What a week! Seeding continues in Canada and the United States well ahead of schedule, creating bearish implications. That being said, freezing temperatures are in the forecast for a few areas and so the percentage complete could be lower than what officials are predicting.
The lower U.S. dollar has also provided support to all commodity prices as it’s now more than 7% below the 12-year high seen in March. And, if more headlines emerge that re-seeding is a popular action, expect a rally by bulls waiting to get out of their short positions (such as we saw on Thursday in the wheat market). An opportunity to make a sale on that won’t likely last more than a day or two.
It’s tough for any bulls to run away with anything anyway, as the most recent WASDE report from the USDA showed grain supplies are set to rise again this year. Almost all production and ending stocks numbers came in above expectations.
For corn, the USDA is predicting a 166.8 bu/ac average American yield, making it the second highest yield on record, producing 13.6B bushels of the coarse grain. The USDA says domestic corn demand will increase to a record 13.8B bushels thanks to more exports and feed use. But, the market may be a little up-in-arms over where feed demand is set at by the USDA, potentially putting carryout near 2B bushels for the 2nd year in a row (currently, corn ending stocks are set at 1.85B bushels for 2014/15 and 1.75B bushels for 2015/16).
On a global setting, things are also bearish as carryout numbers for both old and new crop came in at 192.5 million tonnes and 191.94 million tonnes, respectively, including a 228M-tonne crop in China.
On the soybean side, it continues to be a story of supply. Expectations are that U.S. farmers will take off a 3.85B bushel crop, down from last year’s monster, but still enough to get the USDA to put 2015/16 ending stocks at a whopping 500M bushels (the trade was expecting 443 million bushels). Comparably, the USDA sees 2014/15 carryout at 350M bushels, nearly three times higher than a year ago, but down significantly from earlier estimates as domestic crush and exports have continued to remain strong.
Globally, it doesn’t get any less bearish as worldwide carryout is seen increasing from 85.84 million tonnes this year to 96.22 million tonnes to end 2015/16. On that note, it’s worth noting that Chinese crush margins have dropped from about $30/MT in January to only about $14/MT today (AKA profits have been halved in the last five months).
For wheat, things aren’t any more bullish as total U.S. production was pegged at 2.09B bushels, up 3% year-over-year. That’s mostly made up by the better winter wheat crop, compared to the US spring wheat harvest which is seen falling about 5% year-over-year. The good news is that U.S. wheat demand is growing by 4% but cheaper exporting nations will continue to limit any massive growth in U.S. exports.
On the carryout side of things, expectations are that we’ll end this year at 709M bushels (trade average guess was 693M) and next year at 793M bushels (average pre-report estimate was 750M bushels). For the rest of the world, the USDA sees exports falling in most major producing countries, including Canada, while production is seen increasing year-over-year in Australia, China, & Turkey. Accordingly, the global wheat carryout will remain above 200M tonnes for the next two years.
So what now?
Weather will be a significant focus moving forward but with a fair amount of supply in both the U.S. & the rest of the world, a major pocket of bad weather may only cause a blip in a price move to the upside. Soybeans remain the crop, in my opinion, that still has more significant room to the downside (can you justify $9.50/bu when there’s a 500 mllion bushel carryout?).
Conversely, wheat and corn are both near their seasonal harvest lows which could provide a bounce to the upside (more so in corn than wheat) and the catalyst to push people out of their record short positions. However, global macro factors like the Chinese economy and whether or not Russia will possibly tax wheat exports again will be factors that could slow down any bounces back to higher prices. The underlying component to all this wheat export talk is what the Eurodollar, U.S. dollar, and Russian ruble will do in the months to come, especially since more quantitative easing measure are expected to weaken the Euro this summer.
Does this mean that prices are going to higher?
This is exactly what I talked about this week in a letter to our FarmLead users, with the question “why should I sell now when everyone’s saying prices can go higher?”
At the end of the day, no one knows how prices will move. We all believe we are making rational choices.The reality is, we’re not. There are way too many factors out there to believe that we’re smarter than the market is irrational.
Being rational is saying “I know the price could go up, so I’m going to make some sales today on 10-25% of my grain and lock in a profit. If prices do go up, I have some grain left to sell.”
The questions you have to ask yourself now, is what do you know — not what do you think — and how are you guaranteeing yourself a profit this year?