Don’t Stop Dis-Believing — This Week in the Grain Markets

Grains this week ended surprisingly barely changed, despite a record world agricultural supply and demand estimates (WASDE) report from the USDA. Going into the report, most of the market was expecting the USDA to update U.S. average yields as growing and crop conditions have been pretty good. Ahead of the report, the market was expecting an average U.S. corn yield of 170.6 bu/ac and 47.5 bu/ac beans, but, per their usual style, the crew in Washington put the market in a bit of disbelief.

Compared to their previous estimate of 168 bu/ac, the new forecast from the USDA of a 175.1 bu/ac national average corn yield was worth a double-check to see if what we were seeing was correct. This would suggest a record crop of 15.2 billion bushels (compared to 14.757 billion expected), up an incredible 11% from 2015. For a 2016/17 carryout, the bigger crop means a 41% jump from 2015/16 ending stocks to an incredible 2.4 billion bushels.

Compared to their previous estimate of 168 bu/ac, the new forecast from the USDA of a 175.1 bu/ac national average corn yield was worth a double-check to see if what we were seeing was correct. This would suggest a record crop of 15.2 billion bushels (compared to 14.757 billion expected), up an incredible 11% from 2015. For a 2016/17 carryout, the bigger crop means a 41% jump from 2015/16 ending stocks to an incredible 2.4 billion bushels. For the USDA this translates to an average forecasted price of $2.45 to $3.45 per bushel for the 2016/17 (for the record, that’s unprofitable in a lot of places).

On wheat, total U.S. production was pegged at 2.32 billion bushels, up 13% from last year, with an average yield of 52.6 bu/ac, an very impressive 20% or 9 bu/ac increase from 2015. For the rest of U.S. cereals production, oats production is forecasted to come in 14% below last year at 77 million bushels but smaller demand will keep 2016/17 ending stocks at 59 million bushels. For U.S. barley production, a 7% increase in average yields to 73.6 bu/ac won’t offset a 16% drop in planted acres from 2015, meaning only 94 million bushels will be available at the end of 2016/17, an 8% decline year-over-year.

Looking at the global balance sheet, wheat production got a big boost to a record 743.4 million tonnes, and although there’s some additional demand in the market (thanks low prices….), global ending stocks for 2016/17 will jump 4.5% year-over-year to 252.8 million tonnes (that’s a record). Pretty much all the major producers got an upgrade in terms of output from last year except for the E.U., which will see an 8% decline in output from last year’s record crop to 147.5 million tonnes (this is still near the 5-year average though so do not think that it’s a disaster by any means in terms of production).

Looking at some individual countries within Europe, we’ve seen German wheat production estimates range from 22 to 25 million tonnes (down at least 10% year-over-year) and with France’s problems, they could take the #1 exporter spot for the Bloc. While France will still likely be the E.U.’s top producer at 28-29 million tonnes, it’s been estimated that only 40% of the soft wheat production will make milling grade, versus the usual 70%.

Looking at specific wheat producers outside of the European Union in the WASDE report, Argentina is expecting to take off 14.4 million tonnes (+27% from 2015), Australia with 26.5 million tonnes (+8%), and 30 million tonnes in Canada (+9%) despite some questions over lost acres to Mother Nature. Black Sea wheat production is expected to come in an incredible 10% over last year’s big crop, with 72 million tonnes coming of in Russia (+18% year-over-year), 15 million in Kazakhstan (+9%), and 27 million tonnes in Ukraine (despite much lower acres).

Specifically for Ukraine, cheaper labour and land costs have wheat production happening at a much cheaper cost than anywhere else in the world: growing a tonne of wheat and getting it to an export position costs at least $100/tonne less than it does for Australian or Canadian producers. With the lower quality coming out of France, while Germany will likely become the number one exporter, the Black Sea producers will likely win the majority of international business (though we did find out this week that one boat of 45,000 MT of French wheat was getting shipped into North Carolina!).

Coming back to Friday’s report, global corn production is expected to be 5.3% higher from last year to 1.01 Billion tonnes, and thanks to competition from wheat, 2016/17 ending stocks are expected to be 5.5% higher at 220.8 million tonnes. Brazil’s corn crop in 2015/16 got hit hard with drought, down almost 20% from 2014/15 to 68.5 million tonnes, however, with record prices available, more acres are expected to get planted in 2016/17, which is why production for this new crop year is pegged at 80 million tonnes. Corn production in Argentina in 2016/17 is forecasted by the USDA to be up 30% year-over-year to 36.50 million tonnes. In Canada, with dry weather eating up fields in Ontario, only 12 million tonnes of maize are expected to be harvested in 2016/17, a decline of 12% in production from last year.

Staying in the Great White North, canola production this year was set by the USDA at 17.6 million tonnes, with many questions around disease affecting this final number. In 2015/16, total Canadian canola demand came in at more than 19.2 million tonnes, a healthy 17% jump from 2014/15, especially thanks to 10.2 million tonnes of exports! This is expected to pull back in 2016/17 though to 9.4 million tonnes, likely because of China’s state reserve auctions increasing and the looming September 1st deadline of China’s 1% max dockage tolerance on imports.

While Canada may ship less canola, Ukraine is exporting more peas. Given the high global price of peas, Ukraine peas exports in 2016/17 will double from last year to a record 500,000 tonnes, with harvested acres up 41% year-over-year to 591,000 acres and total production pegged at 745,000 (+97% YoY) thanks to record average yields of 47 bu/ac. Next door in Russia, a similar story is going on as we’ve seen peas export estimates as high as 1.5 million tonnes, also more than double what they exported last year.

We made the call back in late July that we didn’t think the Canadian crop could get any bigger and with today’s massive numbers update from the USDA, we don’t think the U.S. crop can get any bigger either. That being said, the market seems to have priced some of this top-end in as, after the release of the bearish WASDE report, the market dropped a bit, before rebounding to be mostly unchanged for the day. For the week, canola was the bright spot, up 2.4% (we saw some good canola sales on the FarmLead Marketplace too!), while wheat gained 1.45%, soybeans were up 1.25%, while corn dropped 0.4% and oats got pushed into the gutter below 1.70 USD/bushel on the Chicago board, a drop of 6.5% for the week.

Overall, the markets continued to be pressured by bigger-than-expected production. Some may disagree with this outlook though as comments of disease and/or lack of kernel or pod-filling runs rampant trhough coffee shops across North America. Unfortunately, Drew Lerner of World Weather Inc. is expecting things to stay sort of wet for the next few weeks in Western Canada, making Harvest 2016 a big more challenging, while areas in the Eastern Cornbelt and Ontario are expected to get a few desperately-needed mostiure events. Most analysts are calling for sideways trading now through the end of 2016, which we will generally echo for most crops. Don’t stop disbelieving that we’ll be here for the long term though, as I think there’s some upside to be found in the next 3-6 months from current levels after the past 1.5 months of bearish challenges.

 

Brennan Turner

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, he spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email ([email protected]) or phone (1-855-332-7653). @FarmLead

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