grain market outlook
GRAIN MARKET OUTLOOK AUGUST 2016 Dean Cooper Risk Management Consultant INTL FCStone Financial Inc. – FCM Division WWW.INTLFCSTONE.COM [email protected]
Disclaimer The trading of derivatives such as futures, options, and over-the-counter (OTC) products or “swaps” may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Past financial results are not necessarily indicative of future performance. All references to futures and options on futures trading are made solely on behalf of the FCM Division of INTL FCStone Financial Inc., a member of the National Futures Association (“NFA”) and registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a futures commission merchant. All references to and discussion of OTC products or swaps are made solely on behalf of INTL FCStone Markets, LLC (“IFM”), a member of the NFA and provisionally registered with the CFTC as a swap dealer IFM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of IFM. This material should be construed as market commentary, merely observing economic, political, and/or market conditions. It is not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of INTL FCStone Financial Inc. or IFM. Neither the FCM Division of INTL FCStone Financial Inc. nor IFM is responsible for any redistribution of this material by third parties or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the opinions or viewpoints of the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasting statements made within this material represent the opinions of the author unless otherwise noted. Factual information believed to reliable, was used to formulate these statements of opinion; but we cannot guarantee the accuracy and completeness of the information being relied upon. Accordingly, these statements do not necessarily reflect the viewpoints employed by the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasts of market conditions are inherently subjective and speculative, and actual results and subsequent forecasts may vary significantly from these forecasts. No assurance or guarantee is made that these forecasts will be achieved. Any examples given are provided for illustrative purposes only, and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. Reproduction or use in any format without authorization is forbidden. © Copyright 2015. All rights reserved.
3
Macro Market
Macro Market
The US Dollar
6
China’s Economic Growth Slows
10
Black Swans – El Nino ?
?
Dryness on Palm push veg oil prices
Excess rains damage Argentine soybean harvest
Black Swans – La Nina ?
WHEAT MARKET OUTLOOK AUGUST 2016
WHEAT
WHEAT
WHEAT
WHEAT
WHEAT
WHEAT
US Wheat Fundamentals
• 2016/17 – Situation • Lower wheat acres • Low priced environment sees producer shifting to beans/corn/alternative crops or looking to idle production thru CRP or fallow. • We look for this trend to continue
US Wheat Fundamentals
US Wheat Fundamentals Exports look to recover from the lowest levels since 1971/72 which were 599 mb
• El Nino/La Nina on Wheat • Clear correlations between large yields and lower prices in El Nino years due to production increases for the Northern Hemisphere, in La Nina years production and yields do decline particularly for the Black Sea and the US but prices do not correlate as well due to potentially larger crops in the Southern Hemisphere.
US Wheat Fundamentals
US Supply Demand 2016/17
USDA carryout at 1.100 mb – FCStone estimate now at 1.005 mb FCStone Estimate by Mike O’Dea.
WHEAT FORWARD LOOK – Fundamentals: • Large world carryout is the “known” market factor now the “unknown” will be demand, markets need to move to levels that clear inventories. • Black Sea wheat will continue to dominate world trade, but issues in the EU will see US HRW exports increase/Canadian crops look to be good, Australia off to great start. • US will continue to be the residual supplier to the world, function of the US markets are to store the worlds surplus supply, we have the storage capacity and the futures markets that provide the forward curve to hedge those stocks.
– Premiums: • Wheat buyers started to make forward purchases with basis/flat price/board carries at current levels and World FOB values are starting to firm up. • Quality will be the outlier for the year with lower proteins and more feed wheat available to the market – trade flows and export capacity will alter the cash markets as the marketing year moves forward.
– Over The Horizon • Low wheat prices will see producers shift to alternative crops and or limit input costs – this can see quality/milling characteristics continue to decline. • If the shift to La Nina continues will we see yield declines for the 17/18 crop cycle ? • Politics and currency markets can quickly reshape market perceptions.
Wide Protein Spreads
30
MWU-KWU Spread
Source: Prophet X 31
32
US HRW Supply Demand 2016/17 HRW 8/12/2016 USDA USDA USDA USDA 07//08 2011/12 2012/13 2013/14 165 386 317 343 Carry-In 956 780 1,000 745 Production 1 0 18 19 Imports 1166 1,335 1,107 Total Supply 1121 397 Food Use 15 Feed Res 36 Seed Domestic Usage 448 536 Exports 984 Total Usage 138 Carry-Out 0.140 C/O use %
404 15 33 452 397 849 317 0.373
400 179 33 612 380 992 343 0.346
366 24 34 424 446 871 236 0.271
USDA 2014/15 237 739 9 985
USDA 2015/16 294 827 6 1,127
EST USDA* 2016/17 446 1,048 5 1,499
370 20 32 422 269 691 294 0.425
392 33 30 455 227 681 446 0.655
365 185 31 581 340 921 578 0.628
FCStone Estimate by Mike O’Dea.
