2015 08 agrimonitor en

Agri Monitor: Grains

Group Economics Frank Rijkers

Weather or not August, 2015  Grain prices plummet in first weeks of new season...  … but price expectations for corn and soybeans are revised up…  … and food prices remain under pressure

Weather conditions drive spike in grain prices ...

The run-up to the new grain season was anything but calm.

Within just a few days grain prices soared in late June to their highest levels in twelve months. In the space of one and a half weeks wheat quotes (CBoT) shot up 22%. In that same period corn prices jumped nearly 17%, while soybeans also advanced strongly by just under 10%. Soybean prices even remained above the psychological barrier of 1,000 USDc/bushel for several days. The main trigger for this sharp price upturn was the unfavourable world weather forecast. Excessive rainfall in the United States and drought in Europe could adversely affect the development of the plants, raising concerns about lower yields.

Figure 1: Grain price index 115 110

Index (1jan=100)

105 100 95 90 85 80 75 Jan

Feb

Mar

Wheat

Apr

May

Corn

Jun

Jul

Aug

Soybeans

Source: Thomson Reuters, ABN AMRO Group Economics

Figure 2: Wheat production/consumption 750

x million tonnes

700

650

600

550

500 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 Production

Consumption

Source: IGC, USDA, ABN AMRO Group Economics

... but then push them down just as quickly It soon transpired that the heavy rainfall in the United States had inflicted less damage than originally feared. Calm was duly restored to the market, allowing prices to fall back to their initial levels just as fast as they had risen. Continuing drought and the resulting falling yields in a large part of Europe could not prevent this new price decline, the reason being that this drought also appears to have been less damaging than anticipated. Since early July (the traditional start of the grain season), prices for wheat, corn and soybeans have declined by 18%, 13% and 5% respectively. In other words, calm appears to have returned to the market for the time being, as weather patterns are changing day by day. Through this pricefall in grains, pressure on world food prices will remain in the coming months.

Weak US exports and high stock levels depress wheat prices The outlook for wheat prices remains unchanged for the coming months. Prices are expected to continue fluctuating around the current low levels. The low prices in the wheat market are primarily due to high stocks. Compared with last month, both the US Department of Agriculture (USDA) and the International Grains Council (IGC) have raised their stock levels. The USDA has lifted its end stocks outlook for the 2015/2016 season to 220 mt (from 202 mt a month earlier). The IGC has done the same, but its upward revision was smaller, i.e. 5 mt, raising it to 201 mt.

The main reason for this upward stock adjustment was that stocks were already higher at the start of the season.

Disappointing exports from the United States because of the stronger dollar and lower demand from China due to higher domestic production were the main causes. The stronger dollar, which is expected to gain further ground towards the end of this

Agri Monitor: Grains - Weather or not

August, 2015

Figure 3: Corn production/consumption 1.100

x million tonnes

1.000 900 800 700 600 500 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 Production

Consumption

Source: IGC, USDA, ABN AMRO Group Economics

Figure 4: Soybeans production/consumption 330

year, will create sustained export pressure in the United States, which is the main cause for the ongoing price pressure on wheat. Quotes in euros (Matif) will also remain low in relative terms. European grain quotes for wheat are expected to move within a bandwidth of EUR/t 165 to EUR/t 185 over the coming months.

Slight upward adjustment to corn forecast The 2015/2016 season is expected to yield another substantial corn crop. In its latest report, the IGC even raised its forecast by 3mt to 966mt. The USDA recently published a marginally lower outlook, but here too the forecast remains high at 987mt. The higher production levels are mainly attributable to the 4.3% increase in Chinese production. By contrast, key corn-exporting countries (US, Brazil, Ukraine) are all seeing production fall relative to the record yields of 2014/2015. Stocks will decrease as consumption of corn remains high – even higher than production. Owing to these developments, more speculators are taking long positions, so that prices are expected to rise slightly over the coming months. In this light, we have revised up our forecasts, i.e. to USDc/bushel 395 for three months and USDc/bushel 415 for six months.

