Optimistic caution

Global markets were blindsided by Russia in the third week of December as Moscow raised its key interest rates

Global markets were blindsided by Russia in the third week of December as Moscow raised its key interest rates to a shocking 17 per cent, up significantly from the 10.5 per cent level they had been just raised to a few days earlier. Why the rate increase? The rouble has been free-falling this year with their involvement in Ukraine resulting in Western economic sanctions against the Kremlin. This combined with the fall oil prices below $60 and $63 per barrel for WTI and Brent crude respectively, has forced Moscow to spend more than $80 Billion in reserves to slow down a currency that has lost almost half its value against the US dollar in 2014. Those that stand the most to lose with this move are Russia’s major trade partners, China & Germany, which are also two of the largest economies in the world. Further, considering that about half of the Russian economy is dependent on oil & natural gas taxes, the massive interest rate increase is a clear sign of desperation which seriously brings thoughts of ag export bans about (AKA not just rumours anymore).

The Russian rouble rebounded slightly thanks to the Russian Central Bank’s aggressive rate increase, showing signs of stabilization. The Russian Ag Minister also said that they’re looking to increase their state grain reserves from 1.4 million tonnes to at least five million tonnes to ensure domestic supply amidst escalating domestic prices. Food for thought: Russia produced a 104 million tonnes crop and they’ve only exported about 20 million tonnes so far this marketing year. Case in point, the Russian government raised its intervention price that it’s paying to its producers for number three grade wheat to over $164 per metric tonne USD, but that’s still about $15 below what exporters are paying.

In the last couple weeks, we’ve seen some positive strength in pea prices. While production was technically lower this year, exports have been flying out of the country. While reports of $8/bu are running around coffee rows across the Prairies, I think things will likely settle in and around $7.50. For green peas, things might cruise back into the double digits that we saw over a year ago. As for lentils, prices are looking fairly stagnant for the top-end of quality but we might see some increased strength in lower quality grades as more news on the India harvest comes out in early in the New Year. We have seen some good opportunities in the feed wheat and feed barley markets but they have relaxed a bit as most buyers are covered through early 2015.

One bullish headline for the markets is that the Chinese government has approved Syngenta’s MIR 162 corn variety for imports, which would dramatically increase the volume of trade to China (only 57,300 tonnes of U.S. imported so far in 2014/15 versus 1.96 million tonnes at the same time last year). The approval is definitely on Syngenta’s Christmas Wishlist, but apart from wheat, one can expect more sideways trading over the next few weeks as we head into the holidays. This doesn’t mean that all prices won’t increase on the futures boards, but I’m not confident they’ll remain elevated for too, too long, barring a further escalation of geopolitical risk.

To growth,

Brennan Turner

President, FarmLead.com

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 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).