Bearish Shocks — This Week in the Grain Markets

On Tuesday, November 10, 2015, the United States Department of Agriculture (USDA) published its monthly instalment of the world agricultural supply & demand estimates, and things came out a lot more bearish than the market was expecting. Going into the report, average market analysis pegged both corn and soybean yields and production higher than the previous October report.

20150723_cornThat being said, the USDA surprised even the bears by taking average corn yields up by 1.3 to 169.3 bu/ac, barely below last year’s record of 171 bu/ac! Total U.S. corn production was pegged at 13.65 billion bushels, almost 100 million bushels higher than the trade was expecting, The 2015/16 domestic carryout was increased to 1.76 billion bushels, but that pales in comparison to global corn inventories rising by almost 13% year-over-year to a record 212 million tonnes (mostly thanks to lower feed use in China).

Average U.S. soybean yields ticked up by 1.1 bu/ac from October to a record 48.3 bu/ac, meaning total production will touch a record 3.98 billion bushels (or more than 108 million tonnes!). It’s no surprise then, that domestic U.S. soybean end-of-year inventories will grow to 465 million bushels, well above the 436 million bushels the market was anticipating.

On a positive note, global ending stocks dropped slightly as international buying remains strong, the only difference being that most of the business is being given to South America.

On wheat, everyone already knows there’s a large supply out there but with U.S. exports sagging to the lowest levels since the 1971/72 marketing year, it’s no surprise that U.S. ending stocks were pushed up to 911 million bushels, the largest in 6 years. Globally, world ending stocks declined slightly with the Australian crop being cut by 1 million tonnes to 26 million, but that was basically made up by the E.U. crop increasing by 2 million tonnes to over 157 million tonnes (soft wheat production was recently pegged by the European Union at a record 149.2 million tonnes!).

We’ve been reminded recently that most bad crops in the Former Soviet Union states were not a result of bad fall or winter weather, but rather because of adverse spring or summer weather. With that being said, AgResource out of Chicago suggests that they’re not too concerned about the conditions that Black Sea farmers were planting into. Rusagrotrans currently estimates that Russia has planted 40 million acres of winter crops so far, which is slightly below last year, and expectations are that this will equate to a winter grain output of 46.5 million tonnes, versus last year’s 48.3 million tonnes.

I’ll remind them though that, the exacerbation of a poorer crop is only catalyzed by poorer spring/summer weather. Should we see some more adverse weather in a few months in the region as winter crops come out of dormancy, the poor conditions that the crop went into dormancy under will be the main factor in the degradation of the crop size. We’ll agree with AgResource that nothing counts until it’s in the bin, but when there’s a forest fire warning out there, all you need is a little spark to light things up.

2010_07_20_wheat_tallMore rumours of poorer quality wheat are being tossed around, and the pace of harvest slowing down. Just because rains are coming down now, the Australian Bureau of Meteorology says that this doesn’t mean that El Nino is out of the game yet — it’s going to be putting on its rally cap before it starts to break down around the beginning of the New Year.

Less buzz is definitely being given to El Nino these days as more analysts are calling it off in the coming months, but new weather data suggests a La Nina event is coming down the pipeline! The team over at MDA Weather Services is making some pretty aggressive calls in saying that a hot, dry summer is in store for most of the major U.S. agricultural production areas. The NOAA has admitted that the 2 events are the “extreme phases of a naturally occurring cycle”.

While La Nina events have followed El Nino events closely a few times in the 1950s and again in the 1983/84 season, senior climate scientist, Michael Ferrari, says that U.S. crops will likely be more susceptible to El Nino conditions in the 2016 growing season, followed by La Nina in 2017. I say let’s get through one weather phenomenon first before moving on to the next.

In corn, the question is how much product is the market cruising through and at what pace will this help drive prices higher, should we see a mild winter (which could equate to drier seeding conditions for the 2016 growing season). For soybeans, with CONAB (basically Brazil’s USDA), raising production estimates to almost 103 million tonnes, it’s not hard to figure out the math that there are a lot soybeans out there. Yes, there’s been some slight positive points there has been some bright spots for soybeans in terms of domestic use but more than anything, the main variables to watch include China (are they slowing down their imports or just continuing to source from South America?) and El Nino (will it drive up veggie oil prices for a few months or just briefly?).

All in, with supply more than available across the board, sideways-to-bearish pressure remains on the majority of grains complex with only a surprising demand headline or a weather shock bringing about the potential for a rally before the new year. Should these materialize, look to, as I like to say, “selling the rumour, profiting on the fact.”

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