Locks and Limits — This Week in the Grain Markets

Photo by Floris van Halm, CC 2.0.

The grains markets got a surprising World Agricultural Supply and Demands Estimate (WASDE) report on Tuesday, as the United States Department of Agriculture (USDA) raised demand for U.S. corn and soybeans, sending the markets skyward! Oilseeds got the best of the bullish rush, with soybeans going limit-up, followed closely by canola, which touched last summer’s highs at more than $540/MT (new crop values are not far behind, at $520/MT). However, the bullish lust lasted only a day or so as markets pulled back by Friday’s close.

July soybeans touched $10.90 for a bit in Chicago before pulling back to only gain 2.7% for the week, closing a little above $10.60. Front-month canola had it worse, dropping all the way down to $505/MT on the ICE Winnipeg futures board before rebounding to $515 for the week, but that was only a 0.7% increase from the $511.50 it opened at on Sunday night. The speculation is running wild as to just how much soybean and canola acres have been bought (the latter being the greater focus on the northern side of the 49th parallel).

The USDA dropped Argentine soybean production to a 56.5 million tonne crop in Tuesday’s WASDE report. Brazil’s output was also cut, falling to a still-record 103 million-tonne crop. In the U.S., soybean yields this year are pegged at 46.7 bu/ac (2.7% lower than last year’s monster 48 bu/ac average). However, the wild thing is that the USDA did not change its planted area number from its 82.2 million acres back in March, which seems ridiculous considering that November soybeans have gained nearly 23% since March 1 — almost two dollars per bushel!

Combined with domestic crush and exports increase, U.S. 2015/16 soybean ending stocks came in at 400 million bushels (26 million lower than expected), while the 2016/17 carryout was pegged at 305 million bushels (an absurd 100 million bushels lower than pre-report average expectations). Globally, soybean stocks are expected to end 2016/17 at 68.21 million tonnes, significantly below the former 73.23 million tonnes expected (and hence limit-up on report day).

For wheat, U.S. yields are expected to come in 7% higher than a year ago, at 46.7 bushels an acre. But, lower acres put total American production at nearly 2 billion bushels, down 3% year-over-year, with ending stocks still quite large at over 1 billion bushels by the end of 2016/17. Globally, wheat inventories are set to rise 6% to 257.3 million tonnes.

Photo by Debra Murphy, 2015.

Photo by Debra Murphy, 2015.

For corn, U.S. production was pegged at a record of 14.4 billion bushels, mainly because more acres are being planted. Thanks to stronger demand ending the 2014/15 marketing year, ending stocks are projected at 1.8 billion bushels (about 34 million below expectations) and with that demand carrying over into the 2016/17 crop year, the U.S. carryout is forecasted at 2.15 billion bushels, a good 140 million bushels less than what was expected. Globally, 2016/17 corn stocks are seen falling to 204 million tonnes versus the 211.5 million tonnes expected.

Going into the report, hedge funds were positioned extremely long, specifically the largest bull-minded position in 2 years for soybeans. Given the volume and volatility of the market over the past month or so, this meant that any bearish news whatsoever could trigger a sell-off. Alas, there was literally zero bearish news in the report for soybeans and corn.

Strong export expectations by the USDA were backed up by another good week of sales by U.S. exporters. However, some heavier rains across the Midwest this week are likely pushing more than a few farmers to re-consider a few of their wetter fields for soybeans. With that in mind, and without any weather issues affecting the U.S. corn crop, it’s possible that the 2.15 billion bushel 2016/17 carryout number the USDA forecasted on Tuesday will be the biggest number we see this year.

Complimenting the bullish news, Chinese soybean imports in April jumped 33% year-over-year to 7.07 million tonnes, a new record. This is also 16% higher than March’s numbers as demand for soymeal for hog farms continues to grow, showing 23.33 million tonnes imported so far in the first 4 months of 2016, an 11.4% increase year-over-year.

Sidenote: an interesting report came out from Bloomberg this week quoting a feed industry market analyst saying: “It is impossible to lose money in the animal-feed industry in China right now”.

Staying in beans, the Buenos Aires Grain Exchange is estimating that at least 7.5% of Argentinian soybean acres have been damaged or lost to rains and floods in April. This equates to about 1.94 million acres lost to flooding and another 1.85 million acres “severely damaged” out of the entire 49.7 million-acre crop. With the sun starting to finally shine down there, farmers are getting back into the fields, but harvest remains well behind the average pace.

Planting across North America remains ahead of schedule, though rains this week definitely slowed some field activity. In Western Canada, we went from record heat last week to near or below zero numbers at night this week.

While the temperatures are something to consider, the market seems to be focused on soil moisture levels, as that’s most concerning to this growing season’s development. The market seemingly thinks that given the early pace of planting, a replant of a few fields wouldn’t be the end of the world.

Nonetheless, inclement weather premiums should help keep prices stay above their winter lows. The U.S. Climate Prediction Centre is forecasting a 75% chance of a La Nina event by the fall/winter but this means that it would likely miss the North American growing season. U.S. broker Allendale is expecting decent weather over the next few months, and without a drought event starting earlier in the growing season, corn prices in Chicago could fall to $3.20/bushel, and soybeans could tumble back below double digits.

Given the rumbling of such fundamentals and the rise to glory on the futures markets over the past number of weeks, it’s hard not to consider locking up something on new crop sales. From a basis standpoint, the question we’re asking is what has more downside risk: futures or basis? With futures values increasing, we’ve seen basis levels widen a bit. So, should futures pull back a bit, you’ll likely see basis improve. We continue to watch weather reports, but more than anything, we expect some acreage changes in June’s USDA reports — bearish news that could limit the lock bulls have held on the market for the last few weeks.

 

Brennan Turner

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, he spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email ([email protected]) or phone (1-855-332-7653). @FarmLead

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