An Up Week in the Markets Driven By Weather Woes; WASDE Holds Some Wheat Surprises



Grain prices were all higher this week and ended with a WASDE report on Friday that the market read as bullish, even though the numbers didn’t fully imply that. Does the market just not believe the numbers, or perhaps it feels more cuts are on the way?

Either way, weather is creating fairly volatile trading in the grain markets, and economic uncertainty in Europe and China is compounding the situation. Wheat prices are being resilient as drier conditions in Western Canada, Europe, and even Argentina continue to provide fodder for bulls, but the U.S. winter wheat harvest is picking up pace with combines going full tilt in the Southern Plains. With a stronger U.S. dollar because of the aforementioned economic concerns, canola continues to enjoy some solid prices, but I’m not quite so certain we’re at a top yet as we still have some more critical days in the growing season to get through still.

On Friday, July 10th, we got another installment of the USDA’s WASDE report, but despite the various weather issues affecting crops around the world, the report was relatively “blah” in regards to game-changing numbers. U.S. average corn and soybean yields were left at 168.8 bu/ac and 46 bu/ac respectively but production for both row crops fell from the June estimate to 13.53 billion bushels (-100 million bushels) and 3.776 billion bushels (-7.4 million bushels) respectively thanks to lower acreage. As for ending stocks, the 2015/16 carryout for corn was set at 1.6 Billion bushels (102 million bushels less than June’s estimate) and 425 billion bushels for soybeans (-50 million bushels).

For wheat, some big surprises were seen on the bearish side of the trade as production was pushed higher by 27 million bushels in the U.S., to 2.15 billion bushels (albeit the quality is certainly in question when it comes to the winter wheat crop). As for the 2015/16 carryout, wheat numbers are now pegged at 842 million bushels (+28 million from June) and 219.8 million tonnes on a global perspective (+17.4 million tonnes from June!). Global corn ending stocks for the 2015/16 marketing year were seen 5.25 million tonnes lower at 190 million tonnes, while soybean numbers were dropped by 1.42 million tonnes to 91.8 million.

On that note, most recent crop progress reports show that the quality of corn and soybean fields haven’t fallen as much as the market is thinking, which is why any rallies have been reigned in, with corn holding above the $4/bushel handling while soybeans straddle $10. However, most of the market is expecting the USDA will have to further downgrade their expectations over the next two months going into Harvest 2015 as the closer we get to combines hitting the field, the better idea we have of what Mother Nature has actually helped grow (or not grow, in some places).

The United Nations directly challenged those expecting a smaller production number by actually raising their forecasts for world grain and oilseed production, noting better corn fields in the E.U. and South America. They were on the same page as the U.S.D.A. regarding wheat production as estimates were set at 723 million tonnes by the (down just eight million tonnes from last year’s crop!) I would expect this number to fall considering the FAO and USDA are still expecting fairly big what crops to come out of Canada and the Black Sea.

Overall, the report focused mostly on the supply side of the equation but we need to keep our eyes on demand, too.

For feed, a wet May and damp June has created some of the best pasture conditions in years for livestock producers in the U.S. Southern Plains, especially Texas, whereas there’s now some speculation that more Canadian animals could be sent south to the U.S. (the pastures are literally way greener than on the Canadian side of the border!). That being said, I have to play the reminder card that more animals will get sold off and substitution effects will start to play out for the rations of those animals still being raised in Canada. (i.e. switching out barley and wheat for other options).

Expectations this year from Indian pulse crop buyers is that imports will creep up again closer to 4M tonnes but that the market is extremely price-sensitive in that if prices remain high, consumers will cut out more pulses from their diets. Nonetheless, between India’s smaller last year (and again possibly this year), demand will likely remain elevated. Conversely, Turkey is a country that bought up too many lentils last year and will likely pull back on demand.

With acreage up for peas, lentils, chickpeas, and fababeans this year, it’s more a question of where yields will come in given the dry growing season Western Canada has had. Case in point, fababean acres are up substantially in both Canada and Australia this year but lower yields due to lack of moisture will likely reign in total production. On that note, export demand will likely remain strong but there isy becoming more and more interest in pulse crops getting into the feed market (good demand on the FarmLead Marketplace, especially with high feed cereals prices these days).

Finally, on the macro front, Greece looks like it’s off the ropes in terms of their European Union member status as it sounds like the most recent austerity proposal measures were accepted (and totally undermines the point of their referendum). What’s really grabbing the attention of global markets is China, where stock market losses in the last few days have been substantial – literally $3.25 Trillion USD in value was lost on the various Chinese exchanges in a matter of the last few weeks. That number is more than 20 times greater than any value lost from Greece not paying off its debt in time!

With equity markets tanking, Chinese regulators are looking to shore up their financial system but questions abound regarding whether or not the People’s Republic will be able to rebound from such significant loss of wealth. How does this relate to the agricultural markets? China’s double digit growth over the past 15-20 years has correlated quite well with increased commodity demand, specifically for soybeans, meat, and dairy on the farm side of things.

While the argument can definitely be made that food demand is relative inelastic (no response in price to big fundamental changes), there’s no certainty that we won’t see any short-term effects on the import levels of the world’s largest consumer of foodstuffs.

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