Devalued money encourages farmers to sell cheap and expand acres, increasing global supply
Continued currency devaluation among key grain exporters will drive down grain and oilseed prices in 2015-16, says a risk management consultant.
“Prices are going to drift lower,” said Mike O’dea, a consultant with FCStone.
“I really think people need to do something to protect the downside.”
Weaker currencies mean that on-farm prices of corn, soybeans and wheat in countries such as Russia, Ukraine, Argentina and Brazil have not fallen like they have in North America.
International grain and oilseed sales are conducted in U.S. dollars, which means exporters in countries with rapidly depreciating currencies are getting more local dollars each time their currency drops.
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It enables farmers in those countries to undercut growers in countries such as Canada where the currency depreciation has been more modest.
“It cheapens their grain up versus ours because they can sell so much cheaper,” O’dea said in an interview following his presentation at the Canadian Global Crops Symposium.
Europe’s euro is down about 29 percent against the U.S. dollar in the past year, the Brazilian real has fallen 36 percent and the Russian ruble has plummeted by 50 percent. By contrast, the Canadian dollar has fallen 11 percent.
Russian farmers are seeing record prices for their wheat.
“They’re inspired to sell,” said Carsten Bredin, vice-president of grain merchandising with Richardson International.
They will also be selling cheap. Russia recently forward sold new crop wheat to Jordan for US$205 per tonne freight on board at the Black Sea.
“They’re going to be pressing the market lower. It means lower values,” said Bredin.
It also means growers in those countries will be planting as much exportable grain as they can to reap the rewards of their plummeting currency.
O’dea said most of the Black Sea wheat was planted last fall. Forty percent of Russia’s crop is spring wheat, but it is grown a long way from the Black Sea ports and there is a strong domestic market for the crop. As a result, little will be exported.
He will be closely following how much wheat is planted in Russia and the Ukraine this fall.
Input costs in those countries will increase because products like fertilizer are priced in U.S. dollars. As well, seeding could also be restricted by the credit crunch, which is particularly bad in Ukraine.
However, when a Russian farmer is receiving 10,000 rubles for a tonne of wheat today versus 7,150 a year ago, it is hard not to imagine a sizeable increase in winter wheat plantings this fall.
O’dea anticipates grain exporters in Ukraine and Russia will be in a hurry to sell wheat off the combine, fearing the government might try to restrict exports, as Moscow did when a rush of exports threatened to short the domestic market.
The expectation is that the government will eliminate the current export tax as of June 1 if Russia has a good harvest. O’dea believes there will be a big flush of exports in the July through September period.
It’s why growers in North America need to prepare for a downside in the grain market.
Excess global supply will also continue to drive prices lower. Wheat has a bearish carryout-to-use ratio of 28 percent.
“Wheat prices are going to go down, in my opinion,” said O’dea.
He believes corn futures are heading toward $3 per bushel if there is another good U.S. crop this year, although he said U.S. yields have historically declined after a record harvest.
The soybean carryout-to-use ratio is also bearish at 31 percent, which has O’dea predicting sub-$8 per bu. futures prices for the crop.
He advised growers to keep an eye on the July-November soybean futures spread, which was at a 14 cent inverse last week. If it switches to a carry position, that is bearish for soybean futures.
