As 2014 draws to a conclusion it seems appropriate look back at some of the highlights of the year and conduct a mini comparison to where we were a year ago. This has certainly been a transitional year where it would appear we have finally moved from a position of moderate to severe tightness in inventories both domestically and worldwide to one of moderate to severe excess.
It seems that just about every country that produces grain around the world registered record or near record crops, albeit some with a few quality issues. While others may disagree, I believe the two key topics of the year revolved around Russia and China.
Concerning the first, in late February of this past year while the winter Olympics were being held in Russia, there was an internal revolution in Ukraine which created enough tensions between these two countries that war seemed imminent and eventually Russia invaded (was invited) Crimea which technically was a part of Ukraine.
Seeing that both Ukraine and Russia are major players in world grain production and export, markets were understandably concerned and built risk premium into prices. Additionally, the western world enacted several economic sanctions against Russia as chastisement, which has over time turned their economy south and sent their currency into record lows against the dollar and others.
While this overall political situation remains in flux, it turns out there was little to no negative influence on grain production in either country, and realistically pushed them into even more aggressive exporters to help with cash strapped governments.
Once that realization was accepted, Russia/Ukraine ceased to be much of a supportive influence at least until a few weeks ago when talk began the circulate that Russia was looking for way to discourage exports of wheat in an effort to stem food inflation at home.
You really do not need to stretch your imagination too far to think that the ongoing problems there could have an impact on next year’s grain production but for now, the trade has other things to focus on.
The second key topic has been China and it almost seems appropriate to refer to it as the Yin/Yang of doing business with that country. On the negative side, beginning in November of 2013 they began enforcing a zero-tolerance policy for the import of the yet to be approved Agrisure Viptera MIR 162 strain of corn.
While this move looked to be motivated by the fact that they had produced several good crops in a row and were having a difficult time managing the massive inventories they had, but effectively this shut U. S. corn out of their market.
Then around seven months later they extended the ban to DDG’s, of which they accounted for around 60% of the U. S. exports. On the Yang side, China has appeared to have an insatiable appetite for beans, as they have been rebuilding inventories for it seems three years now and for the past six months of this calendar year have posted week after week of large purchases.
Worldwide, it never appeared that there was an issue with supply but as we know, the United States realistically would have run out of beans before the end of the crop year had we not brought in record imports.
Here now at the end of the year, pipelines are refilling, we have produced a record crop of beans by a significant margin, South America appears on the way to producing another record crop and China’s demand appears to be waning a bit. That does not sound like a good combination for positive price action in the months ahead.
On the other side of the coin, just this month they have approved MIR 162, which is psychologically positive for corn, but realistically they have so many strings attached to imports right now it is not expected that they will become a major player for some time other than in the DDG trade.
While all of this was occurring, the United States was able to produce record corn and bean crops and an adequate wheat crop. For corn and beans, it was like the perfect storm as did we not only plant the second highest corn acreage in recent history and the highest bean acreage on record, we recorded new record yields for both crops.
While we will not have the final tallies for a few weeks yet I thought it might be interesting to compare the numbers from one year ago against the current estimates.
Looking first at corn, on the December 2013 supply and demand report, the USDA had estimated that the usage for the crop year would be just over 13 billion bushels and we would finish the year with stocks of 1. 792 billion bushels.
Of course, this was a dramatic increase from the prior year when we ended with a pipeline supply of just 824 million bushels (later revised to 821), and at the time the market was in a psychological funk. A year later we know that the overall usage was understated by almost 500 million bushels and the ending stocks were reduced to 1. 236 billion.
Still an adequate supply but hardly burdensome. The week of Christmas 2013 spot corn futures closed at 4. 275. As it currently stands, the USDA has boosted the total usage projection for the 2014/15-crop year to 13. 67 billion, which is 620 million above the estimate on the same date last year and 120 million above the actual 2013/14-crop year usage.
Even with this, the carryout number is projected to grow 206 million bushels compared to last year but note that the price for spot futures is down only $. 12. It would seem to me that the challenge that the corn market has now moving into 2015 is that we already raised the bar for usage.
