The grains complex pushed up to new highs this week due to two factors: money flow and South America. Here in North America, the percentage of fields planted is well ahead of its 5-year average.
This week, soybeans came within a sliver of touching $11/bushel, wheat was pushed up due to quality concerns in the Southern Plains, while corn pushed through the ground to $4.13/bushel, making it the weekly leader (up almost 5% from last Friday’s close).
Soymeal was the leader of the complex through the middle of the week, reaching $410 USD per short ton in Chicago, and closing just above $400, making its return since April 1 an incredible +52%! Why? South America continues to produce headlines that are more or less recycled thoughts on small soybean and (safrinha) corn crops in Argentinian and Brazil, respectively.
Soybeans continue to follow soymeal around like a little puppy, falling back from mid-week highs. While production is likely to come in around 55-56 million tonnes for the Argentine soybean crop (4-5 million tonnes less than previously expected), the question is more about quality now. Deliveries into crushers are above last year’s pace, but it’s unlikely the worst quality soybeans have been seen. As Argentina is the number one exporter of soymeal and number three exporter of soybeans, that lost supply has to be made up somewhere. America is obviously first in line, but prices in the Gulf of Mexico are reportedly $415/MT USD, matching prices out of Brazilian ports (with the currency differences included).
Brazil’s current drier situation in the north has led the International Grains Council to drop their estimate to slightly less than 51 million tonnes for the safrinha output. With headlines like “Mato Grosso’s corn yields are expected to be the worst in 5 years”, soaring domestic prices for feed have kept more corn than expected trading inside the South American nation.
Consider this: corn exports out Brazil have tripled since America’s 2012 drought, but the Brazilian Ag Ministry just dropped its forecast for corn exports to 26.1 million tonnes (versus the previous estimate of 30.4 million). If the new forecast is true, Argentinian and Ukrainian corn may compete with American corn for Brazilian business.
Wheat prices are at a two-year high in Brazil, as the commodity competes with local corn prices, which are up 44% so far this year. A poor quality harvest in the south is also forcing millers to import, mostly from Argentina, Paraguay, and Uruguay, though it’s rumoured that other major players like Russia, US, and Canada are in the mix.
Other business on the wheat market this past week included India buying 350K tonnes of wheat from Australia and another 150K tonnes from France, suggesting North American wheat is still too expensive.
Speaking of India, the most recent forecasts for this year’s Indian monsoon season (lasting from June-September) is 109% of the long-term average, a welcomed reprieve from the last two seasons, where it’s been near 90% of the average.
El Nino was officially called off this week, as Pacific waters have finally cooled back to a neutral level. Analysts haven’t forgotten La Nina, however, which could have markets considering the potential for drought in as little as two weeks.
In the western half of the Canadian Prairies, there has been some relief from early-season drought concerns, with what some are calling a Billion Dollar Rain for Alberta and parts of Saskatchewan.
Rain won’t matter much to total canola acres though. According to Agriculture and Agri-Food Canada, the area planted to canola in Western Canada has been maxed out. That being said, the Canadian Ag Ministry is channeling Statistics Canada by calling for 19.3 million acres this year, a significant drop from AAFC’s previous estimate of 20.86 million acres of the oilseed. With production now pegged at 15.4 million tonnes, consistent demand both locally and internationally will push ending stocks down to 700,000 MT, a 48% decline from this current marketing year’s expected carryout. With that sort of supply-demand table, one could expect that canola prices should maintain its current $500/MT plus levels (barring a significant collapse of the soybean market).
After the US Memorial Day Monday holiday this weekend, we’ll get the usual weekly update from the USDA on the progress of the crop, showing the first quality ratings of US corn fields. Given the fast pace of this year’s planting, it’s likely we’ll see higher than normal good-to-excellent (G/E) ratings, as is the case in past years where fields were seeded early. The first crop rating report can guide trading for the next few weeks until the crop gets into pollination phase in July.
Overall, South American harvest numbers continue to be watched the most, followed by North American weather, European weather, and then any switch in North American acres. In the US, benign weather conditions are holding in major growing regions across the Midwest & Northern Plains but things in the south are a bit wetter than most farmers would like. Across the equator, wheat planting will start in a few weeks in Argentina. But, with the International Grains Council forecasting a record 474 million tonne carryout for global cereals in 2016/17, we need a few production concerns to materialize yet.
From a risk management standpoint, there’s likely less than a 10% chance of serious drought affecting crops in Western Canada. This would equate to 15-40% upside across all crops if it’s really dry. If it’s somewhat dry, there’s likely 10-15% upside for prices across all crops. The most likely scenario, though, is a 60% chance of average weather, meaning an average to slightly above average crop. As a result, prices could see a 10-20% downside.
Which scenario has your bet? And what percentage of your grain marketing plan are you putting down on it?