It’s no secret that commodity prices, including grain, have all had a tough start to 2016. Oil, one of the most actively used products in the world continues to face bearish headwinds as Iran recently had economic sanctions lifted against them, adding roughly another 500,000 barrels per day to the international trade market. As such, through the middle of January, hedge funds had extended their short positions in oil to an all-time high. With oil continuing to drop lower, and China officially saying their Gross Domestic Product (GDP) grew at 6.9 per cent, there are a lot of people questioning if there will be any global economy growth in 2016.
Some finance veterans think we shouldn’t worry about China’s stock markets and commodity markets selling off to start 2016. Why? There is a constant gap between the speculative financial markets and what’s happening in the real economy and despite the fact that the aforementioned 6.9 per cent growth rate in the world’s largest consumer of commodities is their lowest in 25 years, they’re still the largest consumer of commodities (what country wouldn’t like a 6.9 per cent growth rate?!). From a grain and oilseeds perspective, China is in fact substituting more palm oil purchases with soybeans because by crushing it, they are also able to keep up feeding the demand of the ever-expanding Chinese pork industry (pun intended!).
From a domestic standpoint, the United States (U.S.) market only crushed 157.7 million bushels of soybeans in December, 4.6 per cent behind last December’s number. Accordingly, it is more than likely the United States Department of Agriculture (USDA) will likely have to cut their crush forecast in February W.A.S.D.E. report. The lower value of currencies in South America, and even to an extent, here in Canada, are making purchases outside of the U.S. more attractive (especially with record cheap ocean freight). Conversely, Soceiete Generale has put a new buy call on new crop corn and wheat, blaming La Nina threats in 2016 for their new bullish stance. A La Nina weather event would bring drier weather to North America and parts of southern and western South America, and if it hits landfall by late 2016, as suggested by SocGen, drought conditions would affect crops in southern Brazil, Argentina, and Chile. In the near-term, colder weather is forecasted for the next few weeks across North America, which could support prices a bit with concerns over winterkill on fall-seed crops.
Overall, there are multiple variables that sway the market to and fro, but right now the most important factors are currencies and weather. Leading up to a delivery month on a board, the market swings back and forth from the final price the contract closes at.
As per the PDQ grain pricing website (pdqinfo.ca) for Western Canada, the strength in the Canadian dollar late this past week (as a result of the Bank of Canada not dropping interest rates) has pushed basis down a bit, putting net cash prices for spot movement down about a nickel. Durum prices have started to gravitate higher but Canada Prairie Spring wheat is feeling the most pain, down roughly 1.5 per cent week-over week. As we’ve been saying the past few weeks, locking in the basis on some wheat sales with the Canadian dollar has been a smart money call. Should we see any rally on the futures board, that call will likely get smarter as any basis would likely then deteriorate.
President & CEO | FarmLead.com