Grain markets had one of their worst weeks in the last couple of years as everything from better weather to updated production estimates to geopolitical risk erased most of the premiums we’ve seen over the past two months.
We’ve been saying for the past few weeks in our commentary (both on here and our daily Breakfast Brief) that things were artificially inflated and the air could let out at any time. If you kept hoping for the market to go higher and didn’t manage price risk and lock something in, the market has no sympathy for you — just tough love for your balance sheet.
Alright, so what happened? Things started out rough on Monday when we started to see better forecasts into the July long weekend for most of the North American growing regions. Overall warmer temperatures are expected to be complimented by decent rains.
Also Monday: the USDA crop progress report was published, showing that 75% of US corn fields are in good-to-excellent (G/E) condition, and 73% of the soybean crop considered G/E.
Heading south across the equator, the Brazilian corn harvest put more supply in the market’s pipeline, which pressured prices in North America. While drought conditions in the north impacted yields, Brazil is still likely going to produce 75 million tonnes (MT) of corn this year, according to the USDA’s attaché (the official USDA forecast is 77.5 MT, while CONAB is at 76.2 million). Combined with the aggressive export program Brazil went with this year, these production numbers mean Brazil will likely have to import 1.5 MT of corn, the most since 1999/2000.
Eyes are already turning to next year in Brazil as it’s estimated that soybean acres could be bumped up to again compete with the US for the title of “world’s top soybean producer”.
In Argentina, the Ag Ministry bumped their soybean production estimate up to 58 MT, a solid step up from the doomsday losses predicted back in April that helped spur the recent rallies.
The Argentinian Ag Ministry is also expecting corn acres to jump 20% next year to produce a record corn crop, which could push soybean production down to 55 MT. Why the switch? After one year of no export tax on corn, but still a 30% tax on soybeans, it’s not hard to figure out which crop will be perceived as more profitable.
Crossing the Pacific Ocean, ABARES is forecasting global rapeseed consumption to drop 4% year-over-year to 67 MT. This includes their estimate that China’s imports will drop by 6% to 3.9 MT, despite domestic Chinese output also falling year-over-year.
We agree with ABARES that soybeans will also play a role in canola’s demand decline as they see 2016/17 global soybeans demand (325 million tonnes) outpacing supply (318 million tonnes), again with China playing a larger role.
As for wheat, ABARES is expecting prices to fall to 15-year lows in 2016/17, suggesting supply will again outpace demand. Favourable conditions across most major growing regions suggest this year might only add to the supply. Already, Russia’s Ag Ministry is saying that their earliest harvested fields this year are showing an 8% increase in average yields compared to last year.
The one exception to the global wheat crop could be western Europe, as the EU’s crop monitoring body, MARS, recently downgraded their expectations in France and Germany. Still, upward ideas for Spain, Italy, Portugal, and a few other regions are keeping production forecasts elevated. Across the EU, the crop monitoring agency is forecasting a 90.3 bushel/acre soft wheat yield average (4% above the five-year average), while rapeseed average yields were seen at 55 bu/ac.
This week, the Canadian Ag Ministry forecasted Canadian canola prices to jump to a four-year high of $540 CAD/MT. AAFC is forecasting canola production in the Great White North to fall more than 10% this year to 15.4 MT, mostly as a result of acreage dropping 4% year-over-year to less than 19 million.
Given the run-up prices through early June, though, my thoughts are that some more acres were bought to push it back above that 19 million handle. Given the solid crop conditions, there is a very strong chance that we could see a bigger crop than last year’s surprising 17.2 MT.
We’ll find out for sure on Wednesday where StatsCan is thinking acreage could be as they’ll publish fresh estimates based on phone surveys. We’ll be watching lentils, peas, and canola acres closely, while spring wheat acres are likely pulling back a bit and durum is likely heading up a bit. The bigger report will be out Thursday when the USDA puts out its quarterly stocks and acreage report. For the latter, the market is forecasting the area planted to corn to fall about 1-1.5 million acres, while soybean acres are seen jumping at least 2 million to more than 84 million acres across the U.S..
And finally, there was “Brexit”. Thursday’s vote was quite possibly the most significant geopolitical events since the EU had to decide whether or not they were going to bail out the PIGS of Europe (Portugal, Italy, Greece, & Spain) back in 2009. 51.9% of the UK voted in favour of leaving the Eurozone, a slap in the face to British Prime Minister David Cameron, who called for the referendum and promptly resigned after admitting his defeat.
Scotland and Northern Ireland were not in favour of leaving, nor were major city centres like London. But, for the rest of the UK, especially those on England’s east coast, leaving the EU proved a more favourable proposition.
Looking deeper into the vote, the youth wanted to stay in the EU (64% voted “stay”), whereas the elderly chose not to (58% in favour of leaving), meaning the older generation basically voted for a future that the youth don’t want. Interesting. While the process to effectively leave the EU will take (likely) more than 2 years, the psychological damage is done and the economic impact is far from being understood.
The vote had immediate impacts. The British Pound dropped, which meant that a stronger US Dollar put significant pressure on the commodity complex.
The Brexit move creates more challenges for central bankers as Mario Draghi at the European Central Bank, Mark Carney at the Bank of England, and Janet Yellen of the US Federal are all likely revamping their economic forecasts. One other economic implication is the status of the Canadian – EU free-trade deal. With the UK out, what happens now?
Looking at the entire market, grains bled more than anything else. Corn dropped more than 12% since last Friday (its worst one-week loss in almost three years) to back below $4/bushel in Chicago. Oats pulled back 8% for the week to the $2 USD handle again while wheat dropped more than 6% to return to levels not seen since March. For soybeans, markets pulled back nearly 5% for the week to close back near $11, while canola fell almost 9% week-over-week to below $11/bushel CAD on the Winnipeg ICE exchange.
From a historical perspective, whenever there are major weather premiums getting priced into the market (like we’ve been seeing), there is increased volatility. While there are definitely still many unknowns at this point in the growing season, given the good start to the crop, there’s only so much premium that can be priced in before the market pulls back and starts to correct itself. We saw that this week and it was only amplified by the amount of speculators in the market (read: funds) that headed for the exit sign in droves.
Overall, there’s been plenty of opportunity to manage price risk and lock something in over the past two weeks. We likely won’t see those levels again without some serious changes to acreage or weather, so the next two or three weeks are likely to prove volatile, considering the aforementioned reports and constantly changing weather forecasts.
Since the beginning of the year, we’ve suggested that there may be one or two opportunities to take advantage of rallies, and this was certainly one of them. If you didn’t take advantage, you have no right to complain, especially if the markets don’t pick up in the next couple months, which I don’t expect they will, unless we see some serious weather changes.
Risking your balance sheet for weather anomalies probably isn’t the best play though. While it may be tough to do, for the love of your balance sheet, right now is easily the best time to review your grain marketing plan and adjust to the levels not seen two to three weeks ago, but where we’re at today.