EST FCStone 2016/17 446 1,048 5 1,499 365 125 31 521 430 951 548 0.576
HRW Wheat Fundamentals
Forward Curve – KC
KWN16 went of the board at 4.06
35
WHEAT
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals 35% of corn production used for Ethanol estimated for 16/17
Corn Fundamentals
Corn Fundamentals Feeding increased 475 mb for 16/17
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals
47
Corn Fundamentals
Corn Fundamentals
49
Corn Fundamentals
50
Corn Fundamentals
Corn Fundamentals
15/16 Corn S/D w 16/17 look US CORN Aug-16 Planted Acres Harvested Acres Yield
USDA 14/15 90.60 83.1 171.0
USDA 2015/16 88.00 80.7 168.4
FCStone 2015/16 88.00 80.7 168.4
USDA 2016/17 94.10 86.6 175.1
FCStone 2016/17 94.10 86.6 175.0
ALT #1 2016/17 94.10 86.6 173.0
Carryin Production Total Supply
1232 14216 15479
1731 13601 15397
1731 13601 15397
1701 15153 16909
1687 15155 16867
1687 14982 16694
Feed Exports Feed/Seed/Ind (Ethanol) Total Use
5324 1864 6560 (5200) 13748
5200 1925 6567 (5200) 13692
5200 1900 6610 (5250) 13710
5675 2175 6650 (5275) 14500
5500 2175 6650 (5275) 14325
5300 2175 6670 (5300) 14145
Carryout
1731
1706
1687
2409
2542
2549
CO/Use Ratio
0.126
0.125
0.123
0.166
0.177
0.180
Estimates by Mike O'Dea
$ $
3.60 Low 3.80 Hi
$ 3.10 Low $ 3.70 Hi
Corn Fundamentals
Milo
55
Milo
56
• El Nino vs La Nina • Clear correlations between large yields and lower prices in El Nino years. • La Nina – Yields decline in both corn and soybeans. • Both North and South America have issues.
The majority opinion is El Nino follows the weather pattern of 1998, but we must look at what happens of the El Nino transition follows the 1983 path. The market is trading a 1998 weather pattern but the risk is a 1983 weather pattern. In 1983 corn yields were 78% of trend or the equivalent of a 131.5 yield today, a 1983 equivalent soy yield would be 35.7 bu/acre. A 1998 trend style yield in corn would be the equivalent of 175 and soybeans 45.7. Viewing the market as a 1983 vs 1998 scenario is rationing demand vs building carryout. 58
CORN FUTURES MONTHLY
CORN FORWARD LOOK – Fundamentals; • US Supply side is still an “unknown” fundamental. • US corn producer is still the big long, old and new, in the market. • China in the process of unwinding its corn program. – Demand and price. • Export demand is good looks to stay strong thru the year. • Domestic feeding will expand w cheaper feed grains. • Ethanol margins are good but need to see more exports. – Over The Horizon • Corn use for ethanol plateauing, legislative moves on RFS ? • World livestock expansion slowing - feed grain prices ? • Lower prices seeing corn acres switch to oilseeds globally. • La Nina ?
SOYBEAN OUTLOOK
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals World Soybean Carryout and CO/Use 100
Source: USDA
30
95 28
90 85
26 24
75 70
22
65 60
20
55 18
50 45
16
40 35
14
30 12
25 20
10
15 10
8 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Co/Use Ratio (%)
Carryout (million tonnes)
80
Soybean Fundamentals
Soybean Fundamentals
66
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals
Major change in Brazil logistics – Northern Arc ports shipped 20 mmt of grain in 2015 vs 13 mmt in 2014 an increase of 54%, with new facilities opening this year look for another jump – takes the pressure off the southern ports and gives importers more flexibility for both beans and corn going forward – road systems still an issue but this will continue to facilitate the expansion of bean acres in Brazil as long as prices stay above the cost of production –
71
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals
SOYBEAN MONTHLY
Soybeans – FORWARD LOOK – Fundamentals • US soybean production looks to be a new record. • South American supplies are limited pushing export business to the US. • Brazilian REAL rally and credit issues will see limited increase in acres.
– Demand • US Export program looks to be big with not only China demand but additional demand from traditional Brazil/Argie destinations. • Livestock margins will be key for domestic crush margins.
– Over The Horizon • Trade underestimating world veg oil/protein situation again ? • Brazil expansion looks to slow but infrastructure improvements will make them more competitive and efficient. • Hemispheric soy stocks are declining – more production is needed. • Backlash against palm oil production – consumer and the green crowd. • Are Chinese pork imports the new “soybean” dynamic ?
