Dodging Shadows and Jumping Futures — A Grain Market Recap


Grain prices started the month of February looking to come out of the gate running – mainly from their January shadow (much like the groundhog did, but you probably don’t need a rodent to tell you if winter’s over or not if you live in Canada). Most of North American’s major growing regions are starting to see some actual winter weather after the warm reprieve in the middle-to-end of January (two-pairs-of-longjohns temperatures if you will). Managed money continues to bet that grain prices will continue to decline as the net turn to bearish sentiment reflects what happened in the month of January. That being said, grain prices on the futures board jumped higher earlier in the week thanks to oil prices climbing but fell off their mid-week highs on Friday as profits were taken and the U.S. dollar traded stronger.

Some analysts are pointing to the soybean net short position as being near the record levels seen in September but that hedge funds still have room to run to the almost 80,000 net short position held in September in wheat. Here’s the thing – those numbers mean little to the fundamentals of the market. Sure, it makes for a good headline in the media/papers/Twittersphere but that’s it. The market will move where it has to.

Egypt’s state grain buying agency, the GASC, says that they may go to local traders in the country to buy wheat from the Black Sea in an attempt to prevent the smuggling of foreign grains into the country and passing them off as Egyptian-grown wheat (which is offered a much higher price than international levels as an incentive for Egyptian farmers to grow the crop). Over the past few months, Egypt has predominantly buying mostly wheat from France but more than a few bakers are complaining of the high moisture levels of the French wheat. One positive for North American markets is that the GASC has the option of a $100 million USD line of credit made available to them by the U.S. government but it can only be used to buy U.S. wheat. However, with the U.S. dollar remaining elevated asked most currencies, this seems unlikely.

Recently, StatsCan released its Dec. 31st stocks report and, for the most part, grain supply is less ample than last year but it’s hard to totally agree that this is a big deal because we did produce a record crop in Canada in 2013 and grain movement wasn’t that spectacular that winter. Canola fell but quickly rebounded as the report showed there were 11.1 million tonnes of the oilseed still available by the end of 2014, higher than the 10.7 million-tonne average trade guess. On-farm canola stocks were pegged at 9.9 million tonnes compared to commercials holding 1.2 million tonnes (or 33% more than they did at the end of 2013). Nonetheless, on-farm storage continues to grow as more producers recognize its increased selling power advantages.

Comparably, total wheat inventories came in below expectations at 24.8 million tonnes, mainly thanks to less durum being available than the trade was guessing (4.06 million tonnes versus the 4.2 million-tonne expectation). Flax supply was much higher than 2013 at 608,000 tonnes thanks to increased acres while both peas and lentils stocks were much lower a 1.56 million and 755,000 tonnes respectively as a good export pace has helped farmers open bin doors. Oat and barley stocks were also lower than last year’s levels at 2.5 million and 5.4 million tonnes respectively. From a sales position, locking in some prices on small red lentils, yellow peas, and brown flax (both old crop and new crop) seems to a be profitable option.

What is undeniable is that farm margins globally look to be tightening over the next year, possibly two. The big bearish shift is being led by soybeans with the big South American crop coming to market as we speak. With the official Argentinian peso-U.S. dollar exchange rate holding firm (versus the 30% loss it saw in 2014), it’s expected that more producers will sell their soybean production versus holding it as a hedge against inflation. However, as the price of soybeans is pressured to the downside, it creates the question of just how much acres U.S. farmers will actually plant. The price ratio between corn and soybeans for fall 2015 contracts is currently about 2.3 and if this falls any more, the return on investment for either crop becomes similar.

Nonetheless, American broker Allendale Inc. sees soybeans sliding down all the way to $8.07/bushel by Harvest 2015 (basically they’re saying that producers should look to lock some new crop in sooner than later). As for corn, the market seems to be hovering in the $3.75 to $4.25 range according to Allendale but the recent unexpected uptick in the U.S. cattle herd size suggests that more corn will be used for feed, helping prices. Ultimately this is a positive for wheat too, but the size of the soybean market does have an imposing shadow.

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