 2014.
The only thing that may bring things back from the dead are more geopolitical risk and a more aggressive El Nino than scientists are currently forecasting. Sea temperatures are above average but have decreased recently, potentially lessening the chance of an event. That being said, an El Nino actually would lead to another big crop in South America but would likely adversely affect things in Southeast Asia and Australia, where things are already dry as evidenced by the raging “catastrophic” wild fires in the Land Down Undaa.
On the geopolitical side, Russia is still the main wild card but rumours are also building in Ukraine regarding a wheat export limitation as Ukraine has already shipped out roughly 80 per cent of its exportable surplus this year (or about 8.5 million tonnes of the 10.5 million available). European Union as financial leaders there struggle to combat against deflation (this is a decline in prices of goods and services which can create a spiral of negative economic issues like higher unemployment and loan defaults, both corporately and personally). Currently, markets are watching the Greek elections where some minority challengers have suggested leaving the E.U. if they win power (a “Grexit”, if you will), and would wash their hands of the E.U. austerity loans.
Not only does the EU have some deflation and currency issues, but it also has some bug issues thanks to the pesticide ban. While neonicotinoid use has been banned in an effort to save the bee population, producers have been using older chemicals, those which various other bugs have developed resistance to. Case in point, flea beetles are showing up in parts of England’s rapeseed crops for first time in almost a decade! Accordingly, Oil World is forecasting that EU rapeseed production will drop to a 3-year low of 20.5M tonnes in 2015, versus the record 24M tonnes last year (or a 15% drop). Early indications are that Spanish sunflowers & French corn may also be at risk. Ultimately, we’ve been making the call that this pesticide ban is really the only thing that will take canola back above $500/MT. While export and crush demand has remained solid, EU’s problems are the real possible catalyst for price increases.
The E.I.A. released data this week showing ethanol production dropped last week by 23,000 barrels to a touch under 950,000 barrels per day. The market reacted to this as a negative, reading the decline as ethanol margins starting to dwindle with oil prices dropping. According to Morgan Stanley, overall U.S. ethanol production margins have dropped 58 per cent in the last month to $0.21 per gallon currently. Further, the investment bank says that blending-ethanol-into-gasoline-margins are now sitting at $0.40/gallon in the red (yes, a loss). That being said, R.I.N.s (renewable identification numbers) are becoming the popular kid in class again with them currently trading at 89 cents (up 51 per cent month-over-month) as blenders need the paper alternative to technically meet their ethanol-into-gasoline requirements.
Gavin Maguire of Reuters says that grains will outperform oilseeds in 2015 as quality becomes more of question for the former, meaning a premium will likely get built in. Maguire notes that combined global grain & oilseed production in 2014 jumped 25% compared to a decade ago to almost 3 Billion tonnes, leading to ending stocks sitting at all-time highs of 622M tonnes (or 34% higher than a decade ago & 7.4% higher than last year!)! However, concern over the quality of wheat crop in the Black Sea and 2nd-crop/safrinha corn plantings in Brazil being lower. With worries growing of wheat and corn production from two of the fastest-growing ag markets, it looks like there’s more upside in these crops for prices versus oilseeds as “supplies continue to swell on the back of another large South American harvest.”
In hindsight, back-to-back record production years pushed grain prices down to four-year lows by the end of September. That being said, the complex rebounded nicely in the calendar year’s fourth quarter (Q4) but they’re still at multi-year lows. For corn, things look fairly neutral right now with a large crop but US domestic and export demand remaining relatively strong, especially with China finally approving Syngenta’s Viptera variety (although the Duracade variety still hasn’t been approved). The big question for the coarse grain in 2015 are acres as margins become tighter around the $4/bushel level that many companies are forecasting. Conversely, what doesn’t go into corn will likely get seeded with soybeans in the US but South American production is that scary cloud in the distance that will continue to put downside pressure on the oilseed complex if good weather persists.
Some very bearish market analysts are already starting to call for $7 soybeans come Fall 2015. Canola may see some moves to the upside if more negative headlines appear regarding the E.U. pesticide ban & its effect on rapeseed crops there. As for wheat, we can expect things to remain volatile over the next 6 months (mostly thanks to Russia), but because of the significant available supply, you shouldn’t expect 2012/13 prices in 2015.