THANK YOU
Disclaimer The trading of derivatives such as futures, options, and over-the-counter (OTC) products or “swaps” may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Past financial results are not necessarily indicative of future performance. All references to futures and options on futures trading are made solely on behalf of the FCM Division of INTL FCStone Financial Inc., a member of the National Futures Association (“NFA”) and registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a futures commission merchant. All references to and discussion of OTC products or swaps are made solely on behalf of INTL FCStone Markets, LLC (“IFM”), a member of the NFA and provisionally registered with the CFTC as a swap dealer IFM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of IFM. This material should be construed as market commentary, merely observing economic, political, and/or market conditions. It is not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of INTL FCStone Financial Inc. or IFM. Neither the FCM Division of INTL FCStone Financial Inc. nor IFM is responsible for any redistribution of this material by third parties or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the opinions or viewpoints of the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasting statements made within this material represent the opinions of the author unless otherwise noted. Factual information believed to reliable, was used to formulate these statements of opinion; but we cannot guarantee the accuracy and completeness of the information being relied upon. Accordingly, these statements do not necessarily reflect the viewpoints employed by the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasts of market conditions are inherently subjective and speculative, and actual results and subsequent forecasts may vary significantly from these forecasts. No assurance or guarantee is made that these forecasts will be achieved. Any examples given are provided for illustrative purposes only, and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. Reproduction or use in any format without authorization is forbidden. © Copyright 2015. All rights reserved.
3
Macro Market
Macro Market
The US Dollar
6
China’s Economic Growth Slows
10
Black Swans – El Nino ?
?
Dryness on Palm push veg oil prices
Excess rains damage Argentine soybean harvest
Black Swans – La Nina ?
WHEAT MARKET OUTLOOK AUGUST 2016
WHEAT
WHEAT
WHEAT
WHEAT
WHEAT
WHEAT
US Wheat Fundamentals
• 2016/17 – Situation • Lower wheat acres • Low priced environment sees producer shifting to beans/corn/alternative crops or looking to idle production thru CRP or fallow. • We look for this trend to continue
US Wheat Fundamentals
US Wheat Fundamentals Exports look to recover from the lowest levels since 1971/72 which were 599 mb
• El Nino/La Nina on Wheat • Clear correlations between large yields and lower prices in El Nino years due to production increases for the Northern Hemisphere, in La Nina years production and yields do decline particularly for the Black Sea and the US but prices do not correlate as well due to potentially larger crops in the Southern Hemisphere.
US Wheat Fundamentals
US Supply Demand 2016/17
USDA carryout at 1.100 mb – FCStone estimate now at 1.005 mb FCStone Estimate by Mike O’Dea.
WHEAT FORWARD LOOK – Fundamentals: • Large world carryout is the “known” market factor now the “unknown” will be demand, markets need to move to levels that clear inventories. • Black Sea wheat will continue to dominate world trade, but issues in the EU will see US HRW exports increase/Canadian crops look to be good, Australia off to great start. • US will continue to be the residual supplier to the world, function of the US markets are to store the worlds surplus supply, we have the storage capacity and the futures markets that provide the forward curve to hedge those stocks.
– Premiums: • Wheat buyers started to make forward purchases with basis/flat price/board carries at current levels and World FOB values are starting to firm up. • Quality will be the outlier for the year with lower proteins and more feed wheat available to the market – trade flows and export capacity will alter the cash markets as the marketing year moves forward.
– Over The Horizon • Low wheat prices will see producers shift to alternative crops and or limit input costs – this can see quality/milling characteristics continue to decline. • If the shift to La Nina continues will we see yield declines for the 17/18 crop cycle ? • Politics and currency markets can quickly reshape market perceptions.
Wide Protein Spreads
30
MWU-KWU Spread
Source: Prophet X 31
32
US HRW Supply Demand 2016/17 HRW 8/12/2016 USDA USDA USDA USDA 07//08 2011/12 2012/13 2013/14 165 386 317 343 Carry-In 956 780 1,000 745 Production 1 0 18 19 Imports 1166 1,335 1,107 Total Supply 1121 397 Food Use 15 Feed Res 36 Seed Domestic Usage 448 536 Exports 984 Total Usage 138 Carry-Out 0.140 C/O use %
404 15 33 452 397 849 317 0.373
400 179 33 612 380 992 343 0.346
366 24 34 424 446 871 236 0.271
USDA 2014/15 237 739 9 985
USDA 2015/16 294 827 6 1,127
EST USDA* 2016/17 446 1,048 5 1,499
370 20 32 422 269 691 294 0.425
392 33 30 455 227 681 446 0.655
365 185 31 581 340 921 578 0.628
FCStone Estimate by Mike O’Dea.
