Industry Trend Analysis - Grains: Key Themes For 2015 - JAN 2015


BMI View: G rain prices will continue heading higher over the coming months, with corn, wheat and soybean prices all set to average above spot levels in 2015 . Our forecasts are premised on reduced plantings in key growing areas - a result of lower prices - as well as improving demand growth.

With global benchmark grain prices now having found a base, we highlight the following key themes for grain prices over the coming months. In this article, we recap our views on grain prices over 2014 and then discuss our key themes:

  • Grains index to continue heading higher in H115

  • Wheat to outperform corn and soybean

  • Rice prices to rebound

  • Corn to outperform soybean

A Recap Of Our 2014 Grains Views

Grain prices have rebounded in recent weeks starting in early October after a significant sell-off between May and September 2014. Prices were generally strong in H114 due to concerns over Black Sea region exports related to the escalation of geopolitical tensions between Russia and Ukraine. At the time, we argued that although there were strong risks to the upside, grain prices would average below the then-spot levels in 2014, and maintained our below-consensus forecast for corn 1 and wheat 2. This was premised on our expectation that the global grains market would record a large surplus in the 2014 calendar year 3.

Consensus Coming Our Way
Wheat (RHS) & Corn - BMI vs Median Bloomberg Consensus Forecasts For 2014 (USc/bushel)

Given our expectation that prices would head lower, we initiated bearish grain price views 4 as well as equity views 5, all of which played out in our favour by at least 8%. Starting in May, prices retreated as geopolitical risks to supply faded and growing-weather improved, leading to record corn and soybean crops in the northern hemisphere for the 2014/15 season. Consequently, between May and September, corn and soybean were two of the three worst-performing commodities along with cotton, with an average price decline of almost 30%. Meanwhile, wheat prices fell by 25%. Similar to 2013, when prices collapsed in the second half of the year this prompted an exodus of investors, with speculative sentiment retreating significantly over the period.

Grains In Last
Select Commodities - Price Change Between May 5 & September 1 2014 (%)

In July, we initiated a view that prices would find a base over subsequent weeks 6. In August, we stated that the S&P GSCI grains index would consolidate around the 350 level 7 as we believed that most of the good news regarding northern hemisphere harvests had been priced in 8. After the grains index continued to retreat, we wrote that it would hold the important 300 level 9 and find a base by the end of 2014 10. In line with this view, prices bottomed in early October and began to head higher due to a combination of trader short-covering, higher soymeal prices due to transport disruption, and wet weather in the US leading to harvest delays.

Production Growth To Slow
Select Grains - Cumulative Production Growth (%)

Four Key Short-Term Views On Grain Prices

With prices now having found a base, we highlight four key themes for grain prices over the coming months. We discuss each theme in turn:

  • Grains index to continue heading higher

  • Wheat to outperform corn and soybean

  • Corn to outperform soybean

  • Rice prices to rebound

Grains Index Rebound To Continue

The grains index has risen by 17% since respecting the 300 level between the start of October and early December, and we believe the index will continue heading higher into H115. This is premised on our above consensus price forecasts for 2015. More specifically, we believe the global market will be tighter than consensus expectations allow for, informing our above-consensus price views. This fundamental outlook is bolstered by technical and sentiment indicators.

Bullish Grains
Select Commodities - % Difference Between BMI 2015 Forecast & Current Price Level

On a fundamental level, prices will remain supported towards the end of 2014 due to reduced grain plantings growth in South America for the ongoing 2014/15 season, particularly in Argentina and Brazil, two of the world's largest grain net exporters. Although farmer production incentives will receive some support due to depreciating local currencies against the US dollar (and we expect this depreciation to continue in 2015), we believe this will not fully offset the negative impact on plantings from the reduction in local prices 11. Consequently, we are forecasting limited grain production growth year-on-year in both Brazil and Argentina, even though a possibility of El Ni?o would be generally positive for yields. Indeed, US Department of Agriculture projections for the upcoming 2014/15 season suggest that growth in plantings will be the lowest in a non-drought year since 1998.

Weakest Growth In Decades
Brazil & Argentina - Annual Growth In Combined Soybean & Corn Plantings (%)

Despite the broadly weak production growth forecast for South America in 2014/15, the global grains market will remain in a large surplus, chiefly due to strong northern hemisphere production - a result of record yields and plantings in H114. In 2015/16, however, we forecast the global grains market to return to deficit, chiefly owing to improving grain consumption growth and limited production growth in 2015/16. Indeed, only soybean will record a small surplus in 2015/16.

Large Deficit In 2015/16
Select Grains - Combined Global Market Balance (mn tonnes)

The theme of reduced planting growth (and in some instances a reduction in absolute terms) will carry over into the 2015/16 season. Although plantings in general will remain near record highs by historical standards, the decline in plantings due to lower farm incomes year-on-year (stemming from low prices) will be comparatively strong 1 2. Combined with our expectation that yields will return to trend-line averages after reaching record levels in 2014/15, this informs our view of reduced grain production. The return to deficit will dramatically reduce the constituent stocks-to-use ratios and see prices head higher than spot levels. It is worth pointing out that we do not see prices averaging significantly higher year-on-year, but expect relatively low prices during the planting seasons (on a year-on-year basis) to reduce the area dedicated to grains. More broadly, this underpins our view that grain production in key markets will be lower in the coming years than in previous seasons 13.

