Ag Market Update
2014 started out with a lot of frustration: Grain was hardly moving through Canada as the Great White North experienced some record cold temperatures and significant ice cover on the Great Lakes. With the railroads making more money moving oil, elevators couldn’t take deliveries and the amount of ships sitting at the port waiting for grain started to grow. The government finally made the decision to step in and force the railroads to move grain or else face some pretty hefty fines. At the same time, geopolitical risk started to grow in Eastern Europe as Ukraine decided to join the European Union, angering pro-Russian separatists which lead to a civil war on the Russian-Ukrainian border. This intuitively equaled some higher grain prices globally as concerns mounted if the growing grain-producing powerhouse that is the Black Sea would be able to move grain. However, grain did get moved as shipments barely slowed down and prices started to fall while North America drills hit the fields in April/May.
At that time, there were also some muted concerns of an El Nino event rearing its head in the latter half of the year. This did add some premium to the markets, as did the North America seeding rate falling behind schedule, but with the new technologies available to producers, everything got seeded, including a record U.S. soybean crop. While the growing season in Western Canada saw see-saw growing conditions (a lot of Canada Day rain!), the American Midwest saw some of its best conditions ever, which forced prices to continue to slide. There were short pops in the market that sharp producers took advantage of, but a bottom wasn’t realized all the way until October for most crops. This was because the North American harvest was slowed down by untimely rains, seriously affecting quality, especially in Western Canada for pulse and cereal crops yet to be taken off, namely durum and lentils. If you found yourself with either of these taken off before the rains, it was quite likely that you enjoyed a multi-decade high in the price that you received.
From a production standpoint, Canada didn’t see 2013-like yields, the rest of the world saw did. Europe enjoyed huge rapeseed and wheat crops, although the quality of the latter was also adversely affected by untimely harvest rains. Record U.S. corn and soybean output has now led to a large rebuilding of ending stocks and to aggravate the bearish implications, weather and growing conditions for the big South American soybean crop looks very positive. What’s the bullish news? Demand continues to grow thanks to Asia (namely China) and the Middle East, but slower than production did this year. Western economic sanctions and oil prices sliding to $60 per barrel have put the Russian economy on the ropes, compounded by the Russian rouble losing almost half its value in 2014. Ultimately, there’s a global gluttony of grain this year that we have to work through now – we are seeing better rail movement in Western Canada but the U.S. is now having some problems. This means that apart from Russia limiting wheat exports and trying to buy more for itself (it’s one of the largest growers and exporters in the world), one can expect more sideways to lower trading through the spring in other coarse grains and oilseeds. This doesn’t mean that all prices will fall immediately, but I’m not confident they’ll remain elevated for too, too long, barring a further escalation of geopolitical risk or poorer weather in the southern hemisphere.
Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS and Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (firstname.lastname@example.org) or phone (1-855-332-7653).