Price Slumps and Contradiction at the Pumps --- This Week in the Grain Markets


The grains complex continues to deal with decent growing conditions, better than expected yields, and a tougher global markets environment. This week we saw the market volatility index spike to levels not seen since last year when Russia was invading Ukraine (translation: market participants are pulling dollars out and parking it in cash positions as both commodity and equity markets seem to be in a bit of a slump).

Outside of the grain markets, oil trading is getting pretty ugly as the calls for $30/barrel WTI crude continue to accelerate. While never a perfect correlation, the oilseed market does follow the broader energy market and soybeans and canola have been dragged through the mud a bit this week.

Corn has been supported a bit by a lower European harvest and rumours that China will NOT remove their domestic price supports, which brings favour to more imports.

Wheat continues to be the biggest dog though as record world production forecasts by most private and government operations are undermining prices.

On that note, the Pro Farmer U.S. Midwestern Crop Tour started up and ended without too much fanfare as the scouts confirmed what we already thought: the western cornbelt (Iowa, Nebraska, etc.) is looking pretty decent while the eastern half (Ohio, Indiana, etc.) isn’t showing much promise. Pro Farmer pegs the 2015 U.S. corn crop at 13.3 billion bushels with a national average yield of 164.3 bu/ac whereas the soybean crop was pegged at 3.9 billion bushels at an average yield of 46.5 bu/ac.

While these estimates assume “normal” weather for the rest of the growing season, nitrogen deficiencies were especially noted in the eastern cornbelt. But, recent rains will likely help soybean numbers go higher.

U.S. crops are holding decent promise (i.e. more bearish than bullish at this point in the game) while the earliest harvested fields in Western Canadian are running decent numbers.

Grain prices continue to slide lower as Minneapolis wheat and soybeans are sitting near 2010 lows, and compounding things is the oil market now sitting near a six-year low.

Will we see these lower gas prices reflected at the pump? Most economists are saying that’s unlikely, as a combination of elevated summer demand, overstretched refineries, and even a lower Loonie in Canada will keep prices near where they were almost a year ago (when oil prices were double what they are now!).

Moving on, StatsCan came out with their July survey results of Canadian production estimates and most numbers came in below expectations.

Total Canadian wheat production was pegged at 24.6 million tonnes, a 16% drop from 2014 and 13.7% below the average output of the last five years.

Average wheat yields are seen 17% lower than last year at just 38.1 bu/ac, with production in Alberta and Saskatchewan declining 23.6% and 20.8% year-over-year.

Total durum production is seen falling 14% from last year’s crop to 4.47 million tonnes, but it’s more than likely quality will be much better this year (fingers crossed for another few weeks though at least).

The big number that global market players were watching was canola, which, going into the report, saw range from 12.5 to 14.5 million tonnes, but the actual number from StatsCan came in at 13.3 million (-14% from 2014, -11% from 5-year average).

Other big production declines include chickpeas (-30% from 2014, -35% from the 5-year average), mustard (-45%, -30%), peas (-15%, -10%), durum (-14%, -5%), and winter wheat (-24%, -33%).

Corn production is seen up 7.2% from 2014 at 12.3 million tonnes, while soybean production is seen falling marginally to 5.86 million tonnes (though that is still 15.3% above the 5-year average).

On the flip side, Canadian flax production is labeled as 884 000 tonnes this year, which is just 4.4% higher than last year but a massive 53.6% increase from the 5-year average of 575,460 tonnes.

Barley production is also up from last year by almost 3% to 7.3 million tonnes (still -11% from 5-year average though) while oats and rye production are up 14% and 18% respectively from 2014 to 3.3 million and 230,000 tonnes each.

Rounding out the pulse crops, lentil production is seen 5% higher than last year at 2.08 million tonnes, which is also 12% higher than the five-year average.

While question marks are still raging around the major row crops, there were opportunities to make sales at elevated prices, specifically in canola and soybeans, as we correctly pointed out in July. On that note, good sale opportunities are being capitalized on in the pulse crops right now, while cereals and other oilseeds should likely be sold later.

I’m getting a lot of calls around when will prices rebound again in cereals and oilseeds and the answer is, simply put, I don’t know. I, nor anyone else knows the exact time, date, and final level that prices return to – and if they say differently, I give you my permission to call them on it.

What I do know is that everyone has slumps – professional athletes and markets alike. These new lows are mostly secular in my opinion and we should see some rallying opportunities into the winter months. Selling into these rallies, as we have recommended and will continue to recommend, is the best way to manage your risk.

Further, knowing your cashflow needs from now til the end of February is what I’ll challenge you to focus on. Don’t spin the wheel on your risk management, but rather avoid any slumps by proactively understanding your numbers.

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