Opinion

Commodity prices continue to trade flat to lower as Chinese stock market losses continue to weigh heavy on broader markets, including commodities, forcing broader optimism for global economic growth to fade. All grain values are lower in the first few weeks of 2016 but with some notables being the front month contracts for oats below $2/bushel in Chicago, Minneapolis hard red spring wheat flopping around $5/bushel and canola trading back and forth around $480/MT in Winnipeg. This rangebound trading is all within a market that’s positioned very short, which may be limiting an aggressive short-covering opportunities.

We thought that there could be some aggressive movement on Tuesday, January 12th with the USDA’s release of what is arguably their most significant WASDE report of the year, which gives final yield & production numbers for the 2015 U.S. crop, as well as forecasts for U.S. winter wheat acres. However, the trade didn’t provide a whole bunch of bullish catalysts, and any gains that were made on the day, were shortly erased with further negative outlooks for China.

On the acreage front, U.S. winter wheat area is estimated by the USDA to have fallen by 7.2% in 2016 to 36.61 million acres, with hard red and soft red wheat acreage at 26.5 million (-9% year-over-year) and 6.72 million (-5% from 2015) respectively. Projected U.S. ending stocks for wheat to end the 2015/16 marketing year is forecasted to come in at 941 million bushels (+25% from the end of 2014/15), 1.8 Billion bushels of corn (+4.1% from last year’s ending stocks), and 440 million bushels of soybeans (+130% year-over-year!).

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From a global perspective, ending stocks are seen mostly flat for corn and wheat at 209 million & 489 million tonnes respectively. For soybeans though, global inventories to end this marketing year are seen up 3.1% from a year ago to 79.3 million tonnes, thanks to back-to-back years of almost 320 million tonnes of global production of the oilseed. Helping soften the blow of the supply gluttony, the USDA kept their target for Chinese soybean imports at 80.5 million tonnes, which was also basically matched by the Chinese state grain think tank this week.

As mentioned, China may be experiencing slowing growth but Canadian canola shipments to the People’s Republic and other places continue to remain strong with 6.8 million tonnes of the oilseed shipped out of Canadian ports so far this marketing season through the end of 2015 (+9.7% from the 6.2 million tonnes shipped over the same period a year ago). On that note, the veggie oil supply situation remains relatively opportunistic, given that global inventories are expected to end 2015/16 down 12.2% year-over-year at just 16.7 million tonnes remaining.

Oil has also been a big loser, tanking to its lowest level since 2002, which in turn, has pushed the Canadian Loonie down to below 69 cents USD for the first time since early 2003 (notice the correlation between low points & the years?). Expectations are that Iranian economic sanctions will be lifted soon, creating a flood of fresh new supply for international trade in a market that is already well-supplied.

That being said, China might look to further diverse its sources of energy supply to include Iran, which would add them to their list of suppliers, which now includes the US after their first purchase of American oil after Congress lifted the U.S. oil export ban. All in all, this continues to put pressure on the currencies of net-exporting commodity/natural resource countries like Canada, Australia, and Russia (Psst – those are 3 of the largest grain exporters in the world as well).

Related: China’s Economic Woes Leave Commodities Looking for a New Demand Catalyst

Despite the Australian Dollar sitting near 2009 lows, grain trading company Nidera suggests that Australian wheat exports could call to a 6-year low to somewhere below 17 million tonnes. While the USDA indicated on Tuesday that they’re forecasting Aussie wheat production to come in at 26 million tonnes with 18 million tonnes of exports, most of the private trade believes the crop is somewhere between 23.5 and 24.5 million tonnes. Why the discrepancy?

With the cheapest ocean freight ever, there are more competitive options available to Asia and other international buyers, including Canada, Black Sea states like Ukraine, and now, with their export tax gone, Argentina. Much like Canadian wheat prices, there are strong basis opportunities in the Land Down Undaa for growers to take advantage of right now. That being said, should we see any strength in the Canadian Loonie, we may see the trend of Canadian exports fade as international buyers can opt in for other options.

With supply and demand tables getting the update from the USDA this week, Soceiete Generale has put a new buy call on new crop corn and wheat, blaming La Nina threats in 2016 for their new bullish stance. A La Nina weather event would bring drier weather to North America and the west of South America, and if it hits landfall by late 2016, as suggested by SocGen’s estimate of an 89% chance of happening, drought conditions would increase in the western and very southern regions of South America.

This means, of course, this doesn’t really affect this coming year’s production for the region but it’s something to consider in the long run. With the new regime in government in Argentina removing the corn export tax, the Buenos Aires grain exchange are now pegging 2015/16 acres at 7.8 million thanks to late-season rains. This upgrade nearly matches the 8 million acres that the Rosario grain exchange recently estimated. Ultimately, this all results in more corn for export as the aforementioned new government has issued export licenses for 7 million tonnes since Christmas!

From a weather standpoint, with the rains finally falling in the right places in Brazil, research institute CEPEA says that the Brazilian Real is creating incentive for the 2nd / safrinha corn crop to yield 54.5 million tonnes (close to last year’s record crop, assuming similar acres and a slight decrease in average yields). With the opportunities to lock in a great domestic price, according to ag institute IMEA, Brazilian farmers in the Mato Grosso state have already forward sold 53.5% of their possible production as of the end of December. This equates to almost 5 times the 11.5% of potential output that was priced at the same time a year ago.

In the near-term, colder weather is forecasted for the next few weeks across North America, which could support prices a bit with concerns over winterkill on fall-seed crops. That being said, we continue to see solid basis opportunities for new crop production in wheat, corn, & soybeans. Unless we get a fresh catalyst or weather headline, the grain trade will likely continue to be rangebound until more acreage estimates come out in & drills start to hit the fields for Plant 2016.

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