EST FCStone 2016/17 446 1,048 5 1,499 365 125 31 521 430 951 548 0.576
HRW Wheat Fundamentals
Forward Curve – KC
KWN16 went of the board at 4.06
35
WHEAT
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals 35% of corn production used for Ethanol estimated for 16/17
Corn Fundamentals
Corn Fundamentals Feeding increased 475 mb for 16/17
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals
Corn Fundamentals
47
Corn Fundamentals
Corn Fundamentals
49
Corn Fundamentals
50
Corn Fundamentals
Corn Fundamentals
15/16 Corn S/D w 16/17 look US CORN Aug-16 Planted Acres Harvested Acres Yield
USDA 14/15 90.60 83.1 171.0
USDA 2015/16 88.00 80.7 168.4
FCStone 2015/16 88.00 80.7 168.4
USDA 2016/17 94.10 86.6 175.1
FCStone 2016/17 94.10 86.6 175.0
ALT #1 2016/17 94.10 86.6 173.0
Carryin Production Total Supply
1232 14216 15479
1731 13601 15397
1731 13601 15397
1701 15153 16909
1687 15155 16867
1687 14982 16694
Feed Exports Feed/Seed/Ind (Ethanol) Total Use
5324 1864 6560 (5200) 13748
5200 1925 6567 (5200) 13692
5200 1900 6610 (5250) 13710
5675 2175 6650 (5275) 14500
5500 2175 6650 (5275) 14325
5300 2175 6670 (5300) 14145
Carryout
1731
1706
1687
2409
2542
2549
CO/Use Ratio
0.126
0.125
0.123
0.166
0.177
0.180
Estimates by Mike O'Dea
$ $
3.60 Low 3.80 Hi
$ 3.10 Low $ 3.70 Hi
Corn Fundamentals
Milo
55
Milo
56
• El Nino vs La Nina • Clear correlations between large yields and lower prices in El Nino years. • La Nina – Yields decline in both corn and soybeans. • Both North and South America have issues.
The majority opinion is El Nino follows the weather pattern of 1998, but we must look at what happens of the El Nino transition follows the 1983 path. The market is trading a 1998 weather pattern but the risk is a 1983 weather pattern. In 1983 corn yields were 78% of trend or the equivalent of a 131.5 yield today, a 1983 equivalent soy yield would be 35.7 bu/acre. A 1998 trend style yield in corn would be the equivalent of 175 and soybeans 45.7. Viewing the market as a 1983 vs 1998 scenario is rationing demand vs building carryout. 58
CORN FUTURES MONTHLY
CORN FORWARD LOOK – Fundamentals; • US Supply side is still an “unknown” fundamental. • US corn producer is still the big long, old and new, in the market. • China in the process of unwinding its corn program. – Demand and price. • Export demand is good looks to stay strong thru the year. • Domestic feeding will expand w cheaper feed grains. • Ethanol margins are good but need to see more exports. – Over The Horizon • Corn use for ethanol plateauing, legislative moves on RFS ? • World livestock expansion slowing - feed grain prices ? • Lower prices seeing corn acres switch to oilseeds globally. • La Nina ?
SOYBEAN OUTLOOK
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals World Soybean Carryout and CO/Use 100
Source: USDA
30
95 28
90 85
26 24
75 70
22
65 60
20
55 18
50 45
16
40 35
14
30 12
25 20
10
15 10
8 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Co/Use Ratio (%)
Carryout (million tonnes)
80
Soybean Fundamentals
Soybean Fundamentals
66
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals
Major change in Brazil logistics – Northern Arc ports shipped 20 mmt of grain in 2015 vs 13 mmt in 2014 an increase of 54%, with new facilities opening this year look for another jump – takes the pressure off the southern ports and gives importers more flexibility for both beans and corn going forward – road systems still an issue but this will continue to facilitate the expansion of bean acres in Brazil as long as prices stay above the cost of production –
71
Soybean Fundamentals
Soybean Fundamentals
Soybean Fundamentals
SOYBEAN MONTHLY
Soybeans – FORWARD LOOK – Fundamentals • US soybean production looks to be a new record. • South American supplies are limited pushing export business to the US. • Brazilian REAL rally and credit issues will see limited increase in acres.
– Demand • US Export program looks to be big with not only China demand but additional demand from traditional Brazil/Argie destinations. • Livestock margins will be key for domestic crush margins.
– Over The Horizon • Trade underestimating world veg oil/protein situation again ? • Brazil expansion looks to slow but infrastructure improvements will make them more competitive and efficient. • Hemispheric soy stocks are declining – more production is needed. • Backlash against palm oil production – consumer and the green crowd. • Are Chinese pork imports the new “soybean” dynamic ?
THANK YOU
