MARKETS OUTLOOK by John Buckley It is not surprising that, amongst the largest crop futures markets, soybeans show the weakest forward price ‘curve’ – the distant months on the bellwether CBOT market (ranging into 2018) showing hardly any significant premium over the current spot or cash values.
Another year of cheap & plentiful inputs? Forecasting prices even one year ahead can be a hazardous business. That applies especially to markets so dominated by that most unpredictable element of weather and, increasingly these days; the sometimes even more capricious influence of global economic trends – trade and GDP growth, currency volatility, the price of crude oil, etc. Who would have thought that the latter would have halved for a second year running, with all the implications for using food crops as fuel? Also, many of the regular market outlooks come from crop producing countries - or from ‘outside’ investors – understandably skewed by wishful thinking to the price upside (Shell punting crude’s recovery prospects in mid-January seems a good example). Also, consumers will naturally see the factors that will help input costs fall in a more friendly light. Forward futures markets are another guide to ‘price revelation’ but can also be heavily influenced by speculative interests working their own agendas. That said, these instruments are assumed to reflect the largest possible number of factors – known and likely sowing trends, weather patterns, trade policy, influences on demand etc. Looking at the three biggest futures markets that dominate the headlines – Chicago wheat, maize and soybeans – this month suggests consumers don’t have much to worry about in terms of a significant rise in raw material costs – at least for this calendar year. Further forward, around the spring and early summer of 2017, that view changes as prices begin to point ‘North’ a little more significantly (over 10 percent higher for wheat – a trend reflected in the EU wheat futures markets too). Yet at this time last year, Chicago wheat was forecast to rise to the US$6.20’s per bushel and it’s recently been trading in the US$4.50s, Corn’s year-hence prediction was a bit closer in the US$4.40s (versus the US$3.60s now) while soybeans were way out, looking for over US$10 per bushel now against under US$8.80 actually trading as we go to press. A key factor restraining the prices of grains and oilseed in the year ahead will remain to be the high levels of stocks carried from one season to the next. These will provide ample cushions against all but the most severe weather disruptions to this year’s crops (though current pointers suggest all three of the market leading crops will be large again in 2016 if the weather is ‘normal.’ The USDA has recently raised its forecast of surplus wheat stocks yet again to a new record peak of 232million tonnes; five million more than it estimated at the time of our last review in November; and equal to about one third of annual global wheat consumption. Maize stocks, although trimmed slightly since last year, still amount to almost 22 percent of consumption while soybean stocks are about 29 percent of the estimate global crush. On the demand side, world wheat consumption is apparently growing by less than 1.3 percent or 9 million tonnes during the current season (which ends halfway through 2016) – about the same trend as in 2014/15. Maize consumption on the other hand, actually seems to be falling by about one percent (9.7million tonnes) after a couple of years of very strong growth. World consumption of oilseed meals is meanwhile expected to grow at a more robust 3.75 percent - about 11million tonnes. But even that marks a slowdown from the 5.95 percent growth that it achieved in 2014/15. This lacklustre growth in demand (which may yet prove too optimistic if the world economy continues to sag and it does look likely that is to be one of the main restraints on commodity prices in 2016. As we go to press, market sentiment is dominated by ‘fear factors’ led by the spectre of failing Chinese economic growth and its implications for the global economy. No less important has been the collapse of energy markets and its potential destabilising impact – both on the oil supplier countries and their trading partners. How ironic that the flip side of rocketing oil prices - the very factor that presaged the economic problems and rocketing inflation of the 1970s - should be viewed so negatively in 2016? Cheap crude oil and slowing global trade are also reflected in a further steep decline in ocean shipping costs. The leading indicator, the Baltic Dry freight index fell in mid-January to its
76 | February 2016 - Milling and Grain