February 5, 2014
Close Feb 5
3 week change
US $ Index
US 10 Year Notes
Corn and wheat firmed, while soybeans eased over the past 3 weeks. Volatility has been increasing lately, as it has turned hot and dry in south Brazil, and there is some localized flooding in Argentina. More of the same is in the 10 day forecast.
The 2012 bull market in grains actually started in February that year, on a late season drought in Argentina. The South American crop isn’t in the bin yet, and most analysts are now trimming forecasts from the record production they expected earlier.
The corn chart has turned more positive, following through from the key reversal made Jan 10, the day of the USDA crop report. The March contract has now breached the critical $4.40 resistance area. $4.50 and $4.60 are the next obstacles to overcome to turn the trends higher.
Funds are still short 52,000 corn contracts, so have covered 128,000 contracts of the record short position they held in November. More buying will come from this source should the market break over the resistance levels mentioned above.
Funds are still short a near record 65,000 wheat contracts or 325 million bushels, which is over half of the projected US carryout of 608 mln bu. This should be supportive to wheat prices. It also appears the US may have more winter kill than normal, because of the ongoing cold temperatures.
Stats Canada reported wheat stocks were up 38 percent from a year ago, with most of that on farm. The logistics nightmare in Western Canada has some calling it the Brazil of the north. Some argue that it’s because the Canada Wheat Board was forced to give up their monopoly power, but it has to do more with the monopolistic railroad companies not supplying the necessary railcars.
Canadian corn stocks at Dec 31 were reported up 11 percent from a year ago, also with record on farm stocks. If accurate, the chances of a basis rally become much less. Basis may well ease should Chicago prices rise, as farmers sell the flat price, allowing end users to get coverage.
The Canadian dollar continued to slide, although it did move up over a cent from its low of .89 made on Jan 31. Soybean basis gained $.25, while wheat rose $.15 over the past 3 weeks. There is no doubt our weak dollar is the best thing happening in local grain markets lately.
Unfortunately, the weaker dollar also affects inputs. Fertilizer prices, especially nitrogen, took a big hike lately. Anything imported will also cost more. A weaker currency tends to be inflationary, but will aid in getting an export economy like Canada going again.
There is much talk about the recent depreciation in the currencies on many emerging economies. The worst case is in Argentina. Their peso dropped 20 percent in a week, as inflation is rampant. Compounding the problem is that farmers aren’t selling crop, as they feel more secure holding it rather than their collapsing currency.
Hopefully this loss of faith in currencies doesn’t turn into a contagion. Nearly every country in the world is living on debt and spending well beyond its means. The US Federal debt is now $16 trillion. In Canada it is 638 billion, but if you add in the provinces it is over 1.25 trillion. Scary numbers for sure, with no way out and no end in sight. All we get are political promises that never come true.
Stock markets lost some ground as the Fed cut back on quantitative easing. A correction was overdue after the 33 percent rise in the S&P 500 in the U.S. during 2013. It is not only a coincidence that grain prices rose when the stock market fell. Dollar flows between asset classes are major market influences these days.
- Frank Backx, HDC Forest Location Manager