- We have seen another day where soybean meal has led the charge higher with today’s range in the front month contract (Dec ’14) topping $30 and prices exceeding the $400 level for the first time since late June. There is little in the way of fresh news since yesterday, end user double booking in efforts to beat the logistical snarls and follow on short covering by funds. Calling a “top” to this move is exceedingly difficult, but the move itself looks unsustainable in the longer term. Farmer selling of soybeans appears active, and our contacts advise us that crushers are able to source their requirements without problems. Consequently the push higher appears unattributable to either non-availability of beans or massive export demand, merely transportation. It is likely that this will find a resolution sooner rather than later, and as we said yesterday, we would expect an extremely sharp price correction to occur when the resolution materialises. In the meantime our advice is to “tough it out”, difficult as that may be right now.
- It should be borne in mind that this year, unlike last, we are looking at substantially lower crude oil prices as well as favourable weather conditions. In addition, the outlook for a repetition of last winter’s brutally cold conditions is remote right now given ongoing suggestions of the reportedly strengthening El Niño. None of these points can realistically point towards any long term upward trend in soybean (and by association soybean meal) prices.
- One area of concern to us is that this current price spike could elevate prices to a point where they find it hard to retreat sufficiently far to breach their season lows. However, this is pretty low on our priority list right now, and we will look at it again once the current move appears done.
- Taking a slightly different tack, ongoing reports of adverse conditions in Russia continue to circulate, and the potential impact on grain production is receiving more attention than in recent weeks. Winter wheat in Russia was sown in dry soils and ongoing dryness has persisted in the Southern District, Black Earth and Volga regions. By 8 October some 13.4 million ha was planted to winter grains leaving just over 3 million to meet the projected planting area. The Southern District is Russia’s most important winter wheat area accounting for just over 40% of the national harvest and is made up of four regions, Krasnodar, Stavropol, Rostov and Volgograd. Scant rainfall over the last six months in the region has left a soil moisture deficit reported to be in the order of 120 mm although recent precipitation has improved the position, but significant rain will be required to restore soil moistures to normal. Some are drawing comparison with the severe drought of 2009 in which Russian wheat output fell to 41 million mt, the lowest in nine years, although we believe it is still too early for such conclusions to be drawn.
- In Australia a number of private forecasters are placing the wheat crop at 22-23 million mt which is some way below the current USDA level of 25 million mt. Argentina has suggested they will harvest 14% more wheat than last season allowing greater exports to Brazil than was the case last year, potentially limiting US exports.
- Despite prices of grain being assisted higher by the soybean meal supply bottleneck we continue to believe there are bearish factors which will eventually come into play. The current price levels are putting US corn exports in jeopardy with Ukraine, Argentina and Brazil (and possibly France) looking as if they will benefit. In addition, the volume of feed wheat within the EU remains a bearish factor particularly in the context of record US corn production. Further, the role of the market in the US will be to grow exports to reduce potentially burdensome end stocks to manageable levels, and this will require lower and more competitive prices (and soon). Finally, the uplift in prices in October has made corn production in the US more viable to growers and could well see new crop planted acres at more usual levels rather than, as was being suggested some weeks ago, a substantial reduction and switch to soybeans.
- Ultimately the question which should be asked is, “when is the price of soybean meal, and in turn soybeans, corn and wheat, going to top out and return to normality?” Clearly there is no magic wand or crystal ball but we do think that we are staring at a “blowoff top” and lower prices before much longer.