Grains ended this week with not a whole bunch for the bears or bulls to love for this Valentine’s Day weekend. All prices ended Friday higher with wheat being the big winner on the day, as the market looked at some easing of geopolitical risk in Europe as positive.
While there’s discussions of a ceasefire in Eastern Ukraine, most think that Putin is far from done influencing/targeting the region, making it unlikely that this alone will soften wheat prices, unlike the calls some analysts are making. The reality is, the cost of farming (both financially and figuratively) in Russia and Ukraine has ballooned to unfathomable heights, as the depreciation of the Russian ruble and Ukrainian hryvnia isn’t a very positive lending environment (This, in turn, means less crop inputs, and/or just less acreage in general).
U.S. railroads are apparently getting better at moving grain, per a University of Minnesota report, as all grain facilities are saying service is faster and the majority are saying there are no orders past due! Interestingly enough, while grain is moving quite well inside the U.S., Canadian movement of grain to the U.S. and Mexico has actually dropped 35% year-over-year (something most already knew, it’s just get publicized now though). The reality is, U.S. demand has not waned, but companies are sourcing from elsewhere for things like flax (Kazakhstan) and oats (northern Europe) because they can ensure timely delivery of the product versus waiting on Canadian railway service. This in mind, the whole industry might be in for a shake-up if the C.P. Railway unions plan to strike on Sunday, as they’ve suggested they’ll do.
On Tuesday, February 10th, the USDA came out with its monthly WASDE report and while U.S. ending stocks were dropped, the market reacted as “blah” and ended down for the day. U.S. soybean demand was lifted by exports (up 20 million bushels to 1.79 billion) and domestic crush (up 15 million bushels to 1.795 billion), leading to a net 2014/15 carryout of 385 million bushels. This, however, is a significant increase from the 92 million bushels America ended the 2013/14 marketing year with. On the corn side of things, ending stocks were dropped by 50 million bushels to 1.827 billion, thanks to an increase in corn-for-ethanol use, despite the EPA still not setting a target yet of how much ethanol is to be produced this year. On the wheat side of things, ending stocks were a little higher as exports were downgraded thanks to more global competition as a result of a stronger U.S. Dollar.
The USDA drastically cut its expectations for Chinese corn imports over the next 10 years, dropping their forecast from 22 million tonnes by 2023/24 to just 6.5 million tonnes. While the USDA does expect China’s corn demand to expand substantially thanks to its growing livestock sector, China’s large domestic stockpiling policies are creating significant hurdles. Case in point, at the end of this marketing year alone, China will have a carryout of 79 million tonnes of corn, or the equivalent of about 40 per cent of the end world carryout! While in the long-term, the USDA is less optimistic on Chinese import demand, corn-for-ethanol use seems to be the question on most U.S. farmers’ minds for the short-term as ethanol prices are starting to mirror its oil brethren in terms of prices, making it one of the stronger variables keeping corn below $4 per bushel.
Globally, wheat ending stocks are seen growing by 1.85 million tonnes to 197.85 million, thanks to higher carryouts in Australia, Canada, & former Soviet Union states. World corn ending stocks were upgraded by 500,000 tonnes to 189.64 million but soybean ending stocks dropped by 1.5 million tonnes to 89.26 million. Partially to blame for the decrease, the Brazilian crop was downgraded by only one million tonnes by the U.S.D.A. to 94.5 million, well above the 91.9 million forecasted by AgRural, the 94.7M tonnes estimated by CONAB (Brazil’s version of the U.S.D.A.), and German analyst Oil World, who’s at 89 million tonnes. The downgrade was attributed to the drier weather in January but recent rains have led to more estimates getting upgraded for the Brazilian corn crop. Speaking of rains, timely precipitation in November and December helped boost the Australian crop, according to ABARES (the Aussie version of the USDA)
What does it all mean? Hedge funds continue to cut their net long positions in the agricultural market. More analysts are making the call though that the bottom of the wheat market has been seen (we made that call last week), but there are those who think that grain prices are likely to become more volatile thanks to more outside, speculative money entering the market. Whatever this fresh money thinks, fundamentals continue to point to lower soybean prices (another call we’ve been making) – even some analysts are pointing below a $8-per-bushel handle if yields are above trendline in the U.S. (combined with the big South American crop and expected bigger acres in the U.S. this spring).
With bean prices headed lower, there becomes a point where net returns to a U.S. farmer are basically the same, regardless if corn cobs or soybean pods grow on their land. Looking at things from a Canadian perspective, with lower bean prices, this would put some tough pressure on canola prices, which have been generally resilient, thanks to a depreciated Canadian Loonie and decent domestic and export demand. Locking in good a good basis seems to be the thought du jour lately as devalued Canadian loonie doesn’t seem to have much more room to drop and we’re seeing better levels that where we were a year ago. This outlook combined with making cash sales on rallies seems the best perspective to have while snow is still on the ground.