Commodities Report

February 2, 2016

 

 

Close Feb 2, 2016

Jan 19

2 week change

March Corn

3.72

3.64

+ .08

March Soybeans

8.86

8.81

+ .05

March Wheat

4.76

4.74

+ .02

Feb Hogs

64.25

62.85

+ 1.40

Feb Cattle

135.80

128.25

+ 7.55

Cdn $

71.28

68.71

+ 2.57

US $ Index

98.87

98.90

- .03

Crude Oil

30.03

29.60

+ .43

Gold

1127

1089

+ 38

US 10 Year Notes

130-00

128-16

+ 1-16

TSX Stocks

12430

11996

+ 434

Grains traded slightly higher over the past 2 weeks in Chicago, despite huge volatility in currencies, equities and other commodities such as crude oil and even livestock. Technically, there appears to be good support underneath in crop futures.

Basis however has had a huge swing . At the beginning of January, Hensall’s elevator basis was $2.85 over March for old crop soybeans. The Canadian dollar was at 72.16 then. By Jan. 20, it fell to a low of 68.09, causing basis to rise to 3.40, for a $.55 gain. By the end of Jan., our dollar rose to 71.37, and basis retreated back to the 2.90 level. That’s a wild basis ride.

Corn basis only went from $.95 over March to 1.10 over, and retreated to 1.05 by the end of the month. Wheat basis rose .25 during our dollar’s freefall, and lost a dime of that by month’s end, so not near the movement compared to soybeans.

Meanwhile, the January range in futures was $.24 for corn, .36 for soybeans, and .30 for wheat, with prices closing near their highs for the month. Basis risk is as big or bigger than the futures risk for Ontario farmers currently.

The obvious driver for basis was the Canadian dollar, which was following the crude oil market. The correlation was near 100 percent, as both made classic V bottoms on the charts. This chart pattern is not uncommon after a prolonged and steep bear market.

Perhaps the lows hit Jan 20 in these related markets will be the lows for a while. A trading range is most likely for the next month or two, with our dollar trading between 68 and 72, while crude could trade between $28 and 36 per barrel until spring.

The fundamentals are just too burdensome on crude to see this suddenly turn into a bull market, but at some point, all the bad news does get priced in. Iraq had record production last month, and Iran will become an exporter also. The warm winter in the Northern Hemisphere doesn’t help demand either.

Grain prices are also apt to remain range bound into March, when focus returns to the US growing season. El Nino is waning, and some forecasters predict La Nina will follow. La Nina (below normal Pacific waters off South America) is often associated with drought in the US Midwest. Perhaps some risk premium is currently being added in.

Many markets have often taken their cue from the US dollar index, with a strong dollar bearish to commodities, and obviously other currencies. Lately, this index has been remarkably stable, and it is the crude oil that has become the market that leads the others.

Stock markets, which had a huge run up after the 2008/09 slide, are now also following crude oil on most days. One would think that overall the benefits of lower energy prices to consumers would win out over the negative repercussions within that sector, but that sure isn’t the case right now.

That’s because deflation remains the primary concern, and wealth is lost in that environment. Consumers cut back on purchases thinking they will get it cheaper if they wait. Governments and central bankers are trying desperately to get some inflation going. Japan even went to negative interest rates.   

 

- Frank Backx, HDC Grain Marketer