Waking the Bears — This Week in the Grain Markets


Grains this week followed the rest of the commodity and equity space lower, despite the U.S. Dollar losing more than 1% for the second week of February. Some short covering towards the end of the week helped soybeans stay in the green, but all other grains listed on the board dropped. Canola was a notable loser midway through the week before climbing to pare its losses at only 0.25% lower, whereas corn and wheat took some heat on better weather conditions and slow demand, equating to a week-over-week loss of 1.85% and almost 2%, respectively, not to mention keeping the bears comfortably sleeping this long weekend.

The biggest bearish news this week came in the form of the USDA’s February instalment of the world agricultural supply and demand estimates (WASDE). While the market’s pre-report estimates weren’t wildly far away from actual levels, many were a bit surprised by ending stocks, as pretty much every crop increased from January’s numbers.

Global wheat ending stocks were hiked by 6.8 million tonnes to a record 238.9 million tonnes, thanks to larger stocks in China (+6.3 million tonnes from January to 93.6 million tonnes) and American exports were down another 680,000 MT to their lowest levels since 1971-72, when they weighed in at just 21.1 million tonnes. On that note, with the weaker Canadian Loonie, the USDA upped Canada’s export target for 2015/16 to 22 million tonnes, making it the second largest wheat exporter in the world. For perspective, Russia’s 23.5 million tonnes are number one, but the rankings don’t include the European Union, which the USDA says will collectively export 32.5 million tonnes of wheat this marketing season.

Global corn carryout was pegged at 208.8 million tonnes, slightly lower than January’s forecast, but production in Brazil was raised 3.5 million tonnes and 1.4 million in Argentina. With new production levels of 84 million and 27 million tonnes, Brazilian corn exports were raised by 2.5 million tonnes to 28 million, while Argentina’s corn exports were pegged at 17 million tonnes, an increase of 1 million from January’s tables. Meanwhile, U.S. corn exports dropped 1.3 million tonnes from January’s estimate to 41.9 million tonnes, pushing American corn ending stocks up 890,000 tonnes to 46.7 million tonnes (1.84 billion bushels).

Rounding out the 3 major row crops, South American soybean production estimates stayed at 100 million tonnes in Brazil but were increased to 58.5 million tonnes in Argentina, with exports for the two countries also remaining the same as January at 57 million and 11.8 million tonnes, respectively. With global production hiked by 1.5 million to 320.5 million tonnes, global soybeans carryout was raised by roughly the same amount to 80.4 million tonnes, 12.23 million (449.4 million bushels) of which will be accounted for in America to end the 2014/16 marketing year.

In actual market action, Egypt’s wheat purchases are running about 7% behind last year at just 3 million tonnes purchased thus far. With an ugly stand-off brewing between sellers and buyer (GASC, the Egyptian state grain buying agency), if there’s not a solid supply chain of wheat, well, it’s simply not good. Especially when more than 40 million people are screaming, “where’s our bread?!”

The good news is that there’s still a lot left (see the record ending stocks comment if you don’t believe that)! Perhaps GASC thinks wheat prices could continue to fall, as is the call being made by more than a few analysts and traders (hence the net-short position that still exists in wheat markets). With conditions around the world in generally decent shape (minus India perhaps), it’s unlikely that we’ll see a drastic reduction in global output for the 2016/17.

However, the USDA’s Canadian attaché is forecasting total Canuck wheat production at 22.9M acres, down 840,000 year-over-year (or -3.6%). The bureau notes that a dry spring predicted for Western Canada could push into the summer growing season, obviously having a negative effect on yields and production levels.

Across the pond, according to producer organizations in the European Union, the bloc is set to produce its 3rd consecutive bumper wheat crop, as 156 million tonnes of total wheat production is being forecasted (previous record of 157 million tonnes was set in 2014). Overall, E.U. grain and oilseed production is expected to climb 1.4% from 2014/15’s 304 million tonnes to 309 million tonnes in 2016/17.

The obvious asterisk here is that we’re still more than a few months from any European combines rolling, but the conditions look positive thanks to decent weather/snow cover and limited winter wheat acreage needing reseeding. However, this obviously puts a curtail on any potential catalyst for wheat prices, which is a bit concerning to farm groups as cashflow starts to become a significant issue for farms.

The soybean harvest in Brazil is starting to pick up pace with 14.4% of crop taken off in the Mato Grosso region (largest-producing soybean area of Brazil). Imea is currently projecting the state to produce 27.8M tonnes and with good-to-excellent ratings for the area up 5 points from January to 33.7%, decent rains have certainly helped make that output forecast more of a reality. Weather for the next few days in Brazil and Argentina looks to be generally positive, especially for the latter as the precipitation will ease some of the dryness concerns there.

With generally favourable conditions in South America, it’s hard to justify the return to $4/bushel for corn ($9/bu soybeans on the futures board seems more likely first). The reality is that the combination of the relative appreciation of the U.S. dollar over the past year against other currencies, heavy supplies, and tough competition abroad make $4/bushel corn unlikely for the next 3-6 months with North American weather issues being the only real potential catalyst in the pipeline.

Add in Chinese government support prices for corn dropping in order to make the farm policy of the People’s Republic more “modernized” and the rangebound corn market isn’t too dissimilar from a tide rising and falling back. The difference being that $4 handle in Chicago is like the sand castle that’s built just far enough away from the water that it won’t be touched any time soon.

On the weather front, good rains are being seen in drier parts of Argentina but concerns continue to spark up on the state of the winter wheat out of the Black Sea. The U.S. Climate Prediction Centre is tracking conditions that would suggest La Nina hitting the Northern Hemisphere in fall 2016 while El Nino-induced weather will disappear by spring or early summer (La Nina typically brings drier weather to North American ag regions, while wetter than normal conditions are usually seen in Australia, parts of Southeast Asia, & northern Brazil).

Overall, with the bearishness of the WASDE report, it’s another reality check for every farmer and grain buyer alike that there’s a massive amount of grain available still. The bears are far from going into hibernation given the conditions out there, but I can promise you that they’re sleeping more comfortably than many other market participants. Accordingly the markets continue to focus on a currency and weather catalysts to get the bears out of bed.

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