Through the third week of May there has been much discussion around last week’s WASDE report from the USDA, as well as weather affecting planting.
Oilseeds continued to make the most moves this week, as led by soymeal (up almost 9% for the week and now +46% since the start of 2016). Soybeans, while up 23% year-to-date, were up 1.4% over last Friday, and canola caught a pretty good break on a weaker Canadian loonie to end the week up 2%, and now +8% since January 1st.
Starting last weekend, there were some concerns over freezing temperatures across North America but they turned out to bring minimal damage). Field activity is ahead of schedule with more acres planted than compared to the 5-year averages on both sides of the 49th parallel.
Rains in the US Southern Plains continue to fall, meaning continued questions over the quality of the bushels coming off. Meanwhile, parts of Alberta are finally getting some much needed rain, where the moisture is welcomed with open arms (think Andy Dufresne of Shawshank Redemption). Those needing feed grains have covered themselves up pretty well through to new supplies being harvested, which is why, with the rains, you’re seeing feed grain bids falling a bit.
Staying in feed grains, what there doesn’t seem to be a lot of these days is DDG (a by-product of ethanol production). This has pushed the feed industry to find soymeal, helping to explain some of soymeal’s rise to glory (the other part being a smaller Argentinian soybean crop). This supports other oilseed values, which is why you’ll get a few more acres of soybeans than the USDA’s — in my opinion — rather understated projection of 82.2 million acres.
Staying on soybeans: this month’s WASDE report still has people scratching their heads. There’s obviously bullish thoughts out there, but something to keep in mind is that the USDA’s demand pump-up for beans was based on a price range of $8.35 to $9.85 (or an average of $9.10). With markets much higher than that, one could argue that some of this demand will be lost and that the highs are in. Complimenting a bearish thesis is the fact that with cooler temperatures, some soggier weather, and now being past our May 15th optimal corn yield planting date, those acres that didn’t get into corn could very well go into soybeans instead.
While we’ve seen private estimates as high as 86 million acres of soybeans, the even money may be on Dr. Cordonnier of the Soybean and Corn Advisor, who has lifted his soybean area to 84 million acres (1.8 million higher than the USDA’s aforementioned projection). This would peg US bean output at roughly 3.88 billion bushels off of a 46.7 bu/ac average yield. For corn, Cordonnier dropped acres by 1.6 million from the USDA’s estimate to 92 million acres, and at a 166 bu/ac average yield, this would peg production at 14 billion bushels on the nose.
With current USDA demand projections, one can expect a 1.72 billion bushel carryout for corn and 385 million bushels in ending stocks for soybeans. Some of these numbers are starting to get priced into the market, but for the time being, it’s hard to guess where the new goalposts will sit. That being said, with the Canadian loonie dropping almost 4% in the last month, basis levels for Canadian soybeans, corn, and wheat basis should all improve for the most part towards the end of this week.
On the wheat front, there’s buzz that COFCO, the Chinese state grain-buying agency, will look to buy a couple million tonnes of wheat from Russia this year (historically, they’re a big Canadian buyer). With the very good spring weather and low amount of winter losses, crops in the Black Sea are looking pretty deluxe. Consensus seems to be that Russia will harvest another 100 million tonnes or more of grain, oilseeds, & pulses in 2016/17, including 62-64 million tonnes of wheat. In neighbouring countries, the outlook is fairly similar.
Down south, in the first quarter of 2016, Argentina shipped out 3.13 million tonnes of wheat, 105% more than the 1.53 million tonnes shipped in Q1 of 2015. With the old 23% export tax gone thanks to new President Macri, wheat planting is starting next month in June and it’s expected that acres will be up about 30% from last year, suggesting a 14-15 million tonne crop. The local Argentine Ag Ministry recently suggested that 13.1 million acres would go in, which would be a 9-year high and a 23% increase from last year. The USDA’s production estimate is 14.5 million tonnes.
In Brazil, farmers trying to take advantage of high prices harvesting their second safrinha corn, even though the crop isn’t yet mature. Depending on the region, corn prices are anywhere from 90% to 172% higher than a year ago, selling for about $5.50 USD per bushel.
As the markets continue to watch weather reports, the NOAA is calling for normal amounts of summer rains everywhere expect Nebraska, South Dakota, and Western Iowa. According to World Weather’s Drew Lerner, La Nina may be an “overstated risk”, which will likely have an impact first on the 2017 South American crop, and then next year’s North American harvest.
We made the call earlier in the year that given the global supply of grain, there may be two or three rallies to take advantage of this calendar year. We are in one of those rallies now, especially for the oilseed market, and given the continued buzz in the markets about acreage switches, the upside seems unknown but the downside is omni-present.
Profiting to the upside on 100% of inventory for sale is one way to look at it, but leaving profit exposed to the downside on 100% of said grain is another.
Futures values have definitely increased lately, and with the Canadian loonie now looking like it could drop below 76 cents US, basis levels might compliment the cash market. Should you see futures values pull back a bit (something we expect in oilseeds, given acreage changes), you’d likely see basis improve.
Simply put, this spring rally has given farmerd the opportunity to make block sales at profitably levels — a break many didn’t think they could catch.