Downside risk

The big news hitting the market has been focused on China as they continue to reject U.S. corn shipments

The big news hitting the market has been focused on China as they continue to reject U.S. corn shipments (rumours are now at over 600,000 tonnes, or 30 per cent of U.S. shipments year-to-date, inn less than 5 weeks!) while FC Stone says China is likely to start cancelling soybean orders in early 2014, putting current downside pressure on the market. With South America’s soybean crop still up in the air, soybean prices are staying high relative to canola prices (the canola crop is already in the bin so there aren’t any unanswered questions). Ultimately though, I wouldn’t be surprised if China started cancelling in the last few days of December (they did so last year), when most of the market is far from a trading screen. Even though market volatility is bound to increase with less participants at the trading table, the large supply of grain inventories this year could soften how big the moves are. Another important headline to keep abreast of was the introduction of a bill by U.S. senators to repeal the corn ethanol mandate. The proposed law would remove all requirements to use corn to produce the biofuel, giving an opening to soybean, cellulosic, and other low-carbon advanced biofuels. Or as bill-sponsoring Oklahoman Republican Senator Tom Coburn said, “Eliminating this mandate will let market forces, rather than political & parochial forces, determine how to diversify fuel supplies in an ever-changing marketplace.” At these lower prices, it’s hard not to think that corn acres in the U.S. (and likely elsewhere) will go down for the 2014/15 crop.

Speaking of prices, agricultural bank Rabobank says that soybeans could be the worst performing commodity in 2014 due to the re-building of stocks this past year. The Dutch multinational says that the price of the oilseed (November 2014 contract) could decline 20 per cent to $10.70 a bushel by the end of 2014. As for corn, the bank sees prices trending slightly slower to about $4.10 while Chicago wheat prices are seen “steadying” around $6.40 for most of 2014. With decent production expected for both wheat and corn, the bank says that they expect wheat prices to maintain its strong premium over corn. Morgan Stanley, however, thinks a bit more bearish, pegging 2014/15 average prices at $4.20 for corn, $5.50 for Chicago wheat, & $9.80 for soybeans! This is especially interesting since the U.S.D.A. just put out their 2013 final costs of production at $4.10 for corn, $6.49 for wheat, and $9.90 for soybeans!

If soybean prices are expected to fall, Argentine soybean producers may want to start selling. The country’s farmers continue to use soybeans as a hedge against a falling peso (its value is down 22 per cent in the last year). As soybeans are priced in US dollars, as the peso falls, Argentinian producers can collect more pesos for the same amount of soybeans, making hoarding their supply a legitimate hedge. Planting of the soybean crop across South America is close to being complete and conditions are pretty good so far. This is also the case for much of the European & North American winter wheat crop as decent snow cover and relatively cool temperatures have softened any winterkill risk. At the end of the day, (as we approach the end of the year), crops currently in the ground in decent standing & it’ll be hard for the market bulls to grab any attention.

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and now mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (b.turner@farmlead.com) or phone (1-855-332-7653).

FarmLead Breakfast Brief