Musical Chairs — This Week in the Grain Markets

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Grain markets rode the roller coaster this week as a myriad of factors played into movements across the complex. Currencies, oil prices, weather forecasts, and money flow played a part in helping the market maintain or increase elevated levels.

The oilseed market had a strong finish into the close of trading for the week, as oilseeds regained losses seen earlier in the week while the front-month July canola contract topped C$510/MT for the first time since early August. On the corn and wheat front, they weren’t able to find the same bullish chairs that the oilseeds were sitting in as they faced more bearish music in the form of decent seeding conditions and fresh bearish crop reports.

Over the course of the week, we saw the Canadian loonie lose 2 cents in a matter of 36 hours, while the U.S. dollar touched a 15-month low before rebounding. This obviously has a significant effect on both basis and cash values on either side of the 49th parallel — volatility that most speculators enjoy as it creates opportunities to snap up profits/sales when hitting targets.

On Friday, Statistics Canada published its estimates of Canada’s March 31 stocks, and they didn’t really surprise anyone with lower wheat, canola, and pulse crop numbers than a year ago.

Given the pace of exports this year, total Canadian wheat stocks for the end of March were down 24% from last year and almost 20% from the 5-year average. Canola stocks were down 10% from March 31, 2015 to 8.3 million tonnes, driven by about 13% less canola being held by farmers, whereas commercial stocks across the Great White North were up over 16% from the 5-year average at 1.6 million tonnes.

Related$13 Million — StatsCan’s Reason for Running the Census of Ag During Seeding

Given the slowdown in Chinese purchasing, on-farm stocks of flax across Canada ballooned to 75% from last year and 83% from the 5-year average to 491,000 tonnes. The real surprise in the report came from barley stocks, which were sitting much higher, up 12% from a year ago at 3.4 million tonnes while total corn still sitting in Canada was up 23% from last year and 19% from the 5-year average at 4.7 million tonnes.

Breaking it down regionally as it comes to grain held by farmers, the big changes year-over-year in Saskatchewan were seen in flax (+85%), lentils (-72%), wheat (-31%), in Alberta it was canola (-19%) and wheat (-31%), in Manitoba you saw major adjustments in canola (+15%), corn (+36%), and soybeans (-29%), and in Ontario, it was corn (+17%) and wheat (-43%).

The USDA’s estimates align with StatsCan’s in that there is less wheat out there. That being said, with average yields, and overall Canadian wheat acreage forecasted to only fall about 1%, total production could actually climb in 2016/17 by about 4% from last year’s crop.

Where the wheat crop is definitely getting bigger is in Kansas where this week’s annual Wheat Quality Council crop tour suggested a 382 million bushel crop (10.4MT). This would be the largest wheat crop for the wheat state since 2003, and up about 19% from last year’s 322 million bushels. While there are fewer acres coming off than in 2003, the crop tour is expecting average yields of 48.6 bu/ac, almost eclipsing the record of 49 bu/ac from back in 1998 and a 31% jump from last year’s 37 bu/ac average.

In Ukraine, the USDA’s attaché is estimating this year’s wheat crop in the Black Sea country to come in at 24.5 million tonnes, a 10% drop year-over-year but still about 20% higher than all but one other estimate.

While some rains and colder temperatures are expected in the next few weeks, the outlook remains more upbeat than it was six weeks ago in Ukraine. Will we see more analysts bump their expectations up above 20 million tonnes? History may prove that bump correct — Ukrainian wheat production has continued to surprise to the high side of estimates. Our expectation back in March was there was a high probability that the emerging crop would be susceptible to usual colder weather, but those temperatures never came around.

China continues to look into exporting some of its 250MT of corn currently sitting in reserves as the country shifts minimum price support and stockpiling policies. Total area planted into corn this year in the People’s Republic is expected to fall 3.6% year-over-year, to 88.14 million acres. While the Ag Ministry there is forecasting a 215.4MT crop this year (-4.2% from last year’s output), the coldest and wettest weather in the past 4 years in the northeast and hot, dry conditions in the south could drop that production number closer to 200MT.

Food for thought: the U.S. will likely plant somewhere around 91 million acres of corn this year (not that much more than China) but is expected to produce 345 million tonnes. With ChemChina’s Syngenta acquistion, how long will it be before we see 100 bu/ac corn crops in the land of Mao?

Production estimates continue to jump around in South America as adverse weather continues to grab the attention of much of the market. Fresh forecasts for Brazil’s second safrinha corn crop suggests colder temperatures, mixed with the some rain, the latter of which is certainly welcome. Next door, in Argentina, the government’s Climate and Water Institute is now estimating that the rains and subsequent floods over the first three weeks of April caused at least 9MT of lost soybean production there.

While this would put the total output closer to 50MT, the rest of the market is still sitting around the 55-56MT level. With the production scare coming from somewhere other than the US, there does seem to be some upside potential should more American weather premium get priced in, but at these now-profitable levels, protecting against the downside of hovering profits is more important.

Alas, renowned analyst Dr. Cordonnier of the Soybean and Corn Advisors says that the current rally is a gift that needs to be taken advantage of, as he believes that it’s been propelled 20% by fundamentals (AKA South American production concerns) and 80% by speculative money flows into the sector.

In North America, the crop is going in well ahead of schedule, meaning negative late summer effects of any La Nina event will likely be limited (the NOAA is currently projecting an August entrance to North America, which would likely have more of an effect on soybeans than corn.).

I’ve had multiple conversations with grain buyers and analysts over the past week regarding the dry situation in the western half of the Canadian Prairies. The consensus seems to be that if we don’t get something in the next 10-14 weeks, the markets will go into full-on bull mode, but every time a few drops fall, it’ll push the delivery date of those higher prices further back. That being said, the forecast for the next week is pegging about an inch of rain for the midwest and anywhere from a tenth to half-an-inch in western Canada.

Related: Moisture Extremes to Persist on the Prairies — Drew Lerner’s Western Spring Outlook

Going into the second week of May, the market will continue to focus on weather maps, as well as Tuesday’s WASDE report from the USDA, which tends to be quiet, but this year the market will be focusing a fair amount on the aforementioned South American production issues. Can we see further gains? At this point, money flows and currency effects are driving the grains markets more than fundamentals – it’s just a question if and when their music stops playing.

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