Low Prices To Impact Plantings
S&P GSCI Grains Index (LHS) & % chg y-o-y

Technical and sentiment indicators also suggest room for the grains index to continue heading higher. Once it had broken below support at 400, we identified limited technical support for the grains index until the 300 level 14 . At that point, prices were oversold and looked poised for a rebound. Prices broke through resistance at 350 in November, and we believe the technical picture is supportive of further gains. In particular, the weekly relative strength index is threatening to break above the important 50 level and (given a spot price of 368) will next test resistance around the 400 level. Beyond that level, there is limited resistance until around 440, which we believe is significant because it represents the top of a multiyear trend channel that began in 2012. A break above this level would be very bullish and would likely see prices head towards 500.

Approaching Key Resistance
S&P GSCI Grains Index (weekly chart)

On a sentiment level, speculative positions in the futures and options markets suggest that prices have room to head higher over the coming weeks. Corn, wheat and soybean net speculative long positions had declined significantly since May. However, speculative sentiment has turned more bullish in recent weeks, particularly for wheat and corn. Sentiment is nowhere near extreme bullish levels, allowing for prices to continue heading higher from current levels.

More Room To Run
Select CBOT Grains - Net Long Speculative Positions

In the options market, open interest suggests that market participants are betting on grain prices to head higher. In particular, Bloomberg data show that there is more open interest for calls than puts even for strike prices more than 10% above the current price of second- and third-month corn for expiry in February and March. This is the case for both wheat and corn. This suggests that some market participants expect prices to head well above current levels.

Wheat To Outperform Corn And Soybean

Since July, we have held the view that wheat prices will outperform both corn and soybean 15. This was premised on our view that the global wheat market would be less well-supplied than either the corn or soybean market. Since we initiated that view, wheat has easily outperformed the other grains, and is now roughly back to its mid-June level. We expect this outperformance to continue owing to weak production prospects in Australia and expectations for European wheat production declines in 2015/16. Poor-quality stocks will also support prices 16. Moreover, there are upside risks to wheat prices, as deteriorating economic prospects and winterkill conditions threaten plantings (which have already begun) for the 2015/16 season in the Black Sea region. Overall, we expect wheat to be the only grain with a stocks-to-use ratio lower in 2014/15 than the 15-year average 17.

Wheat The Clear Outperformer
Select Grain Prices Rebased

Corn To Outperform Soybean

On September 17, we initiated a view that corn would outperform soybean over the coming months, a view that is currently up by 6% as of December 4 18. This view was mainly premised on our expectation that the global soybean market would remain relatively well supplied relative to corn over the coming months, as we forecast soybean production in South America to remain relatively strong compared with corn 18. Moreover, we are forecasting a small rebound in US livestock production, particularly for poultry, which will lead to stronger growth in US corn demand in 2015.

Ratio Moving In Our Favour
Price Ratio: September CBOT Corn/September CBOT Soybean

Rice Prices To Rebound

Rice prices will remain weak over Q414 and early 2015, trading within the USD12.00-13.00/cwt range. The global rice market is currently well supplied amid the ongoing harvest of a bumper US crop and large export supply in Asia, with Thailand releasing its hefty stocks and reaccelerating exports. Moreover, we forecast the US dollar to gradually appreciate over the coming months, which will limit upside for prices due to a pricing effect (CBOT rice is priced in US dollars) and by a demand effect (export demand will be reduced for US rice).

Heading Up In 2015
Front-Month CBOT Rough Rice (weekly, USD/cwt) & BMI Forecasts

Rice prices will recover over 2015, as the global market will tighten over the 2014/15 season. We forecast some of the largest Asian producers to see a decline in rice production, which will lead to stagnation in global output this season, while consumption will continue to grow. The rice market will therefore record its first production deficit in 10 years in 2014/15. However, elevated stocks and the increase in export supply due to the rebound in Thailand's exports will impede rice prices from rallying beyond the levels recorded in 2011 20.

Footnotes

  1. 'Corn To Average USc425/bushel In 2014', February 7

  2. 'Wheat To Average USc605/bushel in 2014', June 4

  3. 'Food Price Inflation: Where Are The Risks', March 17

  4. 'Turning Bearish December 2015 Corn', May 15

  5. 'Monthly Company Performance', May 9 and 'US Ethanol Makers To Outperform Refiners', July 4

  6. 'Grains: Consolidation Ahead After Steep Collapse', July 2

  7. 'Monthly Grains Strategy', August 20

  8. 'Americas Fertiliser Outlook', September 29

  9. 'Monthly Grains Strategy', September 17

  10. 'Global Commodities Strategy', September 25

  11. 'Global Soybean Outlook: Argentina Focus', November 12

  12. 'Farm Incomes Lower For Several Years', July 10

  13. 'Americas Long-Term Grain Production Growth To Slow', June 24

  14. 'Monthly Grains Strategy', August 10

  15. 'Monthly Grains Strategy', June 19

  16. 'Global Wheat Outlook: EU-27 Focus', November 19

  17. 'Wheat To Average USc605/bushel in 2015', September 10

  18. 'Bullish Corn vs Soybean', September 23

  19. 'Corn To Outperform Soybean', September 22

  20. 'Rice: Weaker Supply To Push Prices Higher In 2015', November 5