Chasing Chickens — This Week in the Grain Markets


The USDA published its monthly version of the world agricultural supply and demand estimates today and the numbers came in a bit below pre-report expectations. This was great for the bulls, but some weather pressures held the rally back from the massive gains that most were initially expecting after the report’s release as profits were locked up and traders headed for the exits.

For the week, soybeans gained 4%, canola was up 2%, corn higher by 1.4%, while oats was the big winner, up almost 7%.

With soybean’s recent rally into $11, more farmers planted beans in North America this spring, and those in South America will likely plant more. The crop is far from in the bin and production issues could pop here and there in North America, but there doesn’t seem to be any significant negative weather out there to support that just yet.

Corn futures are blazing, as the market continues to price in the effects of smaller production numbers for the safrinha second-crop corn fields in Brazil and a slower Argentinian corn harvest.

Despite the charm of the US corn crop’s condition, the market continues to move higher, up more than 20% since the beginning of 2016. The climb higher has a lot to do with fund-buying as corn long positions doubled last week, with the broader ag commodity complex reaching its longest position in the last two years.

Wheat was pushed down by larger-than-expected inventories, reversing the gains made earlier in the week. Expected year-end stocks in the US for 2016/17 were increased to 1.05 billion bushels.

Russia’s wheat crop was upgraded by 1 million tonnes to 64 million tonnes, which meant their expected exports were increased by 500,000 to a massive 25 million tonnes.

European Union’s crop size was upgraded by 1 million tonnes to a 157.5 million tonnes. This was a bit surprising given some of the negative headlines on France’s rainfall over the past couple of weeks. This has led to numerous producer groups and analytical firms downgrading the size of the crop there.

The negative rain effects are also felt on the French rapeseed crop as yields are forecasted to fall -5% year-over-year to 58 bu/ac. However, the effect will likely be fairly mute considering that acres are up 1.2%, meaning production will only be 3.7% lower than 5.1 million tonnes. As for the other major rapeseed producer, Canadian canola crops have started out relatively decent which has limited any follow-the-soybeans gains.

We’ve started to see pulse prices tempered by the relatively decent start to the growing season. The additional fringe acres that pulse crops are going into, may lose a few bushels because of getting drowned out by recent rains in Western Canada or other problems (i.e. the land doesn’t support the crop being grown there). As such, prices have started to pull back for all lentils and yellow peas. That being said, we can’t discount that it’s still early in the growing season.

International grain buyers are all cognizant that more lentil acres went in everywhere, and with some more demand coming in thanks to substitution out of high-priced chickpeas, the extra supply is welcomed. However, most buyers are forecasting that red lentil prices will top out at $0.45/lb CAD. Similarly, while green lentil demand is expected to remain hot with a tight carryout situation, prices aren’t forecasted to go above $0.50/lb CAD. The bigger impact on what pulse prices could do will be dependent on what monsoon rains in India do and how big of a crop goes in there.

Staying in the weather game, the NOAA released its long-term US summer forecast and the highlights included slightly warmer temperatures for most of America except for the western half of the Midwest (Dakotas, Minnesota, Nebraska, Kansas, Oklahoma). This area is experiencing slightly less-than-average rains, compared to everywhere else getting the normal amount. Conversely, GFS and Euro weather models are calling for decreased heat.

On the La Nina front, we’ve now seen the Australia Bureau of Meteorology, the US Climate Prediction Center, and many more forecasting a 50-70% chance that the event will be in effect by fall, if not early winter but will be weak-to-moderate in strength. This basically means that any effect on the North American harvest will likely be minimal, but there will probably be more issues associated with next year’s South American crop.

Obviously though, the current focus of the market is on the production issues out of this year’s South American crop and how the demand is now switching to America. This could account for 30-50% of the current rally in soybeans and corns, with aggressive fund buying accounting for another 30-50% and weather premiums filling in the gaps.

With these South American production issues in mind, the USDA 2016/17 corn and soybean ending stocks were dropped enough to spur some fast finger trading, including up to $12 beans. Corn ending stocks were still seen at a massive 2 billion bushels by the end of this marketing year while US soybean carryout was decreased by 45 million bushels to 260 million. On the current crop year, almost 100 million bushels were trimmed from corn for a 1.8 billion by the end of 2015/16 while 30 million bushels in demand were added to soybeans, equating to a new carryout number of 370 million bushels.

That being said, analysts like Commerzbank are reminding us that these are still quite high inventories and that this rally will be put in time out once the North American crop starts to emerge. Further, ABN Amro says that “price optimism has gone too far” and while signs of La Nina are emerging, the supply and demand balance sheets has changed a whole heck of lot from a global perspective.

There’s been some good demand stories popping up though. Many are looking at the current crop conditions, weather forecasts, and prices and comparing them to last year at this time. This in mind, soybeans peaked at $10.50 a bushel the last week of June (we’re obviously past that price today but it’s important to note the timing) while canola cruised to nearly $540/metric tonne CAD in early July.

Corn peaked a little later, touching multi-year highs of nearly $4.70/bushel in the second week of July. There are strong opportunities to make sales (depending where you’re sitting today in terms of percentage of bushels already sold). There may be up to four weeks left in this rally but chasing the chicken isn’t usually the best way to secure something for your dinner plate.

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