June 22, 2016

22/06/2016: Markets outlook: Are the markets finally bottoming out?

by John Buckley

First published in Milling and Grain, April 2016

Prices on the benchmark grain and feed ingredient markets had been eroding further since our last review, several reaching new five and a to six-year lows. But the latest descent was much more gradual than in recent months and by mid-March, market leaders wheat, maize and soyabeans had all begun to show signs of bottoming out. The leading Chicago wheat futures market even recorded its biggest rally in months. Although its European grain counterparts have been slower to follow.

Interestingly, some of the broader agri-business sectors have also shown some nascent signs of recovery, spilling a bit more confidence into the sector as a whole. Shares were reported to be moving up for the top seed producer Monsanto (recording its biggest weekly rally since 2012) while those of largest US meat handler (Tyson) and fertiliser supplier CF Industries also rose, Tyson actually setting a record high.

However, one swallow does not make a summer, nor does one good week in the markets mean things are on the turn. The rally has to show it has staying power. Even then, there is no evidence yet of a runaway market in the making to gainsay the opinion expressed in our last review, that 2016 was likely to shape up as another year of cheap grain and feed input costs.

Supporting that theme has been the European Commission’s own preliminary view of the coming year’s cereal outlook in Europe. That’s headlined by the forecast of another big wheat crop; perhaps five percent down on last year’s, but still well above the long-term average, a similar barley crop to last year’s and a big rebound in maize production. Amid huge world stocks of the top traded cereal crops, and assuming no drastic weather upsets in the growing season ahead. The Commission sees no reason for higher prices in the year ahead; which raises the question whether these are the type of prices that crop farmers might have to get used to for a longer haul.

It’s all so contrary to what we were led to expect a few years back when the big financial institutions jumped into farm and other commodities around the time of the global financial crash. As stock markets melted down, speculators then were looking for investment pastures new and, along with the US dollar and gold, commodities found themselves playing the role of ‘safe haven’ for hot money.

At the same time, a series of crop failures in regions led by the former USSR helped a host of pundits dust off old theories about the world running out of raw materials. As consumers, we were told we would have to get used to more expensive commodities as the ‘new normal.’ How wrong that turned out to be. Crops rebounded, supplies did keep up and demand growth slowed in China and other pace-setting economies.

Read the full article in Milling and Grain HERE.    

The Global Miller
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which is published by Perendale Publishers Limited.

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