Great Deals on Oil, Plus How Railroad Closures & Restrictions Are Impacting Global Grain Markets

Grain prices closed the month of November generally higher as colder weather and transportation issues in the U.S. helped prices maintain an elevated level.

While most Americans were putting the turkey in the oven, OPEC, the cartel of major oil-producing nations like Saudi Arabia, declined to ease their production from the current 30 million barrels-per-day. As a result, the currencies of major oil-exporting countries like Canada, Norway, and Russia all dropped against the U.S. dollar. This is because, with oil supply set to remain greater than demand, lower oil prices are realized, and the same amount of oil previously shipped out of a country doesn’t equal the same amount in income (both for a private company and the net economic benefits for a country) than it did even six months ago. Should interest rates rise within the next 12 months, as forecasted, things could become very interesting.

Some very positive and widespread rains in South America recently have kept soybeans supressed despite very positive sustained domestic and export demand. Before the rains, crops were already in relatively decent shape so the additional shot of moisture will just add to the crop’s development. Conversely, cooler weather is a concern for the northern hemisphere, including Ukraine where producers have planted more winter wheat, than initially thought, putting in 16 million acres (four per cent more than initial estimates).

Next door, the Russian Ag Ministry recently said that the country has exported 2.1 million tonnes of grains thru the first three weeks of November, including 1.48 million tonnes of wheat and 400,000 tonnes of barley. Despite grain movement still strong from Mother Russia, the slump in energy prices and Western economic sanctions are hurting the country significantly at a cost of up to $140 billion per year. That being said, it might be time for Russia to re-consider this Cold War-like self-sufficient attitude or otherwise the country is headed for a recession. If they remain the same, it’s likely that the economy will continue to suffer and specifically for the agricultural producers, make it hard to stay in business.

Recent closures of railroads in Western Australia is creating questions around how grain is safely going to get to the port now that more trucks are expected to be hitting the road. Suffice to say, the Australia situation is eerily mirroring that in Brazil where farmers have to truck their corn and soybeans over 1,000 miles to get it to port, a significant waste of time, energy and money.

All this being said, the mandate forcing CN and CP railroads to move grain will end, and although Canadian agriculture minister Gerry Ritz has said they’re not ruling out modifying the order, he believes this year is more about value (AKA blending), not volume. Of course, there is a variety of crop out there, but there are areas that continue to receive very poor service – namely shortlines. The reality is, grain comes from many areas across the land and it goes to many destinations. The real question in my mind is when will the government enforce greater transparency and disclosure from the railroads so as to ensure the gaps in the system are filled. Ultimately though, criticizing each other over and over again, doesn’t create a solution. There needs to be a dialogue so that a long-term, viable solution is established, one that assures international buyers that they’ll continue to get the great quality of product and service they’ve come to know.

A few weeks ago, I wrote about the likelihood that European Union rapeseed production numbers will be much lower in 2015/16 than this year’s record crop thanks to a pesticide ban. However, recent reports have suggest that UK winter rapeseed acres have dropped by 10 per cent from last year down to 1.53 million acres, not the 4 percent drop initially suggested. The increase has been mostly blamed on market prices and rotation reasons as winter cereals acreage looks to be up 6.5 per cent year-over-year to 4.82 million acres. This sentiment is echoed relatively well across the EU though and ultimately, I think the pesticide ban continues to be a major issue that the market hasn’t completely considered yet.

Back home, the most recent data from the Canadian Oilseed Processors Association shows that total canola crushed so far in 2014/15 is up nine per cent versus this time last year with 2.15 million tonnes crushed. This in mind, crush capacity utilization is still only running at about 81 per cent. Overall, fundamentals remain relatively bearish for the next little while and as we move towards the holiday season, things will likely continue to slow down.

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