The Incubation of a Grain Rally: Add the Loonie and It Maybe Real

Grains fall 510   Maybe there is a little hope after all.  I say that because this week in southwestern Ontario, we are finally getting some temperatures that are above freezing.  Even though the temperature has been about 3 or 4 Celsius, it has felt tropical.  Hopefully that hard February really froze out the ground to re-create some soil structure come spring.  Needless to say, the weather of the last week has been like a new attitude for everybody.

The attitude in the grain markets has been somewhat different.  There is no question that the specter of a large South American crop has loomed on the market for quite some time.  The Brazil’s trucker strike has morphed into something less and that big crop seems to be coming off the fields.  All of those soybeans and the spectre of a second crop of Safrina corn have managed to keep a damper on grain futures prices.  Add in the US dollar on steroids and we’ve had somewhat of a ceiling for grain futures prices.

This past week the USDA came out with their March report and lowered corn domestic ending stocks by 50 million bushels putting it down to 1.78 billion bushels.  USDA made no changes to the soybean supply and demand table keeping ending stocks at 385 million bushels.  Wheat is the same old story with US ending stocks at 691 million bushels and the stocks to use ratio of 33.1%.  On the face of things it all seemed to be milk toast.  The markets certainly didn’t get excited about it.

Of course the market is waiting to some extent for the March 31st projected acreage estimates from USDA.  Of course that is always interesting but it serves as an emotional starting point for noncommercial interests.  Whatever it is, March 31st adds excitement for the markets and most farmers across North America have their own opinion about whether there will be less than 90 million acres of corn planted in the United States in 2015.

In Ontario and Québec in my opinion the continuing story of grains in 2015 is about the lower Canadian dollar.  Of course, nobody knows where it may be going but with the US Federal Reserve set to raise interest rates this year that will be negative again for the loonie.  It is a key thing to watch for any Canadian selling grain in 2015.

I cannot emphasize that enough.  However, let’s pretend for a moment that maybe I have. What might the fundamentals be doing with regard to the supply and demand tables for the crop year 2015/16?  My first indication of that came from DTN senior analyst Darin Newsom.  I was in Darin’s webinar last Wednesday.  In that webinar he released a projected corn supply and demand table based on some assumptions he had made.  He had pegged planted acres of corn at 89 million (81.4 harvested) with a yield of 165.1 bushels per acre giving production of 13.439 billion bushels.  Darin pegged corn usage at 14 billion bushels.  So we had ending stocks actually drop for this coming year to 1.266 billion bushels.

What it showed me was that corn is in a familiar pattern.  Until this last year when we had a record crop ending stocks were constantly going down.  However, with the record crop of last year we bumped up against the 2 billion bushel mark.  At the present time we are down to 1.687 billion bushels of corn and according to Darin’s preliminary projections we may be going down to 1.266 billion bushels.  In other words, in some ways we are back to where we were just three years ago, in the unsustainable position of seeing corn ending stocks falling until the price stops it.  14 billion bushels of usage is tremendous and as I’ve said many times, that demand will not be easily tempered when the supply hick up finally comes.

It leads me to believe the 2015 could be a defining year where the turnaround in grains continues having bottomed out last October.  Yes, it was a long way down from $8.49 a bushel for corn.  With the US dollar on steroids, I don’t think it will get back very easily in the short term.  However there is quite an opportunity for a bump in corn futures prices in 2015.  When you add the Canadian basis to the equation the optics of Ontario and Québec prices might be better than 2014.

Of course getting there will be through much volatility.  There might be even be some unexpected Tuesdays thrown in the mix.  Needless to say, the incubation for a bullish rally in grains is very evident to me.  When we add in the low Canadian dollar, it just seems so much more evident.  The challenge will be to pull the sales trigger when the conditions are right.