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January 15 2016
As the new year begins the old market conversations remain. The US dollar continues to dominate world currencies. Not only has the US Federal Reserve increased interest rates once, but there is anticipation that they will raise rates multiple times throughout the year. Concurrently China has made aggressive moves to lower their currency in an effort to boost exports of goods. The market interprets this aggressive and rapid devaluation as an indication that the Chinese economy is weaker than what is currently reported and that growth in the region has stalled. Combine US dollar strength and the thought that the world’s second largest economy is struggling and commodities push to recent lows. Low commodity prices have been devastating in some industries, especially mining and energy. To demonstrate this point the Bloomberg Commodity Index closed recently at its lowest level since it was established in 1991. Consequently, those countries (such as ours) which are long-established commodity producers have seen sharp devaluations in their currency. As a result of the weakness of the Canadian dollar local crop prices have not demonstrated the severity of the general commodity decline. Unless weather severely challenges South American production and with only sufficient new crop production in the US, it is likely that grain inventories will remain burdensome. A perfect storm of negative news has caused the Canadian Dollar to fall to levels not seen in recent times and this has brought opportunity for Canadian grain producers. Farm level production is not immune to the potentially difficult effects of burdensome inventories, similar to what is currently being felt in the oil fields of Alberta. The point of this discussion is that there is likely limited opportunity going forward with grain futures, however the Canadian producer has pricing opportunities a US grower could only dream of. With this opportunity being presented it is time to benefit from the factors that have contributed to allowing you to be profitable into next year. Sell some grain for 2016, lock in some profits and remove some risk in an ever increasingly risky environment.
In its recent Jan 12th report, the USDA estimated 2015 US corn production to be 13.601 billion bushels, down slightly from its December report. US yields were decreased to 168.4 bushels per acre, down .9 bushels per acre from previous estimates. Overall total US production was 45 million bushels less than expected in prior reports. Offsetting this decrease in production is an expected reduction in US exports of 50 million bushels. US exports have been disappointing due to the strength of the US dollar, making US corn expensive to foreign buyers. For years the major driver of corn demand has been Chinese stock piling to ensure food security. This has been achieved and overdone as Chinese inventories have become overly burdensome. On January 9th a Chinese government official disclosed that the country had historically high grain stocks of 500 million metric tonnes. Of these inventories it is reported that 210 million tonnes is corn. Put into perspective 210 million tonnes is about 8.26 billion bushels or about 61% of US annual production. This high Chinese inventory leaves China’s corn stocks to usage ratio at 105%, with anticipation of stocks growing to 131% stocks to usage ratio into 2016. In recent times the highest US stocks to use ratio was approximately 65% in the mid 1980’s.
The USDA reported US soybean carryover to be 440 million bushels in its recent report Jan 12th. This carryout estimate is lower than the previous estimate of 465 million bushels. This carryout represents a large supply of beans, especially when yield expectations are 97 to 100 million tonnes from Brazil. In the same report the USDA reported soybean yields to be 48 bushels per acre, down .3 bushels per acre from its previous estimate of 48.3 bushels per acre.
Again, the USDA Jan 12th report is the key driver currently in the marketplace. Wheat carryovers for this year have been increased from previous reports. This is not only true for the US but also for the world situation. In summary world wheat inventories have continued to grow. The long term outlook for wheat might not point to inventories continually growing however. US Hard Red Winter plantings are 2.4 million acres lower than last year and Soft Red Winter plantings are 367 thousand acres less than the previous year. India has experienced severe dryness and current estimates place their wheat production forecast to be 80 million tonnes. This is down from last years production of 88.99 million tonnes and 2014 production of 95.8 million tonnes. It is reported that India could import upto 6 million tonnes of wheat this year. Likewise the Ukraine has experienced weather issues with poor planting conditions in the fall. Depending on winter survivability and spring conditions, Ukrainian wheat production could fall by 7 to 10 million tonnes with total production falling from 27 million tonnes to approximately 18 million tonnes. Recently discussion has revolved around a US aid package for 100 million dollars to purchase US wheat. This aid package has not yet been confirmed however there is discussion in the marketplace that it likely will occur.