Grains Monitor: Leaving the lower bound

by: Frank Rijkers

  • Prices have recovered on the grain market, though optimism seems to have gone too far
  • ABN AMRO adjusts price forecast for soybeans, thereby reducing downside risk
  • Increasing fears of La Niña

Upward trend seems to have been set in motion…

Prices have been under pressure ever since they peaked in 2012. But now there is a glimmer of hope for better prices for producers of such crops as wheat, corn and soybeans. Prices of corn and soybeans have seen particularly strong increases since the start of 2016. Price increases of 16% and 24% respectively have resulted in a more optimistic market. Corn prices hit an 11-month high at the end of May in both the Chicago and Paris markets, while soybeans were at their highest since more than 21 months. Perhaps the market has overshot a little in its optimism; prices may have gone up too far. Nonetheless, an upward trend seems to have been set in motion.

…and speculators are optimistic too…

The price increases have also garnered more interest from speculators in commodities in general, and especially in agricultural commodities. In both the corn and soybeans markets, short positions, through which investors bet that prices will fall, have been exchanged for long positions over the past few months. Concurrently, more investors have become interested in these commodities, which has resulted in an increase in outstanding contracts. Trade volumes in corn have risen by 15%, while soybean trade has increased by 50%. There is also slightly greater interest in wheat (+3%), yet a price rally seems unlikely in the short run as short positions remain dominant.

…but the recovery remains fragile

From a macroeconomic perspective, better than expected Chinese imports, a (temporarily) weaker US dollar and higher oil prices over the past few months have generated additional tailwind. This has been an important contributing factor to the soaring of corn and soybean prices. Furthermore, deteriorating weather conditions, such as heavy rainfalls in Argentina, are disrupting production. As a result, the supply of soybeans is falling, further boosting prices. While wheat prices do show a slight increase (+2%) on the Chicago stock exchange against prices seen at the end of last year, prices in Paris have declined (-4%). There are several reasons why: high stock levels, a strong production outlook and tepid global trade. As a result, a correction of the current high in optimism on the soybeans and corn markets would not come unexpected.

Fewer soybeans result in an adjustment of price forecast

As mentioned above, heavy rainfalls in Argentina in particular have put pressure on the production of soybeans. In the latest production forecast by the U.S. Department of Agriculture (USDA), expected production has dropped by 5 million tonnes (MT) against its forecast a month earlier. Because expected consumption has increased slightly by 2 MT, to a total of over 318 MT, closing stocks will fall substantially to 74 MT at the end of the 2015/2016 season. The USDA has also published its first forecasts for 2016/2017, in which it expects closing stocks to decline even further, to under 70 MT. While expected production will admittedly increase to a record level of 324 MT (+2.5%, y-o-y), at 3%, demand for soybeans will increase at a faster pace. As a result, the USDA forecasts that closing stocks will fall further in 2016/2017, reaching their lowest point in three years. Consequently, there is more than enough reason for us to make an upward adjustment to our price forecast for the remainder of 2016 to 1,050 USDc/bushel at year end. Although this is below the current market price, we believe the market price has slightly overshot recently. We also expect the USD to appreciate a little during the remainder of 2016, which will have an impact on demand for soybeans.

Price forecast for corn and wheat are unchanged

Although we have upped our price forecast for soybeans, we have left our outlook for the prices of corn and wheat unchanged. We expect corn prices to remain around their current levels, given high stocks and a positive outlook on corn production. The USDA forecasts that for 2016/2017, global production will equal 727 MT against a consumption of over 712 MT. This implies that both production and consumption will exceed their five-year average by 3%. While excess supply continues to dominate the market, the quality seems to have deteriorated due to adverse weather conditions worldwide. Looking at corn, expected global production will increase by 42 MT, to over 1,011 MT, a 7% increase over the five-year average. Simultaneously, consumption will increase by 43 MT to 1,012 MT. As a result, stock levels will drop only slightly. There is no reason for us to revise our price forecast (i.e. a slight increase as we move towards the end of the year).

Fear of extreme weather events

More so than any other commodity, the production of agricultural commodities is highly dependent on weather conditions. A strong El Niño caused a lot of cultivation unrest last year. Farmers of numerous crops on the southern hemisphere followed developments particularly closely. By now, El Niño has surpassed its peak. But precisely because of its intensity, the change-over to a new weather pattern could be worse than initially expected. Furthermore, signs of La Niña, El Niño’s counterpart, are increasingly emerging. Grain harvests in North America could be hit especially hard, which means there is definitely upward price potential for corn, wheat and soybeans.

 

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