While most analysts agree that from a technical standpoint, corn and wheat appear to have more upside potential than soybeans, wheat was the grain this week that tumbled like a baby giraffe out of the womb, dropping its most since September.
Overall, growing conditions are generally favourable in the northern hemisphere as, now that we’re into the month of March, more market eyes are looking to this half of the equator. Eastern Europe still remains an area of concern, specifically northeastern Ukraine and southern Russia, which, compounded with higher crop input and borrowing costs for farmers, sets things up for a bit of dicey growing season. All things being equal, if production out of the Black Sea falters much like currencies have, I will promise you that governments there will intervene somehow and hold their cards (read: wheat) closer to their chests. That has the potential to restructure the entire global wheat trade, a la 2010, when Russia halted export sales.
Speaking of crop conditions, the USDA came out with their latest winter report, showing good-to-excellent (G/E) ratings that were mostly the same as January in major growing states, despite a fairly cold February. Kansas, the biggest wheat grower in the U.S., saw G/E levels drop by two points from January to 44 per cent, but that’s still 10 points better than the same period last year. Wheat production will still likely be lower in the U.S. this year thanks to a drop in acres but that looks to be more than made up for by the rest of the world. Further, the strength of the U.S. dollar continues to undermine the export competitiveness of U.S. wheat.
Globally, the U.N.’s Food & Agriculture Organization came out with its first estimates of the 2015/16 crop year, pegging total global wheat production at 720 million tonnes, the highest out of all the early-year forecasts (ABARES at 707, I.G.C. at 705, & AAFC at 710) and slightly smaller than this year’s crop of about 727M tonnes. In the Black Sea, the FAO expects Russian wheat production to fall 6.8 per cent year-over-year to 55 million tonnes, while Ukrainian output is expected to fall 8.3% to 22 million tonnes. For the rest of the E.U., they also see a slightly smaller crop than last year (147 million tonnes, -5.5% year-over-year), citing some tougher winter weather in Eastern regions, but raised expectations for Turkey, Canada, and Australian production.
More producers are asking about the durum price outlook as values have fallen significantly from their mid-winter highs. What we can expect is more acres going in this year everywhere, including Mexico, where it’s speculated that U.S. millers will source from when high quality stocks get a little tighter in the late spring-early summer months. That being said, there’s a small chance (less than 20 per cent in my opinion) we could see a bounce at that time but it’s more likely that prices will continue to trend downwards to new crop levels, which we’re currently seeing around $7.50/bu for a #3 or better contract (area-dependent).
On the oilseeds front, canola prices continue to swing based on the value of the Canadian Loonie, the soybean trade, and, accordingly, will we see more than or less than 20 million acres planted in Canada this year. The Brazilian truck strike that helped rally the oilseed market is basically over (which is why the rally is now over and you saw both canola and soybeans fall back this week from their February highs). From a trader’s standpoint, they buy the “rumour” of how terrible things are going to be because of a specific change in the fundamentals, but then will sell the “fact” of when the air clears, how much the market really stands to lose. These “buy the rumour, sell the fact” rallies can last days, weeks, or even months when it comes to geopolitical risk.
We could see more of that geopolitical rally come into play, depending on what the Argentinian government does regarding future soybean sales from their farmers. With inflation at ridiculous double-digit levels, producers hold on to their grain as a hedge against the currency devaluation. However, some analysts are pointing to June/July/August when more sales will be made in order to prepare (AKA get cash in their bank account) for their planting season. This, intuitively, would put significant pressure on the oilseeds complex as harvest just gets going in the northern hemisphere.
One last thing to keep an eye on is the maze of central bank policies and its variable effects on currencies. Currently, the U.S. dollar is at its strongest level since 2003, making new records against various other currencies, and an interest rate cut expected by the U.S. Federal Reserve this summer could amplify this. The Bank of England, Canada, Australia, and E.U. have all kept their interest rates steady over the past month, while developing economies like India and China have dropped rates as they try to spur demand, contrasting their BRIC-nation brethren Russia and Brazil who have raised rates in attempts to control inflation.
In a bit of a surprise move, China lowered its economic growth forecast to seven per cent in 2015, its lowest level in nearly 25 years. With lowered growth expectations amidst its rate cut and monetary easing, we need to keep a close eye on China (if you didn’t already notice, they consume a fair amount of grain). Basically, the focus of the People’s Republic seems to be on short-term growth, rather than long-term reform/restructuring, which in turn raises questions about China’s long-term role as a global economic growth engine.