The Markets this Week — Have We (Finally) Found a Bottom?


The grain market continues to stagnate as traders, managed money, commercials, and producers alike are trying to determine if a bottom has finally been found.

Grains have traded lower this week but wheat has rallied to close much higher than earlier in the week. Ultimately, July was an ugly month for the grains complex: canola dropped 2.4 per cent, Chicago wheat was down 6.7 per cent, Minneapolis wheat was down 7.6 per cent, Kansas wheat dropped 8.4 per cent, corn dropped 14.6 per cent (the biggest one-month drop since 2011), soybeans fell 18 per cent, while oats were the only part of the complex that went higher, up 5.2 per cent.

U.S. producers look like they’ll be facing a similar situation to what western Canadian producers saw this past year as a big crop is coming off and the transportation system doesn’t look 100 per cent prepared to handle it. Producers across the U.S. Midwest continue to enjoy an ideal growing season, with second ears of corn emerging on stalks already in some places, which usually implies that the first ear of corn was very big. That being said, there isn’t enough storage space for all the extra bushels. Further, getting the railcars to move said bigger crop could be a challenge. As such, the U.S. producer may find themselves this winter in the same pit that Western Canada was constrained to in that they’re unable move, and ultimately get paid for their grain.

From an analyst perspective, Goldman Sachs is expecting livestock prices to under perform relative to grain and oilseeds over the next year as the Wall Street titan thinks things are due for a reversal. Specifically, with a record U.S. soybean crop, record South American output, and an expected slowdown in Chinese import growth, higher animal inventories and lower livestock prices are expected in the new crop year. The Australian & New Zealand Bank (or ANZ) says grain prices have offered sound value as a record U.S. crop has now been “fully priced” into the futures market. Adding to their optimism is the fact that eastern Australia remains dry, which will likely lead to a downgrade in the Aussie wheat and canola crops.

Concern is mounting in Europe on a few levels, both geopolitically and in the fields. The EU harvest will certainly be large but quality is dropping thanks to harvest rains, especially in France where three-quarters of the harvest is complete but only half of the grain taken off has a Hapberg falling number over 180. That being said, the U.K. is poised to provide Algeria & other closely-situated markets with the quality milling wheat that France normally exports to these markets. On the geopolitical front, the E.U. & U.S. are very close to imposing new financial sanctions on Russia for their “participation” in the fighting in Eastern Ukraine. Staying in Russia, wheat production estimates continue to rise as the harvest moves along, with I.K.A.R. now suggesting a 57.5 million-tonne crop. With some trade sanctions in place though, the ability of Russia exporters to move this grain out of country could be in question.

Coming back to the Americas, soybean production in Brazil is going to be larger for the third straight year as farmers there are continuing to plant more of the oilseed. In the U.S., yield estimates continue to tick up with the most recent Reuters survey of 20 analysts pegging corn yields at 170.5 bu/ac, well above the USDA’s forecast of 165.3 bu/ac and the previous record of 164.7 bu/ac set in 2009. Durum prices seem to be the contrarian in the wheat market as prices rose in July by eight per cent to $420/metric tonne ($11.43/bushel) FOB St. Lawrence Seaway in Canada, by five percent to $415 ($11.29) for FOB US Great Lakes, and by 24 per cent to $490 ($13.34) in France’s Port La Nouvelle (all prices in Canadian dollars).

The logic behind the rise in prices is attributed to a smaller harvested area here in Canada this fall and declining quality in the EU crop (specifically in France, Italy and Greece), much like its spring wheat brethren. Ultimately, crop development here in Western Canada is fairly variable but generally positive, with yields for spring wheat, canola and durum reported to be all above their five-year averages. Fingers crossed as we’re close to taking the crop off.

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