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March 19, 2015
There are many investors who buy commodities as an investment class. Typically these investors purchase commodity index funds that own a large basket of various commodities. Within these funds you find energy, precious metals, industrial metal, livestock and agricultural products. The agricultural component typically includes wheat, corn, soybeans, cotton, sugar, coffee and cocoa. The agricultural component often has a weighting of approximately 10% of the total fund, which is a rather small amount of the total investment pool. The energy component is comparatively huge, typically representing approximately 80 % of the fund. The point of this comparison is to demonstrate the interrelationships that exist between different commodities that are seemingly unrelated. Therefore at times grain prices fall just because an oil futures drop. The Wall Street Traders may be unsatisfied with their return in commodities due to falling energy prices and therefore they sell the commodity fund we spoke of earlier. The result under this scenario is grain and oilseed prices fall. Most commodity prices have continued to face negative headwinds recently. The US dollar has sustained its long term strength and commodity prices continue to be pressured lower accordingly. Unfortunately grains and oilseeds are also subject to these forces and our markets too have fallen.
Old crop corn futures have recently broken to levels not seen since October of last year. Overall the corn market sentiment seems to be one of adequate supply and therefore lower prices are the natural direction of the market place. The US carryover of corn is deemed sufficient for current feed, ethanol and export needs. Current projections suggest US ending stocks to be 1.777 billion bushels, the highest since 2005. While these numbers do not justify higher prices in themselves new crop pricing may have opportunity to move higher into the spring. What unknowns would make new crop prices move higher? One unknown is planted acreage. Consider the following scenarios: If U.S. planted acreage was to be 89 million acres with production around 167 bushels/acre, US ending corn stocks would be approximately 1.637 billion bushels. If U.S. planted acreage were to be merely 87 million acres and yields were 162 bushels/acre, US ending corn stocks would be approximately 969 million bushels. If the latter of these scenarios were to develop the U.S. would find itself having the second lowest ending stocks on record, the tightest ending stocks being 1995/1996. What this shows is that current corn inventories, while they are comfortable today, may not be given poor plantings and/or adverse growing conditions. What will occur with planted acreage and weather is yet to be determined. On March 31st we will get the USDA’s prospective planting report. This report will help us to determine US producers acreage intentions. What will the summer weather be? Last year the winter was cold, followed by ideal growing conditions in the US. This year the winter was again very similar; will this lead to ideal corn belt weather once again? There is much unknown as we await spring and warmer weather. Markets do not like unknowns. Expect volatility and look for opportunities to market your corn as prices reach your target levels.
The soybean market, similar to corn, is making lows not seen since mid October. With current prices, soybeans appear to provide higher profitability than corn, therefore soybean plantings are likely to be large this growing season. Some estimate US soybean acreage to be 87.3 million acres this growing season, up 3.6 million acres from last year. Supposing yield were to be 46.0 bushels per acre, the expectation is for US ending stocks next season to be 604 million bushels. This would be the highest US ending stocks ever recorded. Coupled with record South American production it is difficult to see the soybean market having any sustained strength. While the market is not optimistic, it is possible, and likely that we will continue to see shipping delays and disturbances from South American shippers. In the past few weeks there have been an abundance of protests and demonstrations in Brazil by many truckers at Brazilian ports. The protests stem from what the truckers consider to be unfair or excessive taxation of fuel by their government. These protests, when they occurred recently have temporarily strengthened soybean prices in the past month. If such protests develop again, producers should use any bounce in the market as a selling point as the longer term trend is definitely lower.
Locally soybean demand has been reduced with a major soybean crusher having production issues. Unfortunately this facility will be running on reduced production until approximately June and therefore local basis levels have limited upside.
There are many regions in the world where new crop wheat needs moisture. Already some of the US hard red winter wheat crop is in need of a rain and some surveys show declines in production estimates. Likewise the Russian wheat crop is reported to be suffering due to dry conditions. Currently Russian new crop wheat is the cheapest offered wheat in the world. If this wheat suffers yield loss and Russian production falls the market will be affected by their sharply lower export potential. Large commodity funds have been aggressive sellers in wheat and are very short this market. If production fears materialize wheat prices may rally sharply from today’s values.