Grains this morning were able to make some gains on short-covering and more weather headlines scaring the bears away. Drew Lerner of World Weather Inc. says that the longer it takes for El Nino to dissipate, the likelier that we’ll see a drier spring in western areas of the Canadian Prairies. Conversely, Lerner suggested that when La Nina does make landfall, it will likely result in wetter conditions in Western Canada but drier conditions in the US southwest. When will the exact shift of El Nino to La Nina happen? Flip a coin.
What’s certain in the world of weather is that the recent warm temperatures in the U.S. Midwest and Southern Plains (70 degrees Farenheit in February?!?!) could potentially bring some of the crop out of dormancy. This would make these fields more susceptible to winter losses. Subtle reminder though: U.S. wheat crops have been able to survive these spells in the past so any bump in prices will surely be short-lived.
A lot of eyes this week in the wheat market were on Egypt as the world’s largest buyer of the cereal continued to frustrate its suppliers. After rejecting cargoes from both France and Canada for not meeting their max tolerance of 0.05% ergot (supposedly), there’s been much speculation in the market that the issues were tied to credit issues more than anything else. Nonetheless, Egypt’s state grain—buying agency, GASC, was able to procure 180,000 MT from Russia, 60,000 MT from France, & 30,000 MT from the U.S. this week at some of the lowest prices they’ve paid all year ($193.91/MT USD delivered).
Staying in imports, Chinese soybean imports in January came in at 5.66 million tonnes, a drop of 38% from December’s near record 9.12 million tonnes and down 18% from January 2015 (this despite prices being near 2007 levels). Some analysts are pointing to delayed shipments out of Brazil for the drag but January Chinese shipments tend to be smaller anyways. However, at the beginning of the week there was 163 ships waiting to load corn and soybeans at Brazilian ports, double the amount of boats at this time last year. The loading delays are mostly related to rains slowing deliveries to ports but that’s not necessarily slowing South American farmers’ sales as this week’s improvement in the USD provided opportunities for some more forward selling.
On that note, more Brazilian boats are definitely sailing to China this year versus those from America, as it’s been estimated by private forecasters that Brazil’s market share of Chinese soybean imports will climb 4 points from last year to 49%. Conversely, the U.S. ownership of the Chinese imports of the oilseed will drop by 7 points to 35% in 2015. The good news is that China continues to demand more and more soybeans, a positive for both major players.
While the Chinese are constantly looking for soybeans, they’re desperately trying to downsize their corn and wheat stockpiles. China may be holding onto more corn (a speculated 50 million tonnes), but it’s getting used up at a decent pace by their feed industry. This is pushing wheat reserves to increase. Opposite of the Orient, the E.U. may import a record 16 million tonnes of corn this marketing year thanks to the smaller crop that they had, which means that feedstuffs are getting imported from the likes of Russia, the US, Canada, Brazil, and most significantly, Ukraine.
Switching crops, Strategie Grains believes that, while another big E.U. crop will likely come off in 2016, the leg up that the Black Sea has had in the export game has slowed due to currency swings in the Eurodollar. This means that the French analytical firm sees E.U. wheat ending stocks falling 23% from this year’s 17.2 million tonnes expected carryout to 2016/17’s forecasted 13.3 million tonnes.
The reality remains that the supply of grain out there will continue to quell any rallies as traders and companies quickly understand the effects of any weather issues and/or demand spikes. With the U.S. dollar remaining strong, no big changes expected in the South American crop, and other commodities markets (i.e. oil) still sitting in bearish positions, it’s now about setting expectations for your grain marketing plan.
The hope that the markets were going to go higher before mid-February has turned to frantic concerns over moving something before roads get sloppy. With grain prices subdued, there were opportunities to take advantage of over the past 2-3 months on various crops but many were speculating, not managing risk. This doesn’t mean you’re selling your entire bin yard in these opportunities, but instead adapting your expectations versus just being greedy.
This means knowing for certain what your cashflow needs are going to be in the next 6-9 months and then adding 10% to those numbers just as a cushion. How many times have you wished you would’ve sold at least something (i.e 10 – 20%) after the markets went down and you were forced to sell something for cashflow reasons? (Psst: Make sales when you can, not when you have to!)
This is what we call risk management. Adaptability in these current grain markets is the name of the game and I challenge you to sit down before the end of February and review your plan. This should technically be done quarterly, if not on a monthly basis but if you don’t have a plan yet, put pencil to paper as soon as possible, and look to move 10 or 20% of what’s left in the bins. I’m happy to help you price it, but flipping a coin is not hedging your exposure to the market very well.