Crop quality was the big question on the mind of the market for this first week of June, as the entire grains and oilseed complex moved higher. Despite seeing the largest one-day drop for the U.S. dollar earlier in the week since 2013 (it rebounded on Friday), weather issues were completely at the steering wheel this week. Between freezing temperatures in many areas of Western Canada, to persistent wet conditions in the U.S. Southern Plains, some premium started to make its way into the market.
Oats was the bigger winner for the week, up almost 10 per cent on the front month contract (albeit it’s been sitting near multi-year lows for the last little while so was due for a bounce). Corn also saw an improvement to the upside as rains in the American Delta and parts of the Cornbelt have continued to delay the seeding of final acres across the region, creating some concerns that the Prevent Plant number of soybeans and corn may surpass two million acres each.
Wheat joined the party thanks to concern of quality of U.S. winter wheat crops and limiting rains in spring wheat growing areas of the northern U.S. states and Western Canada. There are also some growing concerns of drier pockets in parts of Southern Russia that will see premium continue to get built into the market without adequate moisture.
Down in U.S. Southern Plains, the winter wheat harvest is finally getting underway but just getting into the fields is proving difficult due to wet conditions, and the consensus is that yields and quality will be lower. As CWB’s Bruce Burnett puts it, the lower quality production will push Kansas City futures prices lower to accommodate the lowest possible quality for delivery, while basis should improve for higher quality wheat.
Speaking of quality wheat, new laws that may limit the frequency and volume of fertilizer application in Germany may result in one of the world’s top wheat export nations lose its position as a high-protein provider for the world market. It’s yet to be seen if German lawmakers recognize the proposed laws implications, but indications are that they’re trading wheat quality in order to win the battle against groundwater pollution. This is a legal precedent that could have ramifications across the E.U. agricultural sector so it’s worth watching.
Canola had another big week, supported by a stronger U.S. dollar, with the July contract up over seven per cent and the November closing out the week at $495/metric tonne. After cold temperatures last weekend led to what was likely around one million acres getting re-seeded in Western Canada, notably Saskatchewan and Manitoba where at least 900 and over 2,700 crop insurance claims have been put in respectively! Keep in mind, that there’s still time for a reseeded crop to grow!
Saskatchewan’s most recent government crop report pegged canola rated as good-to-excellent at just 44%, compared to 87% a year ago and the worst start since the 2009/10 year. To the west, most of Alberta is in need of serious rain or two. As such, there is some clear opportunity for canola prices to head across the $500/MT level soon if we don’t see weekend rains in the aforementioned areas. Other crops that are seeing bumps in prices include flax and some pulse crops, like chickpeas.
Yes there are definitely some possible weather issues popping up here and there but you can’t expect a 25 per cent price increase over night. On that note, it’s easy to think more and more negative weather will come around. The question (reminder?) is how many weather events do you or will you need to see and accept in order to start managing price risk? If the market is up 10 per cent, would you consider selling 10 per cent of production or what’s left in the bin, or do you need the price to go another 10 per cent higher?
The reality is, no one can say for sure that the market will go another 10 per cent higher so why not make a sale when you can. Worst case scenario, if It does go higher, you still have 90 per cent left to sell. That said, this is an easier decision if you have old crop left to sell, but for new crop, it will surely depend on what your fields are looking like – crop risk management comes before price risk management in my opinion.
Specifically for Western Canada, this weekend is definitely pivotal in terms of possible price direction as without a decent rain across the Canadian Prairies, it could set the stage for a gloomy growing season, especially with some hot temperatures in the forecast for next week. On the flipside, if rains do arrive, you can expect markets to fall back, albeit not to the levels we saw a month ago.
Simply put, there’s a volatile trading environment right now and the best risk managers would make sales and lock in profits, and if the price continues to go up, you make more sales. Conversely, you could also make zero sales, betting the market will continue to go higher, but if the market does happen to pull back, you’ll be asking yourself “why didn’t I at least sell something?”