- Midday comments:
- It appears that the soybean market has begun a further leg down triggered by this week’s USDA report which has left the market staring at bearish weather conditions and a limited time frame in which any dramatic turnaround in crop fortunes and yield can occur. Yesterday’s sharply lower close (basis Nov ’14) near to the contract low made after the report was issued would suggest that the recent choppy sideways price action may well be over. Given the latest weather forecasts, which include ½ to 1 inch of rain across much of the soybean growing area as well as some welcome warmer temperatures, traders are raising their expectation for yields to increase over and above the latest USDA estimate. Further bearishness comes from the historically high crop rating conditions that seem to be never-ending and bode well for the crop to withstand any deterioration in weather, however unlikely that may seem right now.
- Yesterday’s indecisive bounce in corn prices have many discussing how difficult it could be for corn to actually yield above 170 bu/acre for the national average harvest, and this, together with some short covering in the market provided some price support. To counter this, the longer-term downbeat view over demand, which is highly likely to be seriously impacted by surplus wheat supplies around the world, and the fact that the grower in the US is holding a huge “long” (his stock and forthcoming crop) which he will likely sell on rallies has a massive potential to cap rallies. Next week’s weather forecast, as with soybeans, leans bearish although this does not seem to be a story of significance any more because there is little to suggest a cut in yield of any relevance although there is a possibility (strong in our opinion) that an increase to 170 bu/acre or more is more likely. The next story of significance will be demand, and the abundant EU feed wheat supply is likely to curb US corn exports in the long run. Reports from Ukraine on their record high grain output coupled with higher exports is also a limiting factor for US corn exports. This is potentially significant given the need for Ukraine growers to sell in order to raise cash to allow for new crop inputs and plantings to proceed. The ability of the US to grow exports is, in our opinion, likely to be a tough road to take.
- The wheat market, particularly in cash terms, appears to be controlled by the bears who too heart in the increased Russian crop (USDA and private forecasters). Sellers remain active and flows from both Russia and Ukraine appear solid and not subject to politically induced restriction or interference right now. The focus on global wheat output is giving the market bulls a difficult platform from which to perform and the market has reacted accordingly. Markets remain technically oversold and support levels are holding, but it feels that it is just a matter of time before tees are breached and a further leg down begins in earnest. Russian interior prices are at their lowest since 2012 and promised government support to growers appears to be sadly lacking. The suggestions of a 61 to 63 million mt (plus) wheat crop, if correct, look likely to have growers battling low and dropping prices for some time yet. It has to be remembered that the Black Sea region sets global price levels well into the winter period (or at least has done so historically for a very long time) and we see little to change this. As such there seems no evidence of a seasonal price low – for now.
- Longer-term market overview:
- As a general comment, in addition to the three specific product summaries above, it appears an almost “racing certainty” that the US will break a number of records in the 2014/15 crop year. Combined soybean, corn and wheat output is forecast to reach 2 billion mt – a record. Each of the three crops is forecast to exceed its previous record, the first time since 1960 that this has been the case. Each crop is also forecast to exceed its prior year harvest – obviously. Global consumption will not be able to swallow up such volumes and this is the basis for our longer term bearish outlook, and this is before we see any further addition to output forecasts that feel inevitable right now. The world is awash with grains!
- This year will be the second successive year in which global production will exceed consumption, hence our much used phrase “global stock rebuilding”. Combined soybean, corn and wheat production will exceed consumption by 51 million mt according to the USDA report although we believe that figure is too low and could be as much as 60 million mt. Around 100 to 105 million mt of stock has been added globally since 2012.
- The level of “overproduction” has to be placed into context where demand growth is projected at 2 or 3% in the coming two years, much lower than was the case as the biofuels demand phase grew. S America has largely made its new season planting decisions and it seems that soybeans will be favoured over corn to some degree. The big question, “where is this leading?” feels like there is only one answer – that is that we are facing a lengthy period of weak and uneventful prices unless we see a significant reduction in planted acreages across the world, which we believe to be unlikely. Only in three of the last twenty years have we seen a cutback in combined soybean, corn and wheat planted acreage.