Grains all ended the week lower as planting continues south of the 49th parallel with some activity here in Western Canada but things have been slowed by some sporadic, cooler weather. The USDA’s progress report is showing us that corn sowing is slightly behind schedule with the southeast and eastern regions way behind. As a result, even the seed companies are admitting that prospective corn acres those regions could be switched over to soybeans or sorghum as the optimal yields window passes.
Conversely, U.S. spring cereal seeding remains ahead of schedule and the U.S. winter wheat crop received some mid-April rain, but the portion of the crop rated good-to-excellent continues to fall in major growing states in the southern plains. Overall, some of the noise currently playing with traders’ and farmers’ emotions includes updated weather reports, rumours of more labour strikes in South America, lower feed demand in the U.S. (with bird flu making the rounds), and crop-killing rain in parts of India.
What’s gaining some more traction is the deteriorating situation for farmers in Russia where wheat export taxes have basically put a cap on demand with Vladimir Putin focused on maintaining low food prices for the country. With the cost of inputs going up significantly year-over-year all over the Black Sea, cash on hand isn’t necessarily readily available and so the “Feed Russia First” policy being employed is one that will likely drive more than a few farmers off their land and into significant debt.
We’re heading into a year though were growing conditions remain relatively decent, and the supply-side argument looks to be well-backed in the form of more big numbers. The International Grains Council came out with their most recent estimate for the 2015/16 crop year with global grain and oilseed production pegged at 1.95 billion tonnes (3% higher than the five-year average) and demand at 1.97 billion (just one million tonnes short of the record demand from 2014/15).
Still, prices remain generally depressed, with carryout still being worked through. There are more and more analysts who are looking at the amount of bears in the wheat market as the catalyst to push things higher, but they’re not suggesting we’re getting back to $10/bushel wheat any time soon. Some people are starting to compare this phase of the commodity cycle to that of the 1980s where margins were similarly tight.
This week’s StatsCan report showed nothing really outside of pre-report expectations but the canola and oats numbers were on the opposite extremes of the estimates. For canola, StatsCan estimates 19.4 million acres will be sowed this spring (-4.5% year-over-year), with Alberta’s area pegged at six million acres (-7.7% year-over-year), Saskatchewan at 10.2 million acres (-4.4% year-over-year), and Manitoba at 3.1 million acres (+1.7% year-over-year). As for oats, the feds are expecting acres to increase by more than 30% year-over-year to 3.65 million acres. Many people are disputing this number, suggesting it isn’t supported by cash oats prices ($2.60-$3/bushel).
As for the rest of the space, everyone was expecting some big lentils, peas, and flax numbers but the feds’ surveys disappointed a little at 3.35 million (+7.7% year-over-year), 3.83 million acres (up 1% year-over-year), and 1.63 million acres (+4.8% year-over-year), respectively. Finally, total Canadian wheat acres are seen at 24.77 million acres (+3.9% year-over-year) with durum acres up 15.8% to 5.5 million. Winter wheat acreage is down almost 25% from last year to 1.26 million acres thanks to the wetter fall that didn’t allow for much fieldwork to get done after harvest.
So what does it all mean? Well, this doesn’t mean $500/MT canola just yet, but targets should be raised a little bit (anything above $475/MT should not be considered a bad place to be selling). With less acres this year, Canadian 2015/16 canola carryout could be a little tight, especially with a new crush plant in Camrose, AB, but I’m still looking at Europe as more of the price leader over the next few weeks. The wheat number doesn’t do anything to help anyone who’s expecting prices to go higher while barley acreage up 10% to 6.45 million acres is more an indication of growing international demand.
As for the pulses and flax, you still shouldn’t be using 40 cent/lbs for lentils and $10 yellow peas for your cashflow projections because that is more of a hope than a legitimate plan. Prices remain above their 10 year averages for most lentils and yellow peas, and with the acreage numbers a little lower than people were expecting, some optimism for higher prices is warranted. That said, neither greed nor hope make good marketing strategies.
All things being equal, when there’s a little bit of noise, the market gives a knee-jerk reaction. This in mind, managed money is still sitting at or near record short positions on the futures board, and some would consider that to be a contrarian indicator that we have bottomed out and there’s only upside here. However, it also brings back the argument that if there is any significant weather risk or increasing geopolitical risk, the market will rise and managed money closing out of short positions could accelerate a rally. And these sort of rallies should be identified as opportunities — traders look at it as “buy the rumour, sell the fact” where a farmer should think of it as “sell the rumour, profit on the fact.”