Grains had another red-banner week…red being the colour that grain markets were wearing basically all week as weather risk premium and fund selling continued to plague the bulls. Rains from last weekend through next week are massively discounting the threat of high heat and high humidity being felt by those in major grain-growing regions across North America. Combined with the U.S. market sitting at 4-month high against other major currencies and crop conditions still quite deluxe, unlike last week’s Calgary Stampede, there isn’t much dirt for the bulls to dig into.

This week, the Canadian ag ministry raised its estimates for the crop potential In the Great White North but did flag an increasing risk of “disease and insect outbreaks” due to the wetter weather. While the U.S.D.A. forecasted 16.5 million tonnes of canola last week, AAFC lifted their estimate by 500,000 MT to 15.9 million tonnes, with an average yield of 33.7 bu/ac. This yield drop of 7.2% year-over-year would contradict the USDA’s commentary that crop conditions were higher than 2013’s bumper crop, yet AAFC did acknowledge the potential.

On the exports front, the Ag Canada dropped Canadian grains export potential for 2016/17, with wheat (excluding durum) down 1.8 million tonnes from last year and canola exports to 8.5 million tonnes, more in line with the USDA’s thinking as that would be down from 2015/16’s 10 million tonnes. While we think that U.S.D.A’s canola production estimate is a bit more legit today than the AAFC’s, it would suggest a higher carryout from the carryout from 2015/16 of just700,000 MT (a 48% drop last year).

For Canadian durum, stocks by the end of 2016/17 were raised to 1.3 million tonnes, an increase of 300,000 tonnes from this year’s expected carryout as exports of pasta-maker has been much lighter/slower than expected. While we know that there will be a big pea and lentil export demand (3.2 million and 2.6 million tonnes respectively, both records), slower international demand for Canadian flax thanks to decent European supply & slower Chinese buying will increase ending stocks by nearly 4 times from last year to 350,000 MT at the end of 2015/16 (wowzers).

Speaking of grain inventories, USDA’s attaché in Ukraine says that wheat stocks there will fall to a 4-year low, despite a new memorandum of understanding signed by the Ukraine Ag Ministry, farmers, and other grain trade representatives. The MOU is intended to slow exports to ensure enough domestic supplies are available but today, Ukrainian flour millers are running at about 30% capacity as they compete with the allure of exports.

Next door in Russia, production estimates continue to rise, with wheat production now forecasted by IKAR at 68 million tonnes (almost 2.5 times last year’s Canadian wheat crop and 3 million above the U.S.D.A’s estimate last week in their WASDE report). Further, with investment in the sea port exportability increasing to 37.7 million tonnes (a 100% increase in the past decade), Russia is sure to win the global title for top wheat exporter. Thus far, the Russian Ag Ministry is estimating that 16.2% of the crop is off, harvesting 31.4 million tonnes of total grain to-date, with average yields sitting about 20% higher than last year.

However, quality of the wheat coming off in Russia is a bit questionable, joining the likes of France and the U.S. where protein has been low. As suck, thanks to the readily available supply of feed wheat, it’s currently trading on the international markets at about a $6 – $8/tonne discount to corn, with decent demand from not only Asia and parts of Central and South America, but also in North America!

Accordingly, U.S. flour millers have been short-changed in the flour department by the low-protein winter wheat coming off in the Southern Plains this year. The premiums for better protein is starting to pick up by U.S. buyers but we haven’t really seen the benefit in Canadian bids yet. Not that it shouldn’t be done every year but knowing the quality of your wheat you take off this year will be paramount so order your quality tests from our partner SGS on FarmLead ahead of combines rolling and be ready to put grain in sample bags as it’s going in the bin (not after!).

Given the surprising size of the Black Sea wheat crops, coupled with the large carryover of North American inventories, we may see lower general wheat prices for quite some time. If corn were to see some upside because of this heat, wheat is likely to follow, and with no other bullish demand story showing up, we’d take advantage and be a seller again of another block or two (10-20%) if you were to see another short-term rally (which may not happen, but my grandfather told me to “always expect the unexpected”).

Market participants are also cautious of how the weather forecast over the next few weeks will play out. In August, the NOAA is expecting above-average rain AND above-average temperatures (rain + sun = grain?). Looking at the long-term, the Climate Prediction Center is calling for higher temperatures across the U.S. through October with average precipitation expected everywhere but the Dakotas, which are forecasted to be wetter than normal.

Drew Lerner recently spoke at an industry seminar and said there’s no major potential for a weather disaster to affect this crop but the warmer weather through August could affect soybean yields. While it’s certainly not made yet, in just 3 years out of the last 20, we’ve seen soybeans rally due to eroding crop conditions from July to September. For corn, the market is currently pegging a 14.5 Billion bushel American corn crop off of a 168 bu/ac average, but one has to wonder with crop conditions remaining pretty deluxe, this coming heat may pull off some bushels but at a starting point of what? 170 bu/ac? 175? 180?

Crop conditions in the Canadian Prairies have dropped a bit with the recent rains, but many market players, including grain companies, are still optimistic that we’ll see an above-average Harvest 2016 if things continue like they do. At the Ag In Motion tradeshow this week, the most common phrase I heard was “it’s not in the bin yet” (obviously) and estimates of lentil acreage lost in the Canadian Prairies is anywhere from 10 – 25% (I would be on the low side of this today, but could easily adjust my position if wetter weather were to continue through August).

In India, monsoons rains continue to fall, but there’s been enough time in between the wet days/nights to see the karif seeding season accelerate. Through the second week of July, more than 17.5 million acres of pulse crops have been planted, 27% above last year’s pace of 13.8 million acres and an incredible 91% above the 5-year average of 9.2 million acres (and you thought a lot of pulse acres were planted in Canada….). This growing season tends to produce crops that puts more pressure on the green lentil market, whereas the rabi crop pressures all lentils, peas, and chickpeas.

With the significant uptick in acres as a result of significant domestic AND world shortages the past 2 years (hello record prices), the Indian government is launching “a new policy framework to rein in the inflationary impact and stabilize the supply of pulses.” Their goal is to be self-sufficient in pulses within the next 5-6 years (currently, there’s about 30-40% shortfall in domestic production versus domestic consumption, demanding on how the harvest goes) and could get their by looking at new MSPs (minimum support prices), more acres to irrigation, and/or the introduction of new varieties.

Overall, traders are taking advantage of some of the volatility in the markets, but similarly, there’s opportunities for the farmer to latch onto as well and having a plan in place – i.e. “I’m going to sell X bushels and Y price – allows one to capture it (make sales when you can, not when you have to). With each passing week of the growing season, the market prices in the remaining chance that yield could be lost (AKA “weather premium), but if the risk isn’t there, the dirt (AKA prices) gets transferred from the higher pile back into the hole that the bears looking to stay burrowed in.

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