A Tempered Spring? — This Week in the Grain Markets


Grains ended this week in the green, with soybeans leading the way at almost 1.5% higher for the week, and nearly 6% higher for the month of March. Canola is a close second, up over 1% for the week and over 5% so far in March. Wheat futures aren’t far behind, after seeing a slight push earlier in the week due to freezing temperatures across most of the winter wheat growing states south of the border. Ultimately, this is bringing bulls out of their pens and springing money managers to cover their short positions to lock up profits before the end of the month and quarter.

In Kansas, 20% of the winter wheat crop is jointed (compared to the 7% average & 3% at this time last year) while Oklahoma sits at 38% jointed (33% average). Looking at those numbers, there’s no doubt things are ahead of schedule this spring. With a few overnight frosts in the books (and possibly more to come this weekend), as much as 10% of the U.S. wheat belt could see some damage, with as much as 2% already written off.

But, there’s still a long ways to go before combines roll in the Southern Plains, and we’ve seen resiliency in wheat crops in the past. For now, I’m split in terms of whether we’ve seen the best price yet or there’s more to come, but after this long weekend, the picture should become clearer.

Durum wheat prices are bucking the other wheat bullriders, as favourable conditions in both Europe and Mexico, and a fair amount of supply in Canada is keeping a lid on prices. With 5.9 million acres of the pasta-maker going into the ground this year in Canada, and more acres in both the U.S. and Europe, it’s fairly clear that prices in the $7 range in 2016 is looking more likely (barring a drought in Western Canada, of course).

While we’re approaching the April deadline that China is expected to make a final decision on their dockage tolerance for canola imports, there’s speculation that the country will start to import more canola meal and canola oil, as was the case the last time China restricted canola seed imports over blackleg concerns. Also supporting Canadian canola prices is the rise of the Australian Dollar, up almost 7% in March alone, and more bulls are expecting it could go higher, pressuring Aussie canola export activity.

The Canadian Loonie is up just 2% this month,  and about 10% since mid-January lows to sit higher than 75.5 cents USD. This correlates well with crude oil prices, which are up almost 12% in March alone to above $40/barrel, despite U.S. crude inventories hovering at a record high of 532.5 million barrels of oil. On the ethanol front, U.S. production is running about 2.4% above last year’s production at this time of year, whereas the USDA is only calling for a 0.5% increase. It’s currently estimated that ethanol plants are losing about a penny on every gallon they produce right now, compared to a profit of 94 cents/gallon in 2014.

Why the change?

Grain prices are closely correlated to oil prices, but, obviously, so is ethanol. Thus, a drop in grain prices has cause the same in ethanol, creating that margin compression that the processors are experiencing today. Adding to the profit pressure is the reality that U.S. production capacity has tripled since 2007, while the number of new plants processing corn has doubled over the same timeframe,

Crops in Europe continue to look relatively decent as forecasts for both the short-term and long-term weather do not suggest below-freezing temperatures that could adversely affect crops like we’ve seen here this past week in U.S. winter wheat. 92% of French wheat crops were rated in good or very good condition and the crop is about 2 weeks ahead of normal pace, suggesting an early harvest.

The worst of the worst looks to be seen in Eastern Europe as 10% of the wheat crop was lost to a January freeze, 30-40% of crops in some areas of Ukraine will be lost to dryness, and Romanian producers are expecting slightly lower yields than last year. Overall, MARS (the E.U.’s crop monitoring service) is suggesting cereal yields will return to more trend-line levels with average soft wheat yields down 4.8% year-over-year to 88.6 bu/ac, while corn will increase 10.9% to 113.4 bu/ac, and rapeseed yields will fall around 56.4 bu/ac, down 1.4% from the 2015 crop.

Ahead of this USDA’s Stocks and Acreage report scheduled to publish on Thursday, March 31, we’re seeing a few more estimates on planting, with most around that 89.5-90 million acres of corn and 82.5-83 million acres of soybeans (official USDA estimate is 90 and 82.5 million acres, respectively). On the inventory side of things, if we see more than 30 million bushels swings, there could be some aggressive corrections in the form of 3-5% moves on the day of, but pre-report expectations aren’t too variable.

What’s supporting the increase of corn acres more than anything is the cheap cost of fertilizers (down on average about 15% compared to last spring). The window to those fringe acres swinging one way or another is closing but with a bit of wet weather forecasted over the next couple of weeks in the U.S. Midwest, any ideas of an early run should be forgotten.

In addition to the USDA’s March 31 Stocks and Acreage report, there are rumours that China will release a new pricing plan/strategy to deal with their burgeoning corn inventory problem. Most recent information from the government there suggests that they want to decrease corn acres in the 13 major growing provinces by 9.14 million acres by 2020, which in turn, could lead to more soybeans getting planted.

After a 2015/16 soybean harvest that only yielded 11.2 million tonnes (26.8 bu/ac average yield vs America’s 43.1 bu/ac), this is the second lowest output of the oilseed in China in the last 24 years. You can only imagine that things could improve. In fact, expectations are that Chinese soybean acres will rise this year by 247,000 to more than 15.3 million acres. On that note, the USDA’s attache in Beijing recently upped their expectations for 2016/17 soybean demand by the People’s Republic to a record 84.5 million tonnes!

However, soybean crush margins are currently sitting in the red. In addition to the recent strength of the Brazilian Real, changes to expectations is a plausible reason behind Chinese soybean buyers cancelling some of their Brazilian shipments. Another one could be the delay in delivery as there is currently 12.3 million tonnes of soybeans sitting at Brazilian ports waiting to be loaded.

With the usual seasonal move of the grain prices around this time of year, we’re starting to see more short positions being covered by hedge funds, but mainly as it relates to currency moves and Mother Nature forcing some hands. It’s not just in North America we’re seeing this though, as in Europe, old crop rapeseed prices hit a season high this week thanks to managed money playing on the Paris futures board covering their shorts on the weaker British Pound.

With front-month soybeans back into the $9/bushel handles, and palm oil futures in Malaysia hitting a two-year high (which is supportive of soyoil prices), canola has tracked higher too, pushing the front-month contracts back above $470/MT on the Winnipeg ICE futures board.

Overall, the market sentiment suggests that any change in acres in the coming weeks will be tempered. However, Mother Nature is doing her usual dance to help kick off the growing season. Historically-speaking, weather markets can often be led by wheat as indication for the rest of the complex, but a spring rally may not be a massive 25% move that most are hoping for, but more of a tempered 5-10% increase thanks to large global inventories keeping a leash on any pop/spring to the upside.

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