Crystal Ball Shows Most Bad News Already in the Market

May 1, 2015 12:00 PM
Crystal Ball Shows Most Bad News Already in the Market

In its April 2015 North American Agribusiness Review, Rabobank shares its outlook for the main commodities. The bright spots are few and far between, but the bad news isn’t new—it’s likely already in the market.

Power Hour Noon LogoBriefly, Rabobank economists point out the strong dollar is slowing exports, and it’s likely the dollar will remain strong. Consequently, firms are more hesitant about their investments going forward and have even slowed down on hiring, based on the March employment report. Moreover, any interest rate changes could have implications for agriculture.

“If the Fed moves too fast [in raising interest rates], a further appreciation of the dollar could undermine the recovery,” the report notes. “The fact the European Central Bank is moving in the opposite directions with its asset purchase makes this side-effect of the Fed’s move to exit [potentially] even worse for the U.S. economy.”

As a result, Rabobank doesn’t think a rise in long-term interest rates will occur before the fourth quarter of 2015.

Corn Will Trade In Narrow Price Range

Planting concerns are the next hope to jog corn out of the 26-cent trading range where it has been since the release of USDA’s March 31 planting intentions report, Rabobank notes. But Rabobank defines future price volatility as a narrow risk premium of between 20 and 50 cents. On the flip side, the corn carried over from this past year is trickling into the market on short rallies and will “cap the potential for a sustained rally.” However, the economists note, a return of China to the U.S. market plus expected lower production in Ukraine could be sightly bullish. On acreage, Rabobank predicts a “market neutral” 89.4 million acres.

Soybean Crush Margins Top $2 Per Bushel

Like most analysts, the Rabobank economists see more acres and lower prices in store for soybeans. “Even if planted acres are lower than expected, the 2015/16 U.S. soybean balance sheet is forecast to show the highest ending stocks in nearly a decade,” the report says. Crush margins are over $2 per bushels, though, which promises continued strong domestic crush even as exports lose steam. That’s assuming the avian flu outbreak, warm weather or both do not significantly reduce demand for meal.

Wheat Outlook Grim

The report had nothing positive to say about the wheat outlook, barring overly dry or wet conditions that still could play havoc with yields. U.S. exports are dismal and unlikely to change, and global stocks are adequate.

Cotton Producers See New-Crop Opportunity

Those holding quality cotton stocks face a more favorable outlook as acreage falls, up to 9.6 million acres, according to Rabobank. “Exports already total 10.23 million bales (Upland plus Pima) and unless there is a rapid spate of export cancellations, U.S. ending stocks will contract below 4 million bales,” the report notes. The economists are neutral toward the old crop and bullish on the new crop. They think futures might edge above 70 cents in the second half of the calendar year.

Fed Cattle Experience Some Seasonal Price Pressure

Seasonal price pressure is building in the fed cattle market, though it is likely to be less pronounced than normal. Rabobank expects a decline to the $150 area for a summer low before prices gradually recover to the $160-plus area in November. Keep in mind USDA projects third- and fourth-quarter beef production to exceed this past year’s level, so barring stronger demand, some pressure should be seen.

Feeder Cattle Weights Head Higher

Feeder cattle, on the other hand are at the beginning of their seasonal rally. “Due to an incredibly unfavorable swap between feeder cattle and fed cattle prices, as well as moderately priced feed, cattle feeders continue to push fed cattle weights to unprecedented levels,” the Rabobank economists notes. This has offset much of the decline in slaughter numbers.

Hog Slaughter Rises, Weights Decline

Also adding headwinds to beef are large pork and poultry supplies, weaker exports and plentiful imports made cheaper by the dollar. Hog slaughter is expected to increase 4% on average in 2015, though weights are expected to be down about 1%. A modest seasonal improvement into summer is still likely, however.

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