Reflections on 2017 markets
As 2017 comes to close, it is a good idea to take a look back. Reflecting on what drove prices during the last 12 months and the recalling the primary fundamental factors can provide perspective as the New Year begins.
First, some macro drivers to remember for the last year: the U.S. got a new President as Donald Trump was inaugurated, crude oil markets rallied to their highest level in three years on Organization of the Petroleum Exporting Countries (OPEC) production cuts, U.S. stocks hit record high levels, summer weather in the Plains was very hot and dry leading to concerns for crop production and quality, and the North American Free Trade Agreement has seen plenty of negotiations and discussions as governments try to iron out details under the new U.S. administration. These are just a few of the many stories that have had an impact on commodity markets over the last year.
Wheat was already pretty cheap heading into 2017. Stocks were large in both the U.S. and Canada. Additionally, most other major exporting regions/countries were pretty well supplied, as well (except for the European Union that was taken lower by a bad French crop in 2016).
For this reason, planted area for winter wheat was reduced in the U.S., and overall planted area was down significantly in the spring in both Canada and the U.S. Even with the reduction, the market was not able to mount much of a rally until weather turned hot and dry in the Northern Plains in the U.S. and Prairies in Canada. This dryness stressed the crop during June and July, taking the market to levels not seen in several years. However, the rally could not be sustained.
As the summer drew to a close, some rains came and alleviated pressure on the crops. Also, global wheat markets put pressure on domestic prices. Russia had a record wheat crop. The European Union recovered and large global stocks forced markets lower. Then as fall came around, it turned out that supplies of spring wheat were not as low as initially thought. Statistics Canada and the U.S. Department of Agriculture both showed reports with better than expected supplies. So in that mindset, the markets are depressed heading into 2018, even with relatively poor conditions and likely smaller area for U.S. winter wheat. There is just too much export competition to get prices going in the coming months.
Durum followed much of the same path as wheat. 2016 production was very good, and stocks were large. With summer heat and dryness, prices rallied after what had been 15 consecutive months of little change. This rally lasted a couple of months before markets retreated, though not quite back to the lows seen early in the year. Stocks are definitely tighter than a year ago, but the market (again) has not been too concerned.
Canola has been one of the more interesting markets this year. In the fall of 2016, about 20 percent of the canola crop was left in the field due to late rains that froze early. This resulted in tight old crop stocks and support due to a supply crunch at the end of the 2016-17 crop year.
Take a pause here and look at the broader oil landscape. Palm oil prices were high early in the year as stocks had not rebuilt from El Nino dryness of 2016. The U.S. had plenty of soybeans, but crush demand was weak leading to a relatively tight soybean oil situation. Additionally, biodiesel mandate policy was changing, with higher volumes required for blending and import restrictions on certain biofuels leading to higher demand for other fats.
Enter canola oil, as U.S. demand picked up. And with the hot and dry conditions during the summer, there was a strong fear that supplies would not be able to match demand. As the year drew to a close, prices backed off. Palm oil supplies grew with strong production and lack of demand from India. Soybean oil markets faltered as well. And the biggest bearish news was the Statistics Canada 2017 production report that showed Canadian supplies were well above market expectations. From that point, markets were weaker into the end of the year.
Peas and lentils
India was the story for pulses in 2017. 2016 saw a huge expansion in planted area and production for pulses. The large carry-in stocks were then reduced by lower plantings in the spring of this year. Overall production was down, but markets were not supported as much as one would expect due to India's demand prospects. India is a major consumer of pulses, and their government announced mid-year that it would look to support local producers. This is done by not only raising support prices but also putting duties on imports of many goods. Palm oil was mentioned earlier, but pulses also were impacted. With less demand from India, pulse markets ended the year softer than initially expected.