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February 12, 2015
Recently oil prices have dominated the headlines. It seems that for every analyst predicting oil to fall further there is another stating that oil has bottomed and is expected to move sharply higher. What these wide ranging opinions demonstrate is that there is much uncertainty in this marketplace. Uncertainty causes volatility. Oil is not alone in this volatility. Oil is not alone in uncertainty.
World geopolitical uncertainty is extensive. Currently there is military strife in the energy rich countries of Syria and Iraq. Also there are concerns in the Eurozone with Greek debt defaults. Not that Greece’s economy is large but if it were to default or if it were to have loan forgiveness, other heavily indebted European nations could demand similar concessions. Russia and Ukraine have ongoing territorial disputes and the situation there could escalate further without notice. These examples of world uncertainty have large and broad based effects on money flow into and out of currencies and also commodities. In times of uncertainty investors move money from risk assets to investments considered less risky. Therefore in times of uncertainty and political distress money flows into US treasury bonds, the safest investment in the world. As the US dollar strengthens typically commodities fall. The US dollar has been strong recently compared to other currencies and commodities have indeed softened. Grains are not immune to these money flow dynamics and they also continue to fall, however political and macroeconomic events such as the ones listed above can change rapidly and effect price forecasts substantially.
On February 10th the USDA released their February Supply/Demand report. Overall the US corn carryover was lowered slightly from the January report but is still estimated to be 1.827 billion bushels. World carryout is expected to be 189.64 million tonnes compared with 131.10 million tonnes just 10 years ago. This is a large carryout representing about 70 days of world usage. The principal owner of US corn today is the US farmer. Therefore as we approach spring the market anticipates that the grower will sell old crop corn as cash flow requires. Market rallys are expected to meet heavy producer selling and therefore significant upside gain in corn futures are not projected. This has indeed been the case in the Ontario marketplace. Recently the market has seen some strength and growers have been moving corn. This is a sensible thing to do: selling into market rallies. Ontario growers have also been benefiting from the weakness of the Canadian dollar, which positively affects commodities traded in US dollars. Because the Ontario producer has been selling corn we have seen local corn basis trading lower in US funds. At the present time the end users are satisfied with their corn purchases and their bids have dropped from the import level highs experienced in the recent past.
There is much discussion about new crop corn prices. Some market participants are concerned that a lack of planted acreage this spring could significantly lower the carryout in 2015/2016 crop year. Supposing 88 million acres of new crop corn planted in the US, one would assume 80.4 million harvested acres. With an average yield of 165 bushels per acre and a carry in of 1.827 billion bushels, with current usage there are estimates that the 2015/2016 carry over could fall to 1.528 billion bushels. Therefore questions exist for new crop pricing. How many acres will be planted? Will energy prices lower ethanol grind? Will US exports shrink from expectations? What we do know with certainty is that new crop elevator board values are about $4.55/bushel. Unless a producer knows of planting delays or is certain there will be poor weather through the corn belt this growing season it seems prudent to sell a portion of their new crop corn shortly.
The USDA dropped US soybean carryover slightly in the February report from 410 million bushels to 398 million bushels. This remains a fundamentally bearish carryover and the outlook for soybean prices remains negative. Currently world soybeans stocks are forecast to grow by 23 million tonnes over last year alone. This translates into a record high 113 days inventory of soybeans and a record high stocks to usage ratio of about 31%. With these fundamentals and stocks in mind one would not expect commodity fund investors to move their investment capital into soybeans.
Recently South American producers have considered the holding of soybeans to be in their best interest. Over the past 3 years Argentine growers have doubled their ending stocks to an estimated 34.9 million tonnes. Why have they done this? It is not because they are bullish soybeans in themselves but rather they are holding beans because they are valued in US currency. The producers are holding back soybeans as a hedge against their currency devaluing, the Argentine peso is very weak. Again, as their currency falls their beans valued in US dollars appreciate to the benefit of the grower. At some time these beans will come to market.
Of all of the major agricultural commodities wheat has been the worst performer recently. Wheat’s world ending stocks are projected to grow to 197.85 million tonnes. It appears wheat has removed any risk premium in pricing and this may be premature. Winter wheat has started coming out of dormancy in parts of the US including Texas, Oklahoma, Kansas and even parts of South Dakota. This wheat could potentially be at risk of winter kill if temperatures fall as the winter continues. The size of the Ontario wheat crop also remains questionable. The insured acreage is indeed known however the adverse planting conditions in the fall were not beneficial for crop establishment. We await the spring to see how well this wheat comes out of dormancy. Overall wheat basis levels are likely to stay firm. It appears millers have been cautious in acquiring deferred ownership and have wheat requirements that will need to be covered.