Downside Risk on Soybeans, Strong Demand for Canola Feature in This Week's Market News


On Monday, January 12th, the USDA released its January installment of the WASDE repor. Heading into the report, most analysts were bearish, and the report ended up showing some increased corn demand compared to the December report, which is why corn was the only grain that was green/higher by the end of the day. Specifically, corn 2014/15 ending stocks were seen at 1.877 billion bushels, 121 million bushels less than the USDA’s forecasts a month ago. Further, yield was seen at a record of 171 bu/ac (but 2.4 less than the December report though) and an official production of 14.2 billion bushels. The change in carryout was attributed to the decreased yield and more corn being processed for ethanol, which is seen as very positive with lower oil prices. Globally, corn stocks were dropped three million tonnes to 189 million tonnes mainly thanks to increased domestic feeding.

For wheat, U.S. winter wheat acres fell more than analysts were expecting, down 1.95 million year-over-year to 40.45 million, the lowest since 2010. Soft red winter wheat (that which is traded in Chicago) saw its acreage fall by 12 per cent from last year. However, the drop in winter wheat acres are completely offset by the bearish implications of the 2014/15 ending stocks increasing by 33 million bushels to 687 million. Globally, wheat ending stocks were raised yet again to 196 million tonnes, suggesting the fundamentals remain bearish but a close eye is being kept on the Former Soviet Union states winter wheat crop. According to one firm, Russia has exported over 21 million tonnes marketing-year-to-date (or +29 per cent year-over-year), including 16.5 million tonnes for wheat, 3.2 million tonnes of barley, and 1.1 million tonnes of corn. While export limitations have been set up, how long they are extended for could be the catalyst that push wheat prices higher heading into the 2015/16 crop year.

On the soybean side of the report, a yield upgrade of 0.3 bushels per acre from the December report offset a slightly lower harvested acreage of 83.1 million acres. Accordingly production was increased by 11 million bushels to 3.969 billion while the year-end carryout stayed untouched at 410 million bushels. Most analysts were expecting to exports increased thanks to the aggressive sales so far this year but the U.S.D.A. only hiked the number by 10 million bushels to 1.77 billion, suggesting that the government agency might be expecting more South American business. However, the U.S.D.A. left South American soybean exports unchanged but did upgrade Brazil’s crop by 1.5 million tonnes to 95.5 million! World soybean ending stocks grew by almost one million tonnes to 90.8 million tonnes. Overall, the price drop in soybean contrasting the movement in the corn market suggests that more corn acres may get put in this spring than what was being estimated just a few weeks ago.

The bearish implication in soybeans continue to put pressure on canola but improving basis levels suggest that demand remains relatively strong for the oilseed. That in mind, the board could quickly swing either way if any reports from Europe suggest a worse or better rapeseed crop (although a drop in production is likely already priced in). Specifically, Commerzbank says soybeans “have virtually no upside potential” thanks to lots of production” while key rapeseed/canola producers “will reap a significantly lower crop in 2015.” Moreover, some investors have looked at the recent discovery of verticillium wilt in Manitoba as another major negative for the Canadian crop (although its yet to be seen how far the soil-borne fungus has spread). Regardless, we continue to stand by our call that the E.U. pesticide ban will be the main catalyst bringing canola back above $500/metric tonne (on the futures board at least ). Thus, as indicators emerge in March/April as to how the EU rapeseed crop is doing, might be worthwhile to consider switching a few fields back over to canola in your current Plant 2015 plan.

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