Commodities Report

Dec 9, 2014

 

Close Dec 9

Nov 25

2 week Change

March Corn

3.95

3.87

+ .08

Jan Soybeans

10.48

10.51

- .03

March Wheat

5.86

5.58

+ .28

April Hogs

86.15

91.65

- 5.50

April Cattle

162.80

169.10

- 6.30

Cdn $

87.40

88.90

- 1.50

US $ Index

88.58

87.89

+ .69

Crude Oil

63.22

74.10

- 10.88 WOW

Gold

1233

1197

+ 36

US 10 Year Notes

126-17

127-01

- 16

TSX Stocks

14156

15041

- 885

S & P 500

2054

2069

- 15


Grains were little changed over the past two weeks. The period after the US Thanksgiving is often the quietest time of the year, as things wind down for Christmas. Plus weather news is in the background, as North America finishes harvest, while South America wraps up their planting, so few crops worldwide are at critical stages.  

USDA will be out with their monthly demand/supply and carry out reports tomorrow. The Dec report is rarely a market mover, however. The same cannot be said of the Jan 12 report, which will include final production numbers and actual first quarter usage and stocks. A limit move has become very common after the Jan report.

One factor perhaps not fully priced in is the sharp drop in South America (SA) corn acres. Planting there was delayed for various reasons, so farmers switched acres to soybeans. It will also mean less safrinha or second crop corn, which is normally planted in March or April. Soybeans are a more profitable crop anyway, especially in the interior areas, due to freight.

Informa is now projecting perhaps 7 million acres were switched from corn to soybeans in SA. This should be enough to return the soybean to corn ratio back to its normal 2.3 or 2.4 to 1. Currently the ratio is at 2.70. The futures structure has some of this fundamental already built in, as 2015 futures are 7 percent higher than 2014 for corn, but 3 percent lower for soybeans.

There is no doubt the biggest commodity story for 2014 is the drop in crude oil prices, especially in the second half of the year. At the end of June, prices hovered near 106 per barrel. This week, they hit a low of 62.25, for a loss of over 40 percent in less than 6 months. This should have pressured grain prices also, but strong demand and seasonals allowed crops to gain nicely since October 1.

The collapse in crude occurred for two main reasons. US crude production has increased from 5 mln barrels per day in 2009 to 9 mln now. Most of the new production is in North Dakota and Texas. Obviously, this means less imported oil, so OPEC, Russia, Canada and other exporters are struggling to sell their regular supplies.

The second reason is the relentless rise of the US dollar in foreign exchange markets. It is more than coincidence that the crude freefall occurred at mid-year, exactly when the US $ index began its 11 percent appreciation. The world’s largest economy is outperforming almost all others, so investors and traders continue to buy their stocks and bonds in a big way.

The Canadian $ has been weak for the above reasons, but the drop pales in comparison to many other currencies. The Brazilian real is at a 9 year low, while the Russian ruble (rubble?) is down 38 percent this year. The Eurozone and Japan are still in recession, and China growth is also slowing of late. The rising US $ should help all these countries sell their wares into the US market. The US will need to be the engine for world growth in 2015.

Stock markets worldwide are correcting, with large drops in Asia and Europe. The heavily weighted TSX in Toronto fell 6 % over the last 2 weeks. Because money is still pouring into the US, their equity markets fared much better. However, downside risk is increasing there also the higher it goes, as markets are more inter-twined than ever.

Livestock markets have been weaker lately. Hogs began 2014 at .87, which is where they are now. However, in between, they made new all-time highs at 1.33. Cattle started the year at 136, and are still at a lofty 1.62 now, as it takes much longer to build up the breeding herd in cattle. It does appear that red meat prices may have peaked for this cycle.  

- Frank Backx, HDC Grain Marketer (HDC Forest)