Analysts offer their insights and reveal wild cards that could push grain and oilseed prices up or down
Grain markets are juggling a lot of balls this year.
A variety of factors hang suspended with major implications whichever way they fall in the coming year.
Few would spark an outright bull market, considering a preponderance of bearish factors.
However, if those bears can be dodged, farmers might get to take advantage of rallies to salve the wounds of a weak overall crop market.
Exchange rates top the list of potential market movers.
“It’s as much Canadian dollar related as anything,” analyst Jim Beusekom of Market Place Commodities said.
“It’ll significantly affect the price should (the dollar) go up or down any amount.”
Beusekom’s view was shared by several analysts, who have seen Canadian farmers benefit from the drastic decline in the Canadian dollar since the end of the commodity bull market.
Analysts identified several factors as wild cards that will play out in the coming months:
- currency exchange rates
- global demand for U.S. corn
- South American soybean production
- El Nino/La Nina
- China and the developing world’s economic strength
- crop yield gains
- soil moisture and growing conditions in the western Prairies this spring
Currency factors play a significant role in the profits farmers see from selling their crops. Prices in Canadian dollar terms for many crops have seemed to stay stable, or even rise, as the loonie slumped, while U.S. corn, soybean and wheat prices grind lower.
The effect of exchange rates is even greater in countries such as Brazil and Russia, where the currencies have slid further than in Canada.
Weak currencies strengthen crop returns, encouraging aggressive seeding next season.
Meanwhile, U.S. farmers are seeing poor returns, and some are losing money, which will not encourage aggressive spending at seeding time. However, farmers are not expected to cut seeded acres. They will hope strong yields lead to profitability.
Weak world demand for corn has been a great millstone around the neck of the grain markets and left the United States sitting on a mountain of the crop. Weakening U.S. exports sap any optimism for a cereal grain rally.
“All of the sectors (of corn demand) are a little bearish now,” said Rich Nelson, analyst at Allendale Inc. “The biggest issue we see (influencing the 2016 market) is corn demand.”
Oversupply worries also hang over the oilseed market. Brazil’s soybean crop has suffered a number of weather challenges this season, but it could still produce a record large crop that will weigh down oilseed prices.
To prevent a build up of South American soybean stocks, China will have to buy a lot, and Chinese demand is another factor that has crop market analysts anxious.
The country drove the world commodity boom for years by buying ever-larger amounts of almost every commodity, until it stopped doing so and even began to buy less of some commodities after 2012.
Booming commodity production in the rest of the world was built upon an expectation of steadily increasing Chinese demand.
“I’m watching ongoing failure (of demand growth) in China,” Errol Anderson of the Pro Market Wire said Jan. 4 as red numbers appeared on his market screens while the world’s stock markets recoiled from poor Chinese economic statistics.
“They consume half of global commodity trade.”
He said the near record low prices for world ocean freight are a symptom of flagging Chinese demand, and analysts warn that any change in China’s situation will have a major impact on markets.
As always, weather events can significantly affect crop markets.
The large stockpiles of many crops mean major production problems would be needed to have a big impact on prices because it will take a lot to scare buyers into believing they will run short of crop this year.
The biggest impact of bumper crops would likely be to lock in prices similar to today’s for a long time.
El Nino has had a significant effect on Southern Hemisphere crops this year, so that is still a factor to watch.
Some analysts have predicted a reappearance of La Nina later this year, which could throw additional wild cards into the game, analysts say.
Analysts will also be looking to see if there is any change in the long-running trend of increasing corn yields.
Ever-increasing yields were good for farmers in years when demand grew even faster. However, new yield gains could further suppress price potential in a stagnant demand market.
The cheeriest part of the market outlook has been the small crops grown in Western Canada, which generally have better outlooks than the big market crops.
Barley, flax, pulse and other special crops have seen good prices recently, offering Canadian farmers relief while the world is drowning in other crops.
Most analysts say currency exchange rates will probably be the biggest single factor affecting Canadian crop returns this year, regardless of the crop, and that’s a factor that is difficult to predict.