Pricing in the Risk — This Week in the Grain Markets


As we predicted in last week’s Friday column, grains started to pick up some steam in the second week of March, as the monthly WASDE report from the USDA was published. Global ending stocks were lowered a bit but the better catalyst for the move was the grains complex, which finally started to track oil’s move to the upside like other commodities. Let’s stay honest with ourselves though – a fair amount of grain is still available, keeping the market busy trying to price in various scenarios of weather risk.

U.S. export numbers out this week show a below-average pace, with wheat hitting 88% of the USDA’s 2015/16 goal (usually 94% by now), soybeans at 93% (average by now is 95%), and corn at 69%, compared to the normal 79%. The latter isn’t much of a shock, when U.S. Gulf prices are $160 USD/metric tonne, its $160 at Argentina ports and $140 at Brazilian ports. While Brazilian corn prices are amongst the lowest in the world, prices paid in Brazilian Reals is pushing up the domestic price 66% since just September.

This will put pressure on livestock producers as cost of feed is taking margins razor-thin or even into negative territory. The good thing for the livestock producers though, is that there’s a lot of grain getting harvested in Brazil with more corn going into silage (instead of export) and the USDA’s attaché is estimating a record amount of soybeans will be crushed due to higher biodiesel demand and stronger domestic and export soymeal demand. Supporting this new high is CONAB (the Brazilian USDA), which upped its production forecast for soybeans by 1.2 million tonnes to a record 101.2 million tonnes and the corn harvest by 150,000 to 83.5 million tonnes.

China imported 4.5 million tonnes of soybeans in February, up 6% from February last year but down 20% from the lower-than-expected January figure. With the South American harvest and export season underway (Brazil soybean harvest nearing halfway complete, slightly ahead of the average pace), it’s expected that Chinese buyers will continue to buy, with COFCO pegging the 2015/16 final number at 83 million tonnes, just 500,000 MT higher than the 82.5 million tonnes the USDA just increased its forecast to, and a 5 million-tonne improvement from 2014/15.

However, per the USDA’s supply and demand monthly report, China is still sitting on roughly 43% of the world’s corn reserves (or 88 million tonnes), which, if a different price policy gets introduced, could flood the market (and hurt prices). Truthfully, there wasn’t much that came out of this month’s WASDE that we didn’t really expect with slightly lower numbers to global ending stocks for wheat, corn, and soybeans by 1.2M, 1.84M, and 1.55M tonnes, respectively.

Global soybean carryout for 2015/16 moved lower thanks to lower ending stocks out of South America, with more getting crushed in Argentina for soymeal exports, and China’s soybean imports increasing by 1.5 million tonnes to 82 million. Global wheat production was pulled back by 3.4 million tonnes, due to smaller crops in India and Australia (the new 24.5 million-tonne figure they came out with finally matches other private estimates), but global ending stocks were still left at a record level of 237.6 million tonnes.

While the USDA showed less optimism in India, dropping their harvest this year by 2.4 million tonnes to 86.5 million, the U.N. is echoing Indian government sentiments, forecasting a 93.8 million tonne crop. However, the USDA may be factoring in the stormy weather that’s expected to hit northwest and central regions, the main wheat-growing areas, through this weekend. As India is about to start their harvest, any thunderstorm activity that brings winds and hail isn’t good for the crop. Not to fear though Indian consumers – AGT Foods recently suggested that Canadian farmers could plant as many as 10 million acres of lentils and peas this spring, a 30% increase year-over-year.

The Climate Prediction Centre continue to echo its prediction that we will see El Nino dissipating in the Northern hemisphere by late spring or early summer, with a 50% chance of La Nina making landfall by fall of 2016. As we’re ending a second year of an El Nino event, the data is somewhat mixed with U.S. corn and soybean yields and output lower in 1973 and 1983 (after the first year of an El Nino event in 1972 and 1982, respectively), while yields were much higher in 1998 at the end of the last major El Nino event.

A more mathematical approach by University of Illinois ag economists suggests that with the effects of El Nino waning, the transition to a La Nina event possible, and wet Midwest conditions this winter, the likelihood that we see a normal U.S. crop in 2016 is 66%, and a 33% chance a very poor crop is grown. Further analysis from the Illinois professors showed the average U.S. soybean yield could fall below the trend line, which could lead to lower carryout numbers (and obviously, higher prices!)

While any thoughts of challenging seeding weather will most certainly give the market a pop (it always does!), as we’ve been saying, the pop will likely only last a few weeks once the effect of the weather becomes apparent. From a grain sales standpoint, we call this “selling on the rumour, profiting on the fact.” From a hedging perspective, probably the best “smart money” plan I’ve seen recommended yet is by a U.S. broker, who suggests looking at buying some short-dated puts in the options market (puts are basically a simple hedge against prices going lower) and then waiting for a spring or summer rally (cue that weather risk being priced in!).

Where many aren’t expecting production risk is in Europe where the European Commission says that E.U. wheat inventories will end 2016/17 at an eight-year high. Other than bigger production, the reason for this hike is the tough competition in the export market (currency and cheap freight at play here) as E.U. soft wheat exports are expected to fall to 27 million tonnes, a 7.25% decline from this year’s projected 29.11 million tonnes and a 19% decline from 33.34 million tonnes in 2014/15.

Also expected to drop are U.K. rapeseed acres, down 10% year-over-year to 1.35 million acres this year. That’s the lowest since 2009, and is largely due to lower prices and neonicotinoid bans that are ongoing in the E.U. With 2 years of below-expected production, more groups like Commerzbank & ABARES are betting that rapeseed prices will be a bit more resilient than other grain and oilseeds (haven’t they been resilient thus far anyways?). While, yes global veggie oil stocks are down, the obvious cheaper option than canola/rapeseed or palm oil is soybeans.

It’s clear that the market is very uncertain at this point going into Plant 2016. With some questions around weather up in the air, it’s a matter of deciding how much of your potential production are you willing to bet on that weather rally? Of course, we need to grow a crop first but what about what’s left in the bin? Keep in mind that any weather rallies will likely be pulled back into where the market thinks is an acceptable price equilibrium between supply, demand, and weather risk.

What’s your price?

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