Soybeans. Who cares about anything else?
The oilseed has taken the majority of the grains complex with it to heights that most analysts didn’t think were possible a few months ago. Sure, you lose a couple million tonnes in Argentina, but with bigger crops in Brazil and North America, and demand climbing a bit, there’s more than a few who argue a $3/bushel jump in the last two months wasn’t warranted. Alas, here we are with better prices and a balance sheet that looks pretty good compared to just a few months ago.
Granted, there’s a ton of back and forth in the fundamentals that are keeping things interesting. For wheat, positive rains in Australia and Canada are helping prospects but wetter conditions may affect quality in US and European crops. For corn, a slower Argentine harvest and smaller Brazilian second crop have US corn fields looking pretty deluxe. Corn supply are channels starting to dry up in South America, affecting livestock production in Brazil, namely in the poultry industry, where bird production has dropped 10% in the last three months for the world’s largest exporter of chickens.
As for soybeans, consistent demand and the aforementioned decline in Argentinian production is hardly being challenged by a swell outlook for production in the Northern Hemisphere. As such, soybeans have reached new levels not seen in at least two years, and American farmers are seeing the good opportunity — they’ve sold double the amount of new crop beans that they normally do by this time of year.
Despite the increased sales, fresh money flows and bullish headlines continue to support the oilseed trade. A pop in the Canadian loonie towards the end of this week to back above 77 cents has tempered canola gains to keep them below $12/bushel CAD on the Winnipeg ICE futures board (while soybeans topped $11.60 USD per bushel in Chicago). While we’ve seen some crop issues elsewhere, eyes are on North American crops, specifically US corn and soybeans as, if we do see any production issues whatsoever, the global carryout numbers will start to get tight.
The FAO division of the United Nations is optimistic that oilseed prices will stay higher this year as strong demand will continue to offset the slight improvement in production from 2015/16. Societe Generale is also optimistic on soybean prices, but not for levels that we’re at today, calling for an average of $10.59 on the Chicago board for the last three months of 2016 and $11.09/bushel for the first three months of 2017.
The French bank is also thinking that wheat prices could improve as it becomes more competitive with corn for feed. From a data perspective, Chicago wheat’s premium to corn has dropped to 15% versus the long-term average of 37%.
A decent American wheat harvest is likely going to put a lot of grain on the ground, as storage is in short supply almost anywhere you look in the States.
Optimism for the crops in Australia is strong thanks to steady rains. The National Australia Bank is forecasting a 26.1 million tonne wheat crop in 2016, a bit higher than the IGC and USDA estimates of 25 million tonnes. This could be the largest Australian wheat harvest since the 30 million-tonne monster back in 2011. Should a La Nina event start to develop earlier than the fourth quarter forecast, the usual rains it brings to Australia with it could bump wheat crop even higher.
The Australian Oilseeds Federation says that the rains will also help canola production, with their first estimate coming in at 3.4 million tonnes (roughly +10% from last year). This is a little bit more than ABARES (3.27 million tonnes) or the USDA (3.3 million tonnes) are forecasting. The interesting thing is that the Federation is also calling for a drop in acres to 5.34 million acres whereas both ABARES and the USDA are calling for a larger area, forecasting 6.3 million and 6.4 million acres, respectively.
Overall, the Federation’s call may be a bit early to give a full acknowledgement to. In the meantime, we can look to the IGC’s call for global rapeseed inventories to fall to a 13-year low of 3.7 million tonnes by the end of 2016/17. While this is likely positive for canola/rapeseed prices in the long-term, substitution effects (by soybean, palm oil, etc.) have been known to make the game to higher prices a bit tougher.
Rains in France have started to bring about more questions of the size of the French crop but the true damage is hard to tell at this point. Overall, the EU wheat crop isn’t looking as big as last year’s incredible 160.1 million tonnes, and France’s good-to-excellent (G/E) ratings have dropped from 92% to 83% in the last six weeks.
MARS, the EU crop monitoring agency, pegged the average French wheat yield at 113.6 bushels an acre (-3.5% year-over-year). While France will have the final say, the International Grains Council pegged total European wheat production at 153.6 million tonnes (including durum), nearly matching the European Commission current estimate of 153.9 million.
In North America, you could say that some weather premiums are helping corn prices in Chicago. This should support the prices of comparable feedstuffs like barley and wheat, but rains in key growing areas (including Western Canada) are keeping the mood of the parade a little more melancholy.
University of Illinois ag economist Darrel Good notes that, from a historical perspective, poorer weather tends to reduce yields more than really good weather helps. With the first crop rating from the USDA showing 72% of US corn fields in good-to-excellent health though, it’s too early to suggest a deviation from the yield of 168 bu/ac currently being forecasted. If conditions remain benign, it wouldn’t be outlandish to think a record US corn crop is possible, even with the likely acreage switch into more soybeans.
Speaking of corn and wheat, Asian feed mills are buying more wheat than corn for a second straight year due to more readily available supplies, narrowing the spread between feed and milling wheat prices. In the Ukraine, for example, feed wheat prices of $170/MT USD are only about $8 below 12.5% protein milling wheat prices. Western Canadian milling wheat prices are only about 10% higher than feed right now, with the latter getting priced in the high $5 to low $6 CAD/bushel range.
Rains continue to fall in places that seem to need it in Canada, but there are starting to be questions about how much damage it could pose to the pulse crops (a few days under water and those seeds could be toast!). Thus far, it seems there’s enough of a moisture profile in the large majority of North America to get the crop up out of the ground and going. Compared to what the driest of areas were looking like just a few weeks ago, it’s hard not to have more of a feel-good attitude about something starting to poke out of the ground.