If correct, then to justify higher prices we would need to either cut supply, which could happen if the USDA cuts acreage on the January report or we run into a weather issue with the next crop, which of course would be six months away.
Compounding the issue, we have the speculative community via funds quite long, which is just the opposite of the situation we were looking at twelve months ago. With a scenario such as that, the burden of proof lays with the bull.
Over on the bean balance sheets, a year ago at this time the USDA estimated that with a 3. 274 billion bushels usage we would have a tight situation with beans but would still end up with a carryout figure of 150 million; very comparable to the previous crop year at 141 million.
Additionally, the general consensus was that if South America produced a good crop, China would divert their business down there and we could move comfortably into the next harvest. As we now know, South America did produce a good and in fact record crop, but China continued to buy from the U. S. nevertheless. While the reasons are likely many, the logistical issues they confronted in South America the prior year were evidently not forgotten.
Ultimately, the total usage for beans came in 204 million bushels higher than that December estimate and had it not been for the record import of 165 million bushels, our inventories would have been depleted.
On the Friday of Christmas week last year spot bean futures closed at 13. 31 and into the spring had rallied to as high as the 15. 50 mark. If we fast-forward to the present, we now know that we have produced new records for both yield and total production and by hook or by crook scraped together enough inventory to reach new supplies.
Spot futures just after Christmas closed at 10. 47, down $2. 84 from the previous year reflecting the now adequate to excessive supply of beans. While the final production number is still a few weeks off and the South American crop is growing, it would seem that beans confront the same issue as does corn.
The USDA has already boosted the total projected usage for this marketing year by 260 million bushels above the estimate a year ago and even 177 million above last year’s actual usage so the burden now will be to live up to that expectation.
We are aware that to date, China has been buying at such a pace to support the outlook but the figures have been steadily dropping for the past several weeks. On top of that, there already appears to be a general consensus that we could see one to two million more acres planted in the United States next year.
From a fundamental standpoint, it would seem that the outlook for beans is quite bleak. That said, the technical action has never bore that out and as I have written in previous letters, we have been in a standoff between the two camps now for the past two months.
I suspect we will need to at least move out to the January 12th final production and supply and demand report before we uncover the victor, but as with corn I believe the burden of proof lays with the bull.
Finally, on the domestic front wheat has never looked at a burdensome picture. On the December 2013 report the USDA estimated we would have a comfortable supply of 575 million bushels but even then the figure was down 128 million bushels from the prior year and would mark the lowest ending stocks figure in six years.
The Friday after Christmas spot futures closed at 4. 27. Prices really remained under pressure from that point until February but we finally shook off the bearish control by the aggressive moves of the Russian bear.
Even that turned out to be temporary and once the world felt comfortable that exports would not be disrupted and there were no serious crop issues around the world prices headed lower into fall. But once again we were shocked out of bearish complacency and a heavy short position by the speculative funds with additional concerns with Russia and the need to build in some risk premium once again.
Moving forward to December 2014, we see that for this crop year the government actually projects that usage will slip by 292 million from the previous year estimate and the projected carryout will climb 79 million bushels and yet today the spot price is just a touch higher than were we where at that time.
Does the market feel we need to build in additional risk premium due to the political uncertainties in major producing countries around the world? While that could be the case, I tend to believe the recent advances have pushed prices higher than the numbers would suggest realistic and unless a real problem develops somewhere, we will give back a sizeable portion of the gains in the New Year.
While this little review exercise does not necessarily provide any answers to what markets will be doing in the year ahead, I believe it does lend a perspective of the current price and at a minimum reinforces they idea that we have moved into a new era of adequate to abundant supply that we have not experienced for several years.
With the growth engines of ethanol and export trade leveling off, price moves will be primarily influenced by production problems somewhere. In that kind of net sum game world, someone will have to suffer a disaster to stimulate price action and you just hope it is not you.
Welcome to the new/old world of Agriculture with one major change. Prices have elevated to a new realm with along with higher prices come greater risk. Sharp pencils and disciplined risk management are essential more now than ever.