February 2014 Month End Comments
World agricultural markets are at a very interesting juncture. The South American harvest of corn and soybeans has just started and will continue for the next four months. At the same time the producers in the northern hemisphere are considering the all-important decisions of which crops to plant. In the midst of all of this we have financial unrest in Argentina and political and military unrest in the Ukraine and on the Crimean Peninsula. Market risk and volatility are increasing and we expect them to remain high for the next several months.
Before we get too far ahead of ourselves, we should take a quick look back at February. All of the grain markets were higher last month with the oilseed -complex again leading the way. We entered the month expecting that Brazil would over-perform logistically and that China would find that it owned more nearby soybeans than it needed. Both expectations proved correct, but they did little to slow the rise in the market. Despite growing port stocks and nearby margins that became sharply negative, most Chinese crushers maintained their ownership and only a few took advantage of the opportunity to roll their positions forward. At the same time, with Brazil prioritizing the loading of soybeans, cash soybean meal in the west remained extremely tight. This was particularly true in Europe where the two-month inverse reached $80/metric ton. This has created excellent crush margins for both the Americans and the Europeans.
Another key contributor to the rally in the soy complex was the weather in Brazil. An unusual combination of too little rain in some areas and too much in others led to a modest reduction in the size of their crop, from 90 to 88 million metric tons.
A final contributor to the oilseed rally was Argentina. While their weather improved, their currency and their agricultural policy did not. Argentine farmers continue to hold as much grain as possible as it remains their safest and most economic store of value. The government, in desperate need of revenue, has threatened to tax grain stocks as of Apr. 1 and is implementing a system to monitor grain holdings and movement. At the same time they are uncooperative and unpredictable in the way they issue export licenses; making it virtually impossible for producers or commercials to develop a coherent business plan.
This has contributed to tightness in the soybean meal market and has led to increased corn and wheat exports out of the U.S. -- --The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
The elevated grain prices we experienced last month have created a long term benefit for U.S. farmers. The USDA uses the average futures price during the month of February to calculate the base price for their Revenue Insurance programs for corn, soybeans and spring wheat. U.S. farmers will now be able to use government supported insurance products to guarantee a gross level of income that should allow most of them to remain profitable.
As with most springs, the planting decisions made by the U.S. farmers will be one of the key drivers of price. There is currently a considerable difference of opinion as to how many acres are available to be planted. The USDA’s very conservative estimate at their recent Outlook Conference was another contributing factor to our continuing price strength. Our expectation is that actual planted acres will be several million higher than their Feb. 20 estimates.
A month ago we wrote how the civil unrest in the Ukraine was contributing to additional U.S. corn exports. Today the risks are much higher and the potential impact is much greater. With the Russian army moving into the Crimean Peninsula there is a possibility that corn and wheat shipments from both of those important exporters could be disrupted. It is a very fluid situation and we should expect the market to add an additional risk premium. There is a risk that Ukrainian farmers will hoard their remaining stocks and also a risk that political and economic instability could lead to reduced planting this spring.
As we said above, the world agricultural markets are at a very interesting juncture. South American harvest and northern hemisphere planting are always vitally important, but the level of uncertainty in Argentina and in the Ukraine has added two new elements of risk that we haven’t seen in quite some time.