Grains Monitor August – Still more than enough

by: Frank Rijkers

Prices move lower at start of holiday period…
Prices for wheat, corn and soybeans dipped sharply in the past  few weeks. Since the peak in June, wheat prices have dropped over 20%. Corn and soybean prices suffered similar losses after also peaking in June. With declines of 25% and 22% respectively, traders evidently have little faith in a strong price recovery in the near future and there was widespread profit-taking before the start of the holiday period.

…thus (partly) cancelling out the earlier gains
Due to the substantial price falls of the past weeks, most grain prices are once again at or around their start-of-year levels. After achieving initial gains of, respectively, 30% for wheat and over 20% for corn, these grains are now back to square one. Soybeans also sustained a strong price correction on their previous gain of over 35%. However, with a remaining return of 15%, soybeans are still the best-performing agro-commodity of the moment.

Market more weather-driven than ever…
The current price volatility is mainly caused by fears of the impact that extreme weather can have on crops. The primary driver of the uplift in soybean prices was the heavy rainfall in Argentina (the world’s biggest exporter). This rainfall put both the volume and quality of the soybean output under pressure. Corn and wheat prices chiefly benefited from fears of crop damage due to drought (in the United States) or excessive rainfall (in large parts of West Europe). Now that the impact of these weather events appears to have been limited, prices are starting to go down again. Another factor that created unrest in the market was the fear of consequential loss from La Niña. In view of the current phase of the global crop planting cycle, we can conclude that this impact will not be too severe. All in all, the weather is mainly having an impact on soybean prices at the moment. The bad (predominantly wet) weather in North West Europe has put a damper on wheat production, which allowed the wheat price to rebound on the European exchange (matif). This price has advanced by 10% since early May. However, a further increase is unlikely in view of the high stock levels and upbeat crop forecasts.

…reinforced by speculators
Short-term price movements are often caused by speculators buying and selling positions. Their trades can strengthen or weaken the prevailing trend. Due to the uncertainty that crept into the market as a result of the unfolding weather in key production areas, we saw more speculators winding down their short positions (wheat, corn) or taking long positions (soybeans and later also corn). As the fears ebbed away, speculators gravitated back towards short positions, thereby putting prices under renewed pressure. Another factor is the diminishing interest in the trade for grains and oilseeds in the past weeks. This is visible in the lower number of traded contracts, a direct consequence of the reduced probability of production setbacks around the world.

Another large wheat crop expected
Wheat production has been on the rise for several years now. The 2016/17 season is expected to produce another excellent crop. The latest report of the US Department of Agriculture (USDA) even projects a record output of 738 million tonnes, 4 million tonnes more than in 2015/16 and over 30 million tonnes above the average of the past five years. Consumption is also continuing to grow, but less quickly than production, so that stocks will rise further. All in all, these are unfavourable signals for the price of wheat. This is one reason why we see no reason to change our forecast. After the summer period, prices are expected to pick up again due to the seasonal effect, but will then settle into a sideways trend.

Enough corn in the global market
Corn, like wheat, is amply available. As noted, previous fears that weather damage might dampen output in the upcoming season (2016/17) proved unfounded so that the crop forecasts have been revised up. The USDA’s latest report projects 1,010 million tonnes, 5% higher than last season. The International Grains Council (IGC) is even predicting as much as 1,017 million tonnes. In both cases, the expected output will exceed consumption so that, after a brief revival at the end of the summer period, corn prices are also expected to move sideways in the rest of 2016.

More soybeans, but too little to meet demand
Soybean production is set to break all records in the coming season (2016/17). The projected output of over 325 million tonnes (USDA) entails an expected rise of almost 4% compared to 2015/16. This increase, however, is insufficient to meet the growing demand. The consumption of soybeans is projected to hit an all-time record level of 328 million tonnes, notably driven by persistently high Chinese demand (87 million tonnes). We  therefore see soybean prices edging slightly higher in the rest of 2016.

 

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