(Reuters) The past 12 months have been a tumultuous time for the crops arena with corn, soybean and wheat prices all suffering steep losses over the latter half of 2014 amid a swell in global output and a jump in projected year-end inventories to record levels.
But while production of all crops increased over the past year, stores of oilseeds are projected to climb at a much faster clip than grain inventories over the rest of 2014-15, which should help grain prices to outperform oilseeds in 2015 even if the overall tone of the crop arena remains neutral to bearish.
SUPPLY SURGE
The production side of the global ledger in the 2014-15 crop year has been one for the record books. Combined grain and oilseed output scaled a record 2.986 billion tonnes, which marked a near 25 percent increase compared with 10 years ago and a 25 million metric ton (1 metric ton = 1.1023 tons) increase over the prior year's total.
At over 622 million tonnes, total grain plus oilseed stocks are set to climb to fresh all-time highs this year, up more than 34 percent from a decade ago and 7.4 percent higher from last year.
With total crop consumption projected to climb by 2 percent for the year, this steep swell in supplies was the chief factor weighing on crop prices for the past several months, especially in the United States as harvest progressed.
But while most of the projected supply surge is already in the bag thanks to a blockbuster U.S. crop and early soybean harvest progress in South America, some questions remain about grain crop potential over the remainder of the crop year, namely the quality of the Black Sea and Australian wheat crops and Brazil's "safrinha" corn crop.
SCRUTINIZING GRAIN PRODUCTION POTENTIAL
While a majority of the world's crop growing belts received favorable growing conditions throughout most of 2014, bouts of dryness in certain locations have curbed yield potential in key areas.
In the Black Sea, a combination of below-normal rains and snow alongside a sudden recent plunge in overnight temperatures has raised the risk of crop damage across large portions of the winter wheat crop, especially in southern and central Russia.
Meanwhile in Australia, enduring hot temperatures so far in 2015 – following the third hottest year on record since Australian record keeping began in 1910 – have threatened crop potential, leaving wheat importers concerned about supply availability later in the year.
There are also questions over corn crop potential in 2015 after planting delays to some of Brazil's soybean crop raised the prospect of fewer second-crop corn plantings once the soy harvest is complete.
Some soybean cutting is already under way in major producing areas such as Mato Grosso and Parana, but is generally behind last year's pace. It will be several more weeks before a clearer picture of safrinha corn crop planting potential is available.
In addition to concerns about timing – as Brazilian growers like to have second-crop corn seedings completed by mid-March – South American farmers are expected to weigh the economic merits of committing to large-scale corn production this year, as crop prices are below where they were at this point in 2014 even as costs for seeds and inputs remain high.
Cost considerations apply in Ukraine as well, which has emerged in recent years as a major corn export player after having boosted output by over 700 percent between 2000-01 and 2013-14.
Economic and political turmoil in the country have led to a drop in credit provision for many small- and medium-sized growers and co-operatives, leading to expectations of cutbacks in costly fertilizer and chemical purchases associated with corn production.
Major crop forecasters such as the U.S. Department of Agriculture have already penciled in a 3 million metric ton reduction in corn output for 2014-15 compared with last year, but additional downside risk remains if access to credit remains tight and overall farm sector revenues get impacted by turbulent currency swings in the region.
Combined with the ongoing concerns about wheat production potential in 2015, this prospect of potentially smaller corn production this year looks set to underpin grain market sentiment going forward even as oilseed supplies continue to swell on the back of another large South American harvest.
This in turn may provide traders with a potential strategy for 2015 in a crop arena that is likely to remain beset by large global stockpiles for the near to medium term.