Bearish sentiment dominates grains in December

December 2013 month-end comments

Wheat was by far the biggest price mover in December. The world balance sheet saw several meaningful changes last month and all of them were bearish. Key producers Canada and Australia both reported increased production estimates and India, owner of one of the world’s largest stockpiles, became a regular seller. Even Argentina saw its prospects improve as hot/dry weather arrived just in time to help the crop ripen. The result was a 10% price drop in all three classes of U.S. wheat. Even with that drop, a shortage of U.S. export capacity left us uncompetitive in key export tenders by Egypt.

Corn put in a surprisingly strong performance and finished virtually unchanged on the month despite some very bearish news. Not only was wheat breaking 65- 70 cents, but there was also the impact of China rejecting U.S. corn and DDG because of the unapproved GMO variety MIR162. Offsetting those factors was excellent profitability in both the feed and ethanol sector. Also, the U.S. farmer was a strong holder of his crop and hedging pressure was kept to a minimum.

For the first time in a long time soybeans lost ground to corn. Soybeans ended the month on their lows and were down 2% from the end of November. The early yields in Brazil were very good and the forecasts for Argentina were finally improving. The potential for a six billion bushel South American soybean crop is still very real.

For the year of 2013 corn was the lead story. Extraordinary yields were achieved in the U.S. despite very difficult and delayed planting and a dry July-August in the Midwest. China, the world’s number two producer, also produced a record crop. Record corn crops were also reported by major exporters Ukraine and Brazil. The net result of that bounty was a 40% drop in the price of corn, the largest one-year drop in over 50 years.

Looking ahead to 2014 we believe that soybeans present the greatest opportunity. They are historically expensive to both wheat and corn and they are on the cusp of the largest harvest ever seen on any continent. Brazil soybean logistics will be very important, and we believe that the market has taken significant steps to improve their capacity versus last year. One very notable change has been the virtual elimination of their February and March corn export program.

The strong price of soybeans will not only impact feed rations, it will also impact spring planting in the U.S. All but the highest yielding corn fields now show a better return from planting soybeans. With the recognized future benefit of crop rotation we think we will see an unprecedented acreage shift in favor of soybeans. With pleasant yield surprises being found globally we think the function of the market will soon be to price some land out of production. Canada’s 11 million metric ton production increase between November and December is one dramatic example of how even sophisticated producing countries can experience shocking results from new seed and production technology.

The key items on our radar are the USDA report on January 10th, South American weather, Brazil logistics and the February USDA Outlook Conference. Any one of those could provide us with a bullish surprise, but we think the overall outlook for agricultural prices—soybeans in particular—is decidedly bearish.

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