Grain markets this week stepped up the plate, took a swing on some expected weather forecasts and new demand numbers from the U.S.D.A. on Tuesday July 12th, and hit one out of the park. However, the play was reviewed, and with updated weather information, the home run was called back and things ended up lower than where we started the week.
For the last 3-4 weeks, grain prices have been moving lower. At beginning of this week, new weather models suggested to the market that scorching heat would hit the U.S. Midwest the last two weeks of July. The 100-degree temperature 14-day forecasts reiterated the “La Nina is coming!” declarations by the bulls. Competing with the rumour mill though was the fact that the updated U.S.D.A. crop progress report showed the portion of the U.S. crop rated good-to-excellent at 76% and for soybeans, 71% (the best since 1999).
Also offsetting the bullish buzz through the middle of the week was rain actually falling across the Midwest, which will boost soil moisture profiles ahead of the forecasted heatwave in major U.S. production regions. Where rain definitely fell this week was in Western Canada as the Prairies got soaked, including some localized flooding in Eastern Saskatchewan. In fact, a number of areas across Saskatchewan and Manitoba who got enough rain over the past 3 weeks or so to match their annual average.
The rains this week have certainly downgraded the Prairies’ crop potential, but quality concerns are likely, at this point, limited to winter cereals and the earliest planted pulse crops (lentils don’t like standing in water). Ontario, who is experiencing one of their driest summers in 30 years, also got some much needed rains. While it slowed down harvest for what may be a record winter wheat crop in the province, it definitely helped parched corn and soybean fields.
Getting into this month’s W.A.S.D.E. report from the U.S.D.A., the new numbers showed the market bigger crops pretty much everywhere, but also stronger demand (they say low prices cure low prices!). Forecasted average U.S. corn yields of 168 bu/ac would equate to a 14.5-Billion-bushel American crop (which would be massive!) but, despite increased exports, the 2016/17 carryout for U.S. corn is pegged at 2.08 Billion bushels, a 22% increase from this year’s ending stocks.
The additional U.S. exports comes at the hands of Brazil’s smaller export program of just 18.5 million tonnes in 2015/16 and 22 million tonnes in 2016/17, a drop of 46% and 36% respectively from 2014/15 massive 34.5 million tonnes. In Canada, with the aforementioned heat in Ontario in mind, corn output was dropped by 1.25 million tonnes to 12.5 million, as the month of June in Ontario was one of the driest in the past 30 years.
For wheat, total U.S. production came in at 2.26 Billion bushels, 10% higher than last year (despite less acres) thanks to higher yields pretty much everywhere. Of note was in Kansas where production is expected to be 41% higher compared to last year at 454 million bushels, thanks to record yields. This means a 1.11-Billion-bushel carryout in the U.S. but thanks to feed use globally rising to its second largest level ever, world wheat inventories by the end of 2016/17 were lowered by more than 4 million tonnes from the June forecast to 253.7 million tonnes (albeit, that’s still a record carryout for the end of a marketing year).
Internationally, Russian and Ukrainian wheat production were each upped by one million tonnes from last month to 65 million (+6.5% year-over-year) and 25 million tonnes respectively (-8% YoY but much less of a drop than everyone was expecting, including yours truly). Although we did see some adverse rains, decent growing conditions pushed the U.S.D.A. to upgrade Canadian wheat production to 29 million tonnes (+5% YoY). Australian wheat output was also raised month-over-month to 25.5 million (+4% YoY) thanks to good rains and, with the removal of export taxes encouraging more acres, Argentinian production is pegged at a huge 15 million tonnes (+25% YoY).
As for the oilseeds, a bigger 2016 U.S. harvest (3.88 Billion bushels) is being overcome by more domestic use and exports, the latter sitting at a new American record of 52.25 million tonnes (+7% YoY but still below Brazil’s expected 59.7 million tonnes in 2016/17). However, the bigger crop will mean a bigger carryout than initially expected of 290 million bushels in the U.S. (-17% YoY) and globally, at 67.1 million tonnes (-7% YoY).
The Chinese number of soybean imports is seen climbing 5% year-over-year to 87 million tonnes (another new record), but China has also started to accelerate the amount of soybeans they’re selling from state reserves. China’s rapeseed/canola imports are seen declining 10.5% year-over-year in 2016/17 to 3.8 million tonnes, despite domestic production dropping by one million tonnes to 13.3 million tonnes. While Canada was pegged at exporting 10 million tonnes of canola in 2015/16, that number is seen falling 12% in 2016/17 to 8.8 million on a 16.4 million tonne crop (a 4.7% drop from last year’s surprising 17.2 million tonne crop and a little smaller than A.F.F.C.’s current estimate of 16.8 million tonnes).
Coming back to the weather front, our call here at FarmLead since spring has been that we while don’t doubt that La Nina is making its way into the game, just that it won’t have a massive impact on the North American crop potential this year. More specifically, the N.O.A.A. dropped their expectations of a fall/winter La Nina to 55%-60% (from 75% last month) and the latest forecasts from the International Research Institute for Climate and Society are expecting a weak event by early August or September. Accordingly, we continue to think South American crops are likely the first to feel pain from The Girl and that the 2017/18 North American crop could possibly be impacted a bit (but not this year).
Yes, in Western Canada, the wet weather has put a damper on crop potential in Western Canada, but quality effects are still uncertain. Given the speed of crop development this year, most fungicide spraying were likely done before the rains came, but that doesn’t help lentils or peas standing in water for more than 2 days. For those thinking about grade and protein spreads for wheat starting to widen, it’s just to early to bet your grain marketing plan on that. More specifically, unless it rains like it did this past week during the end of August / early September, we won’t see the variances we did in 2014 (anyone calling for $20/bushel durum like they did that year should use history as a lesson).
Ultimately, hitting the halfway point of July, the market is getting better indications of the size of the crop potential in the northern hemisphere, as indicated by some of the updated U.S.D.A. numbers. This includes smaller crops in France than what was originally expected a few months ago, but bigger crops in the Black Sea (again). Over the next 2 weeks, the margin of error in the various models held by hedge funds, grain companies, and others will start to decline and new crop pricing will adjust accordingly as with each week that passes and we get closer to the bin, the risk of negative weather will become less concerning.
However, this doesn’t mean you should go off and be 90% sold on something that you haven’t even combined yet, but it does mean that when the market moves higher on some of these amped up weather models, it does present the opportunity to make a block sale (10% or so) and manage some of that price risk. Case in point, soybeans and corn were basically up almost 10% on the board by Wednesday but as new forecasts showing some rains with the hot weather through the end of July, the market pulled back. Specifically, wheat was down more than 2% for the week, soybeans lost more than 1% for the week, corn dropped by nearly 1%, canola was flat, oats, being the usual outlier, was up 5% for the week.
From a grain marketing perspective, things are only going to get more hectic as we creep towards Harvest 2016. This in mind, things to keep in mind for the next 18 months of grain marketing:
- Take swings at singles when you can (making sales in block increments of 10-20%);
- Know the quality of your bat (know what’s in your bins);
- Know the tendencies of the pitcher on the mound (what are your cashlow needs going to be at specific points over the next 6-18 months); and
- Be realistic and understand that you may strike out (meaning the market is more than likely NOT going to hit the price that you’re “hoping” for).
While the crop still looks like a green monster, I’d prefer it if we can make your grain marketing the home run to talk about in 2016/17.