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2016 Grain Outlook – An End to the Bear Market

The Hightower Report's President - David Hightower discusses 2016's Grain Outlook

David Hightower is the President of The Hightower Report. A commodity research and information firm specializing in high quality futures research and analysis for individual investors, brokers, commercial producers, farmers and end users. David has over 30 years experience in the commodity and financial futures industry. 

2016 Grain Outlook - An End to the Bear Market

The 2016 outlook for grains presents a less significantly bearish view than was present at the beginning of 2015! Extreme weather in the US and Europe has brought production concerns,  and this could be followed by a severe El-Niño event in the year ahead that could adversely affect growing conditions in Asia and Australia. Combined, these events suggest that major lows have already been forged in grains.

In looking ahead players should expect:

- Surprise impacts from soaring global ethanol demand
- A surprisingly strong recovery in global feed demand
- Prospects of lower crop inputs in the face of crimped profitability
- Increased index fund interest in grains on any return to the 2015 summer lows

One factor that pulled corn prices down from their 2012 peak off was the expectation that feedstock demand for ethanol was set to peak in 2014 from blending-wall restrictions in the US.  However, with 2015 global vehicles sales expected to climb to an astounding 74 million vehicles, demand for US ethanol production appears to climbing.  Ethanol production estimates are being revised higher, and some major US energy sector players are gearing up to begin large-scale ethanol exports to meet the surging global demand for transportation fuel. As of late June 2015, weekly ethanol production data advanced to a record high, and US ethanol stocks that same week declined by 9.5% from the February peak. This indicates much stronger demand than had been expected, likely for export.

While feed grain demand remains threatened by the prospect of a return of bird flu into the last quarter of 2015, it is clear that the USDA has consistently understated feed demand.  The USDA’s global feed demand estimates for the 2014/15 season were steadily adjusted higher from July 2014 to July 2015, ultimately increasing by a whopping 16 million tonnes. 
Early impacts from El-Nino might be felt first in palm oil prices, as previous El-Niño events have had a tendency to adversely affect growing conditions in Southeast Asia, including Indonesia and Malaysia.

Grain traders should also be aware of the added significance of India and China in the world supply and demand equation since the last major El Niño event in 1997-1998. With India and China making significant attempts to become less reliant on foreign food inputs over the last 16 years, even a small measure of weather adversity might end up having an outsized influence on food prices.  In 1997/98 China and India’s combined vegetable oil consumption was around 18.3 million tonnes. Consumption this year should be more than 56.2 million tonnes.

World grain traders had grown complacent global grain supply, but adverse weather and better than expected demand has changed all that. Has the market put in a cyclical low? A case can be made when you look at index fund activity, as these players appear to have developed a new-found respect for the grain markets. Index fund buying for all actively traded non-financial markets exploded to a new, all time record during the last week of June, and that was also their fourth biggest week ever for buying corn, soybeans and wheat.

This content is provided by Global Grain Events for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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