A Weighted Start?
Markets across the board started 2016 a little rough as fresh Chinese economic concerns continue to show contraction. 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. Weather in South America continues to improve as dry areas in the northern state of Mato Grosso have received beneficial rains over the holidays. Conversely, storms over the last two weeks of December in the United States (U.S.) Midwest tried to support grain prices, as sections of the Mississippi River were closed and standing water in winter wheat fields likely did some damage. However, we ultimately start 2016 fresh but with relatively the same fundamentals that we ended 2015 with: lots of supply. Add in some negatives from the Asian markets, and commodity prices have continued to be weighed down.
Case in point, despite analysts guesstimating a moderate increase in oil prices in 2016, oil prices actually dropped to levels not seen since 2003, asa production increase in the Middle East continued to push the market into an oversupply situation. Other bearish facts include the U.S. now officially exporting oil, and the previously mentioned factor of China slowing down is not helping the demand side of the equation.
On the grain side of things, there is 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 has been a rumoured record wheat and corn output, and in 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. That does not mean there are NO factors out there to watch out for. The most significant is a slowing El Nino effect on veggie oil production in Asia, Eastern European/Black Sea winter crop conditions, and soil moisture conditions in the southern half of North America being too wet and maybe a little too dry in the top half, Western Canada included. Also playing into effect are currencies, a theme that would likely continue in this lower price environment.
On the cash front, wheat prices had a bit of a pop to end 2015 because of the previously mentioned floods in the U.S. and the continued weakened levels of the Canadian Loonie against the U.S. dollar. As per the PDQ grain pricing website (pdqinfo.ca), we have continued to see stronger basis levels across Western Canada for both deferred delivery and new crop, compared to before the Christmas/New Year holidays.
The money question is now, what should I do Brennan? Here at FarmLead, we have been stressing since early October to hold off on better quality wheat sales because of the fundamentals of the market putting multi-year lows in. With the Loonie trekking lower with oil (and other natural resources) prices, gains in basis because of the currency decline will be limited (worth reading up on the law of diminishing returns theory to understand this further). Ultimately, looking to lock in some basis is not a bad idea for a block or two (10 to 20 per cent) of your current supply and/or new crop production (of course though, weighting when you’re able to and/or should price out the futures component of the contract).
Brennan Turner President & CEO | FarmLead.com