December 22, 2015
Close Dec 22
2 week change
US $ Index
US 10 Year Notes
Most markets were in holiday mode the past two weeks, with crop prices mixed. Soybeans did the best, as weather patterns in Brazil remain the same. It is dry in some key northern areas, and too wet in the south, but it is still early to cause major concerns, especially after the US Midwest experience last year, where a poor start turned into record yields. South American weather in January is gaining in importance.
The big news in grains was the huge changes in Argentina under their new President. He dropped the 20 percent export tax on wheat and corn, and dropped the tax on soybeans by 5 percent to 30. He also let the peso float, and it dropped 30 percent that day. That’s like our dollar going from par with the US dollar to $.70 in one day!
The immediate affect was a huge jump in the value of the grain stockpiles they are sitting on, at least in their currency. Farmers there have been reluctant sellers because of their 25-30 percent inflation. There was also a huge difference between the official exchange rate and the black market rate. This is now gone. The fact the bean price in particular didn’t take a big hit is an underlying sign of strength, in my opinion.
Brazil’s economy is also a big mess, politically and economically. Rating agencies put their debt at less than junk status. Their currency, the real, has lost one third of its value this year. This helps their basis, but adds significantly to inflationary pressures also. The developments in Brazil and Argentina obviously create strong headwinds for US exports, especially in the soybean complex.
Despite crude oil’s weakness, US ethanol production is staying near record levels. Demand remains strong, especially from China. Meanwhile Brazil’s production is dropping due the weather there hurting their sugarcane crop. The higher US renewable fuels standard for 2016 is also helping.
As expected, interest rates firmed 25 basis points in the US. The US dollar index dropped ahead of the announcement, and rallied marginally when rates rose. However, the key reversal down on Dec 3 is still intact. Psychology seems to be slowly shifting towards a weaker US dollar in 2016.
A weaker US dollar would help commodities. Base metals and energy remain under pressure, however, for fundamental reasons. Grains have held up better than those markets, even though they too are still in bear markets. History shows that when commodities turn, it is usually the food commodities that lead the other commodities to higher ground. I suspect 2016 will be a better year for commodities than 2015 was, despite all the negative news right now.
The biggest local news story for 2015 in my eyes was the commodity deflation and its effect on the Canadian dollar. At the start of 2015, our dollar was at $.85. The 15 percent drop was the saviour to our grain prices, as basis made up for the Chicago drops. Yields were generally better than expected after a tough start to the growing season.
As we head into the New Year with our usual optimism, I think it’s important to look back at the many blessings we have received in 2015. I wish you all good health and happiness in 2016, and maybe better grain prices too! ♦
- Frank Backx, HDC Grain Marketer