x million tonnes

310 290 270 250 230 210 190 170 150 2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 Production

Consumption

Source: USDA, ABN AMRO Group Economics

2.500

2.000

1.500

1.000

500

0 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Soybeans

Corn

Source: IGC, USDA, ABN AMRO Group Economics

Increase in soybean prices too on the back of lower stocks The past period has seen speculators exchanging short soybean positions for long positions, which suggests that prices are expected to rise. This is not surprising in the light of the physical factor: production. The USDA has lowered its end stocks for the past season, bringing the world’s soybean stocks to 82mt versus 84mt a month earlier. The reduction is mainly due to lower stock levels in the US as a result of wet weather conditions, strong exports and processing of old crops, notably from South America. As global demand for soybeans continued to be high, stock positions remain under pressure. Partly for this reason, we have revised up our price forecasts. The three-month outlook is now USDc/bushel 980 and the six-month outlook is USDc/bushel 945.

Upward price risks remain…

Despite the slightly higher price outlook for corn and soybeans, the overall grain price is still relatively low compared with prior years. Good stock levels and the promise of another strong production year are keeping prices under pressure.

Notwithstanding the expectation that prices have hit bottom, a new dip cannot be entirely ruled out. The continuing strengthening of the US dollar can bring further pressure to bear, notably on wheat prices. Another factor that is keeping a lid on prices, particularly where corn and soybeans are concerned, is the development of the Chinese economy. A further flattening of growth may dampen demand, giving rise to a downward price risk. The same applies to a new drop in oil prices. This could put the price of corn under pressure as a lower oil price may lead to less corn being turned into ethanol.

Figure 5: World grains production

x million tonnes

2

Wheat

3

Agri Monitor: Grains - Weather or not

August, 2015

Table 1: ABN AMRO price forecasts Q1 2015*

Q2 2015*

3m

6m

2015**

Wheat (CBoT) (USDc/bushel)

526

510

500

530

520

Wheat (Matif) (EUR/ton)

191

182

180

185

185

Corn (CBoT) (USDc/bushel)

387

368

395

415

395

Corn (Matif) (EUR/ton)

158

161

175

185

170

Soybeans (CBoT) (USDc/bushel)

992

964

970

945

970

Price

Source: ABN AMRO group economics, * actual ** average

… but also downward risks looking around the corner Alongside these possible downward price risks, there is always a chance of deteriorating weather conditions pushing prices up.

More specifically, fears of a stronger-than-expected El Niño have been mounting recently. One possible consequence would be drought in the southern hemisphere affecting wheat production in Australia and corn and soybeans in Latin America. At the same time, extra rainfall in North America could have a favourable impact on corn and soybean crops. Owing to the growing chance of a more severe El Niño and the simultaneous disappointing market performance of other commodities (metals, energy), many (mainly Chinese) speculators are cautiously switching over to commodities, e.g. from copper to grains. As a result, more long positions are being taken in grains, which can also drive up prices. On the other hand, an accelerated exit from these long positions could have the opposite effect.

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Agri Monitor: Grains - Weather or not

August, 2015

Group Economics | Commodity Research Frank Rijkers Economist Agrifood and Agricultural Commodities tel: +31 (0) 20 628 64 37 frank.rijkers@nl.abnamro.com

Group Economics Commodity Research team Marijke Zewuster (Head)

tel: +31 20 383 0518

marijke.zewuster@nl.abnamro.com

Hans van Cleef (Energy)

tel: +31 20 343 4679

hans.van.cleef@nl.abnamro.com

Casper Burgering (Ferrous, Base metals) Georgette Boele (Precious metals) Frank Rijkers (Agriculturals)

tel: +31 20 383 2693 tel: +31 20 629 7789 tel: +31 20 628 6437

casper.burgering@nl.abnamro.com georgette.boele@nl.abnamro.com frank.rijkers@nl.abnamro.com

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