Markets across the board started 2016 a little rough as fresh Chinese economic concerns continue to show contraction which led to not one, but two halts to trading in their stock markets this week! While the Chinese government moved to support the market immediately by flooding it with fresh capital, the broader market still isn’t necessarily buying into it, but the sky is not falling there. We start 2016 relatively fresh, but with the same fundamentals that we ended 2016 with: lots of supply, which isn’t the best start when it comes to grain (and other commodity) prices.
Case in point. Despite analysts guesstimating a moderate increase in oil prices in 2016, oil prices actually dropped to levels not seen since 2003 as production increase from the Middle East continues to push the market into an oversupply situation. Other bearish factors, such as the U.S. is now official exporting oil and the aforementioned situation in China, are not helping the demand side of the equation.
In the Middle East, there is some heightened geopolitical risk, as Saudi Arabia broke off relations with Iran, which could be a catalyst for further problems within OPEC, which is struggling with reigning in oil production across its member states, without jeopardizing their position as the leader in oil production.
Weather in South America continues to improve as dry areas in the northern state of Mato Grosso have received beneficial rains over the holidays. A recent report categorized only 32% of the crop in the region “good or excellent,” with 43% was labeled “poor or very poor.” Some production estimates have pulled back a little bit, including FC Stone & the USDA’s attaché in Brazil who are suggesting 98 million and 97.8 million tonnes, respectively. The USDA’s current forecast remains higher, at 100 million tonnes, whereas Informa is pegging things at 101.4 million.
We did, however, see the USDA follow their regional office’s lead and drop their forecast for Brazilian soybean production on January 12, with the publication of their monthly World Agricultural Supply and Demand Estimates report (WASDE). The January report is usually considered one of the most closely watched by the markets as it gives final numbers from this past year’s U.S. crops. Going into the report, expectations by the trade were mostly mute – we all knew that output was very positive despite variable growing conditions throughout the growing season. Still, I wouldn’t be surprised if we saw corn yield estimates at below 169 bu/ac, versus the 169.2 the trade is expecting and the 169.3 forecasted in November (translation: slightly neutral-bullish).
The soybean trade isn’t expecting any changes from November estimates with U.S. yields sticking at 48.3 bu/ac. And given the 175 million tonnes or so coming off South America fields before we turn dirt here in North America, the soybean balance sheet is looking pretty heavy.
While canola has been generally range-bound since harvest, the spread between it and soybeans is a bit concerning in the sense that we likely see that close a bit. With the suppressed Canadian Loonie though (which dropped below 71 cents this week!), canola prices are generally supported, but it’s hard for me to see the market going above $500/MT unless we see seeding concerns this spring.
From a weather standpoint, more than a few producers are hoping that an El Nino winter might help tame the amount wet areas that they’ll have deal with when things thaw out. Multi-week models are suggesting that colder temperatures across North America are in the mix towards the end of January / start of February which could hurt those winter wheat crops with limited snow cover. But, for the most part, those crop conditions have improved measurably since November. In Kansas, the largest wheat growing state, 54% of the crop is rated in good-to-excellent (G/E) condition, up from 49% a year ago, while Oklahoma winter wheat crops were pegged at 77% G/E, significantly better than the 51% suggested in November and 54% this time a year ago!
Speaking of forecasted weather, the Australian Bureau of Meteorology has recently said that the El Nino indicators are weakening, suggesting that the weather phenomenon has peaked. Don’t express gratitude just yet though, as the Aussie weather arm believes that conditions will swing back to neutral, or even over to the La Nina side of the extreme weather pendulum sometime in late 2016. La Nina is usually associated with drier conditions in the summertime in the U.S., and could help rally . However, given the average “swing time” between El Nino and La Nina, the latter of the two looks like it might start making its presence known closer to the fourth quarter of 2016.
Overall, grain markets seem to be a bit oversold, which has market analysts agreeing that given the already large net short position on the futures board, we could see more short covering like we did on Friday (before the WASDE report). There are still a lot of questions that will need to be answered in terms of potential production in a few areas, including that of Argentina, where it’s been rumoured record wheat and corn output could be seen, and the Black Sea, where worries over the combination of fluctuating temperatures and snow cover of fall-seeded crops is on the minds/screens of many traders.
On that note, there are limited catalysts to really push commodity values higher in the near-term. The most significant include: the slowing of the El Nino effect on vegetable oil production in Asia; Eastern European/Black Sea winter crop conditions; and soil moisture conditions in the southern half of North America. Also playing into effect are currencies, a theme that will likely continue in this lower price environment.
While you and I can have differing opinions on when and where the markets are going in 2016, the fact is that we can expect to see more volatility with weather issues in 2016, especially moving into the North American planting season, which could be the first real opportunity for a price rally. Managing risk and limiting exposure to moves against your operation should be a goal and a focus in 2016. We’ve been recognizing stronger basis levels for wheat in the west and corn and soybeans in the east. Consider locking in 10-20% of what’s left in the bin, or even what you’re penciling out for this coming growing season.
Categorically, we still have a few years left in a downturn of the commodity cycle, specifically as it relates to ag prices and credit availability, and as a result, understanding where you sit in different price AND yield scenarios is crucial to your grain marketing plan. While the last half of this decade may not be like the 1980s when it comes to grain prices, there are still opportunities to improve.