Russia’s in a Pickle, Oil is Cheap (ish) & Southern Soybeans Abound — A Market Update

Rumours are building again that Russia may limit their grain exports (specifically wheat) and the government might start increasing the purchasing price from farmers for the government reserve stocks (the government is definitely worried about rising domestic food prices). This would incentivize producers to sell to the government versus grain merchants/exporters. SovEcon said earlier in the week that Russia’s grain exports don’t look to be slowing down, thanks to a weaker ruble and said increasing domestic prices. Thanks to a 104 million-tonne crop this year, there’s plenty of product available and SovEcon expects Russia to export about three million tonnes in December, slightly down from November’s 3.14 million tonnes. Since domestic prices are rising though because of the rouble’s 40 re cent depreciation over the past year, meat producers are starting to see increased feed prices. The Moscow-based analytic group says that the market could stabilize if grain exports exceed 10-11 million tonnes in the 2nd half of the marketing year (January-June) compared to the 21 million tonnes in the 1st half AND the ruble stops (free) falling.

That’s the reality: Russia isn’t falling over with cash in their pockets – their economy isn’t doing so hot with the rouble down significantly, Western economic sanctions, and the price of WTI crude oil dropping below $60 per barrel this past week and Brent crude below $63. Russia is in a bit of a pickle but with exports staying relatively high, it seems the government is ready to step in yet and stop farmers from enjoying crop movement & better prices. Government intervention (i.e. Putin buying more grain to add to his 1.75 million tonnes in reserve stocks) will only add more volatility to the market, but potentially better prices on the futures board.

Combing back to oil, recent ethanol production data shows that processors continue to pump out the biofuel at a record rate, despite its rare premium to traditional gasoline. The real driver for the ethanol market though is likely on the export side – demand is up more than 40 per cent year-over-year, pushing prices higher than gasoline in some domestic markets, yet, because of the large amount of cheap corn available, costs of production in America have declined. Ultimately though, the premium that ethanol is currently enjoying over gasoline is unsustainable, alas, corn sellers are enjoying the level of support ethanol is providing as the most recent USDA WASDE report showed 2014/15 ending stocks being revised to just under two billion bushels. The report also forecasted the global wheat carryout to be two million tonnes higher at 195 million tonnes. For soybeans, U.S. ending stocks were dropped to 410 million bushels thanks to export sales remaining strong but the South American crop is looking good and that will put negative pressure on the oilseed.

CONAB (the Brazilian USDA) recently published their forecast for their soybean crop and it was a big number at 95.8 million tonnes, which would represent an almost 10 per cent increase from even last year’s record crop and a five million-tonne upgrade from their November estimate. Total acres seeded are seen growing to 78.3 million acres and average yields are seen growing by about six per cent year-over-year, thanks to beneficial rains that fell soon after the crop was planted in many areas. As for the corn crop, C.O.N.A.B. expects their producers to take off 78.7 million tonnes, slightly up from their previous estimate in November of 78.1 million tonnes. This higher number reflects more second crop or safrinha acres but, comparably, Informa is much less optimistic at 68.7 million tonnes.

In the last couple weeks, we’ve seen some positive strength in pea prices. While production was technically lower this year, exports have been flying out of the country. While reports of $8/bu are running around coffee rows across the Prairies, I think things will likely settle in and around $7.50. For green peas, things might cruise back into the double digits that we saw over a year ago. As for lentils, prices are looking fairly stagnant for the top-end of quality but we might see some increased strength in lower quality grades as more news on the India harvest comes out in early 2015.

Ultimately, one can expect more sideways trading over the next few weeks as we head into the Christmas holidays which isn’t to say that prices won’t increase on the futures boards, but I’m not confident they’ll remain elevated for long. There’ll be opportunities to sell cash on the rallies and trade paper on the “buy the rumour, sell the fact” mentality. Regardless, enjoy the warm weather while it’s here because temperatures are sure to start falling again soon.

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