January 20, 2015
Close Jan 20, 2015
Dec 23, 2014
4 week change
US $ Index
US 10 Year Notes
S & P 500
Grain prices dropped sharply over the past 4 weeks. Some of this can be attributed to outside influences, such as the devastation in crude oil prices, and the spectacular rise in the value of the US dollar. However, some of it is also crop specific, as South America crop conditions improved with rains in the drier areas, where conditions were deteriorating.
The crude oil drop has been relentless since it topped out last June. Countries, such as Russia, that are reliant on exports, must suddenly sell twice as much to raise the same amount of revenue. Meanwhile, the US has ramped up production, through fracking in North Dakota, so the world’s largest consumer isn’t buying nearly as much.
OPEC, the world’s cheapest producer, is also likely behind crude’s freefall. They too are losing market share. They could keep prices low enough to stop the higher cost production from being profitable. Suncor, in Canada, has already announced a $1 billion cut in capital spending, and are laying off 1000 employees. This is likely only the tip of that iceberg.
The US dollar’s strength is worrisome. While their economy is outperforming most in the rest of the world, there also appears to be a flight to safety going on. This also happened in a big way in 2008, when the US banking crisis seriously affected all markets. Governments at all levels worldwide have kept operating in the red; and a bailout of the financial system, as happened in 2008, would be more difficult now.
Currency instability is increasing. The Russian ruble has lost half its value since June. The Swiss franc shot up 25 percent in 1 day after they announced they would no longer link it to the Euro. The Canadian dollar was .94 in June and .826 now, for a 12 percent drop. These are huge changes in short time frames. The strength in gold is also a sign not all is well in financial areas.
Supporting soybeans since harvest was the pace of exports. 17 percent more soybeans have left the US compared to last year at this time. However, another record South American harvest is getting closer, so US exports will surely slow then. This is the time of year traders begin to think about US acres this spring, but with carry outs growing sharply with the 2014 crops, it is less of an issue.
Informa expects US corn acres to fall 2.3 mln from last year, and soybeans to increase 4.3 mln to another new record. This is entirely possible, as inputs refuse to back down with the lower crop prices, and it is much cheaper to grow soybeans than corn. This will also drive acres to soybeans in Ontario, as will the questionable winter wheat crop out there.
There are still strong premiums available for some top yielding identity preserved soybeans, which would make a potential drop in the soybean price more tolerable. The herbicide cost advantage GMO soybeans had is also fading with the round ready resistant weeds out there. Ontario has done an excellent job of supplying food grade beans to the world. ♦
- Frank Backx, HDC Grain Marketer