Where Have the Grain Bears Gone?

Bears Will Kill You   The days are growing very short here in Southwestern Ontario.  Corn is still coming off across the province, but with each day of relatively good weather even that is starting to wind down.  Who knew?  After one of the most difficult falls in recent memory the first 3 weeks of December made for tremendous harvest weather.  It certainly tried my patience.  I’m just glad the year 2014 is almost behind me.

2014 had many surprises for us but as I look back I think the October November grain rally was one of the biggest.  Of course in Ontario this was accentuated by poor yields and quality.   Wheat has been on fire lately finishing up $1 over the last 6 trading sessions.  When you look back to the summer of 2014 with record crops in the fields, it seems so different now.  It’s like the grain bears have all but left.

The wheat market seems to always suffer from oversupply.   It always seems like it’s been like that forever.  Wheat is grown everywhere and planted in every month except for February so one production shortfall somewhere is always made up somewhere else.  However, when Russia runs into problems like they have now, the wheat market always seems to fire up.  With the price of oil dropping the Russian economy is in deep flux.  The Russian agriculture minister has said that they will limit exports of wheat to three specific countries and that is for now.   With winter just setting into Russia, there is much more production risk on the table.  The wheat market has responded accordingly.  Nearby soft winter wheat futures are actually in inverse.

At the same time we have seen our Canadian dollar drop into the $.85 range this past week, which continues to buoy Canadian cash grain prices.  Who would’ve thought we’d have $7 old crop wheat and corn approaching $5 a bushel.  It begs the question that something must be up because it can’t be all commercial demand.  It’s like the acres and the yield aren’t quite there.  Or maybe we are in for a fall in the grain markets in the New Year.

Take Ontario for example.  You might’ve read this column last week about the Ontario corn basis and how it is exploded through harvest, at a time when generally it goes the other way.  This is related to the US replacement price for corn but also our own domestic supply as well as the value of the Canadian dollar.  It would seem to me that along with the bad quality issues we have in Ontario corn, planted acres and yield might be way off.  Statistics Canada earlier in the spring said 1.9 million acres, but the Ontario corn basis is saying it might be more like 1.6 or 1.7 million.  Add an Ontario corn yield, which I estimate now to be at approximately 140 bushels per acre and you have a much shorter supply than anybody expected.

Much of this flies in the face of the conventional wisdom of last summer where grain decided to go down almost every day from June to October.  During that time I always said that there was one thing that producers had in their back pocket–record demand.  I still believe that.  At a certain point Mother Nature isn’t going to play nice during the growing season.  When that happens prices will search much higher to satisfy that record demand.

China has also been in the news this week when it was announced that they would be accepting corn and corn products with the MIR 162 gene.  This Syngenta trait had been the subject of many rejected American DDG and corn-laden ships from the US.  It was a point of contention with China and it’s finally in the rear view mirror.  It could be the signal too much more Chinese corn imports in the future.  Long gone is the day when China didn’t import corn.  This latest decision to accept this GMO trait long castigated may open up China for more.

It begs the question, what happened to all those grain bears?  Do they still exist with onerous ending stocks and big South American crops in the offing?  Or is yield, acreage or some other lever out of sync making these markets rise up?

On January 12th the USDA will weigh in with their final yield numbers on the 2014 year.  Live trading has taken some of the drama out of those past limit moves.  This year it’s likely to be no different.  However, the late fall rally in grains meant something.  Maybe the grain bears had there day and won’t be back for a long while.