As we enter the second half of the 2016 calendar year, the second quarter (April to June) could be easily characterized as the fund-rally that brought farmers profits. The commodity space in general enjoyed its best quarterly performance since 2010, outperforming every other asset class, and that’s exactly the reason that we saw money managers pile into the grains space with one thing in mind: returns.
While the market collapsed over the last two weeks, it did get a shot in the arm with the USDA’s quarterly stocks and acreage report on Thursday. Going into the report, the market was expecting about 2 million more soybeans than the 82.2 million forecasted in their March 31 report, and about 600,000 fewer acres of corn from the 93.6 million March estimate. However, the USDA seems to believe that there will be no “Prevent Plant” acres and that American farmers are literally only planting corn, wheat, and soybeans this year.
Every estimate for the 3 major crops went higher.
- For wheat, total area planted was pegged at 50.8 million acres, above both the 49.6 million estimate in March and the pre-report average estimate of 49.9 million. However, this is still 7% below last year’s acreage. US durum acres are up 11% year-over-year to 2.15 million acres, but winter wheat and spring wheat are both lower by 2.9 and 1.1 million acres, respectively. On the inventory front, stocks of the cereal were in line with estimates, reminding us with subtlety that there’s a lot of wheat still available, in addition to the record winter wheat yields currently being taken off. Accordingly, wheat got buried this week by more than 4%.
- The 94.1 million acres of US corn that the USDA forecasted in the report is up from the 92.9 million expected and the 93.6 million forecasted back in March. This would represent a 7% increase from 2015 and the third largest area planted to the coarse grain since 1944. Stocks were a little more bearish as 4.72 billion bushels (June 1) was higher than the 4.53 billion estimated by the market ahead of the report. As such, the market bullied corn down after the report for a net loss of over 5% for the week.
- Finally, soybeans took the cake, with the solid rally since the March 31 report buying only 1.5 million more acres from the March report’s 82.2 million forecast, for a total of 83.7 million acres. This still represents a 1% increase of 2015 numbers, but a record number of acres are forecasted for fringe areas like Michigan, Minnesota, New York, North Dakota, and Pennsylvania. On the stocks side of things, 870 million bushels supposedly were still available at the beginning of June, but the market was expecting 829 million bushels. The area for new crop was the focus, which is why soybeans gained almost 7% for the week.
Overall, the report was mostly bearish corn, bullish soybeans, and neutral-to-bearish wheat. Something to keep in mind, however, is that the USDA almost always gets this report wrong. For corn, in the last 20 years, the June US acreage number has been above the final acreage number 16 times! As for soybeans, the June report has been on the high side 13 of those same 20 years.
The other big report was published by StatsCan on Wednesday, giving the market its updated estimates for Canadian acres this year. The government agency confirmed what we were expecting — more pulses and canola and less cereals. Lentil acreage across Canada was pegged at a record 5.84 million (+48% year-over-year, +97% from the 5-year average, we were expecting 5.25 million) while multiple buyers still think the number is closer to 6 million. Pea acres are seen up 16% year-over-year to 4.3 million (+25% vs the 5-year average, we were forecasting 4.5 million), while rye and mustard area also popped, up 36.5% and 52%, respectively, over 2016.
Where did these acres come from? Spring wheat acres are down 9.2% from last year to 15.5 million, flax area is down 44% year-over-year to 925,000 acres, while canola acres are down 2.2% from 2015 but still above 20 million. Barley area dropped 2.2% to 6.4 million acres (-4.6% from 5-year average), corn acres increased by 1.7% to 3.33 million acres (-0.8%), fields planted to soybeans increased by 1% to 5.47 million acres (+16%), oats fell by 14.3% to 2.86 million acres (-7.5%), and durum area increased by 4.8% to 6.1 million acres (+26%).
Looking at some of the fundamentals elsewhere, the EU durum crop is coming into question after rains there have challenged quality ahead of harvest. Specifically, in France, good-to-excellent ratings are substantially lower than last year, including:
- Durum – at just 58% of fields considered G/E (-21 points versus last year),
- Winter barley – at 67% (-18 points),
- Corn – at 69% (-14 points), and
- Soft wheat at 71% (-10 points)
There could be better opportunities for North American durum to enter European and African markets if the bloc can’t produce the higher quality needed to export. However, the two facts that are currently challenging higher prices in durum markets is the increased area planted in North America and the good growing conditions. Our call remains that we’ll see more high $7 per bushel CAD handles before we see any high $8s.
Egypt will likely be looking less at France for wheat supplies given the rains and likely disease issues not meeting the GASC’s buying specs. Maybe Egypt can look to Argentina as a wheat-sourcing option then as, with no export tax, acres are expected to climb 23% from 2015 to 13.1 million acres. Also, as one headline put it this week, Argentinian farmers have “corn fever”, planting 20% more acres of the coarse grain, also thanks to the removal of the export tax by the new Argentinian president.
As for North American crops, things still look really good. Pockets on the western side of the US corn-belt are missing rains so soil moisture concerns are creeping up, but it’s expected to get hit with a couple of inches towards next weekend. That in mind, analysis by the Iowa State University crop extension office shows that weather through the last week of June doesn’t really matter. What matters is this current week and the first few in July.
Given the good crop conditions, even with lower acreage in some crops, prices will continue to be challenged. It may be worthwhile to think about what you saw in 2013 and the results of what you did (or didn’t do). But, keep in mind that prices were still coming down from 2012 drought-driven highs.
One comparison we could make is that the bullish bias from funds piling into the commodity complex helped create some highs that were hard to ignore. If you didn’t price something in, namely in wheat or oilseeds, you may not see that opportunity again until winter.
Keep the US Dollar in mind as we move forward — if weather premiums start fall through harvest, a stronger Greenback could put pressure on all commodities, and it’ll be harder for money managers to stay in their bets. While the gains are significantly lower than the highs seen in early June, for the quarter: soybeans gained 28%, canola was up 3%, oats remained flat, and corn and wheat fell 2.5% by 8.5%, respectively.
With the start of a new month, take an innocent look at your grain marketing plan. Remove the cognitive bias of the negative/bullish commentary and recognize what sort of crop potential you have and what sort of cashflow needs you’ll have through to the end of January 2017. Without this honest look in the mirror, your returns are more likely to be lower than you (or I, or your banker, etc.) would like.
Stay safe out there as you celebrate, and Happy Canada Day / 4th of July!