Living Large — This Week in the Grain Market

The grain market was filled with lots of pictures this week, thanks to scouts testing Twitter’s ag photo limit by uploading shots of corn cobs as the annual Pro Farmer crop tour ran from Monday to Thursday.

The tour showed numbers that came in about 5 full bushels below the U.S.D.A.’s current estimate on the average U.S. corn yield, for a 170.2 bu/ac mean. For soybeans, while Pro Farmer crop tour just counts the number of pods in a 3’ x 3’ square area, they’re estimating an average 49.3 bu/ac versus the U.S.D.A’s 48.9 (and a new record). These yields would equate to 14.73 billion bushel U.S. corn crop and 4.09 billion bushel soybean crop – not quite the more than the 15 billion bushel crop that the U.S.D.A. is calling for, but both American row crop staples are looking quite large.

However, relatively decent weather and some slower demand sales this week kept the markets from popping out of their seats and climbing to the front rows of market gains. Instead, for the week, corn dropped an incredible 5.4% to $3.25/bushel USD on the Chicago board. November soybeans crash landed after a decent run through Wednesday, as the futures markets dropped from $10.15/bu USD to a close of $9.67, for a weekly loss of 3.7% for the week. Both U.S. corn and soybean export sales have been running well ahead of last year’s pace: Oil World points out that in the period of April through August of this year when Brazil & Argentina own the chunk of business, the U.S. has exported 2.85 million tonnes of soybeans to China, a massive bump from the 240,000 MT exported during the same period in 2015.

20160819 soybeans podsSoybeans toppling over towards the end of the week didn’t help its Canadian brother, canola, much as the a somewhat bullish Statistics Canada was trumped by the impending Chinese dockage issue. As such, canola ended down just 2% for the week to $460/MT on the Winnipeg ICE board but it’s trading range was a decent $20/MT for the week, topping out at $475 on Wednesday (still not quite at $11/bushel). However, any gain made in the futures market this week practically erased by widening basis levels in the cash markets.

The canola number from StatsCan came in at 17 million tonnes when the average guesstimate ahead of the release was 18.1 million. This would represent a 1.2% drop last year’s crop, but it’s still technically 5% above the 5-year average. What we do know is that there is some very big looking crops out there (anything in those pods though?) and with the large amount of rains that has fallen in Western Canada, there’s certainly some disease pressures. We also know that in the past 7 years, StatsCan has underestimated their August canola production number versus the final they give out in December so, the “bullish” nature of the number wasn’t really believed by the market.

Regionally, Manitoba is expected to see its canola production drop about 8% from last year to 2.6 million tonnes (but still up 7% from the 5-year average), Alberta is seen taking off 5.4 million tonnes (-1% from 2015, -3.4% from 5-year average), and Saskatchewan is supposed to harvest 8.9 million tonnes (+1% year-over-year, +10% from 5-year average). After the 19.2 million-tonne demand year in 2015/16, there are concerns that all this canola will add surplus to the market, especially with the Chinese new September 1st policy of max 1% dockage. It’s been suggested that the Canadian government is taking a scientific, rather than political approach to the trade issue, and the market appears to pricing in that no resolution will be reached before Thursday.

winter wheat 16 2 (1)For wheat, total Canadian production was estimated by StatsCan up 10.5% from 2015 with 2.9 million more tonnes produced for a total number of 30.5 million tonnes. This is mainly thanks to a massive jump in winter wheat production, +53% YoY or +1.2 million tonnes from 2015, with Ontario owning 1.1 million of that. Also adding to the production number was an equally impressive 1.4 million extra tonnes of durum wheat compared to last year for a 6.8 million tonne crop (+26% YoY, +24% from 5-year average). There are some analysts who still think that this crop will touch 7 million tonnes, but again, we cognizant of the current rains and disease issues impacting quality (i.e. fusarium).

Looking at some of the other numbers, total Canadian flax production is pegged at 576,000 MT (-39% YoY, -19% from 5-year average), the Canadian oats crop is estimated at 3.26 million tonnes (-12%, -8%), total soybean production in the Great White North is estimated at 5.44 million tonnes (-6.5% YoY but 6.7% from the 5-year average) and corn output is expected to come in at 12.7 million tonnes (-9%, -3%) because of the drier weather in Ontario. Canadian barley production is estimated to come in at large 8.7 million tonnes, up 6% from 2015 (and 4.7% from the 5-year average), mainly thanks to Alberta and Saskatchewan producing about 500,000 MT more than they did last year.

We’ve been bearish on mustard, field peas, and rye since the acreage report at the end of June came out. Apart from prices dropping since then, StatsCan’s estimates has confirmed our bearish call, forecasting 250,000 MT of mustard, 4.6 million tonnes of peas, and 382,000 MT of rye, which, year-over-year, would represent increases of 44%, 103%, and 69% respectively. Yellow peas are dropping into the high $6s/bushel for deferred delivery (spot still has a $7 handle but not for long) with some strong early yields and we think anything with a $7 in front of it is a smart price to lock in some price risk on.

Mustard prices are hovering in the mid-30 cents/lbs but with production doubling and demand staying relatively flat, it’s hard to justify upside arguments. Lentils continue to be a question mark on the quality front, and we have seen some decent low-to-mid 30s (per lbs) for small red lentils and mid-to-high 40s for greens getting traded on, but with a 3.2 million-tonne crop coming off, that’s a 36% increase from last year and 40% above the 5-year average. While we’re conscious of the current acreage losses, we don’t expect 40 cent small red lentils, even with rains falling for the next few days (we have to get to $0.35 / $0.36 first).

With StatsCan’s bearish numbers out of the way, it was the International Grains Council’s turn on Friday, calling for record global wheat and corn crops of 743 million and 1.03 Billion tonnes respectively. While French and German production will lower total output out of Europe, bigger numbers out of the Black Sea, North America, and even South Africa are contributing to global wheat ending stocks building by 5.5% year-over-year to 229 million tonnes.

However, the big question is just how much of this global wheat crop will meet milling specs for food consumption, versus competing with corn and other options for the feed market. High quality wheat hasn’t been readily showcased across world harvests this year, suggesting some protein premiums are available, although not significant enough to open some bin doors. With almost 17 million less tonnes of milling wheat quality available from the E.U., their exports are expected to drop to 27 million tonnes. This would make Russia the number wheat exporter with at least 30 million tonnes shipped out from the likely 70 million tonne crop (or even more if the wheat export duty is revoked).

Overall, the Pro Farmer Crop Tour is showing things that are smaller than the what the USDA is currently projecting. To start the season, we were wondering if the US corn crop was going to top 14 Billion bushels, then the USDA is suggested more than 15 billion was possible, and now it’s possible that the final tally may come in under 15 billion. Will a final 175 bu/ac corn yield be reached? The U.S. crop isn’t 100% made and the next few weeks of weather will determine just how close we get. Nonetheless, the market is now admitting, via where prices are, that the 2016/17 crop is going to be larger than demand’s life.

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