Grains blew through the first week of August like a night owl, trading well overnight before collapsing during most daylight hours. For once, wheat was the big winner of the week, up more than 2% on concerns over the crop coming off in Europe and substitution away from corn for feed demand pretty much all around the world. Oil prices slipped to April levels, putting pressure on the oilseeds, with canola down 1% and soybeans down 3% since last week. Corn wasn’t far behind at a 3% drop but the biggest loss was seen in oats, down 11.5% for the week to below $1.80/bushel USD on the Chicago board.
Why did everything else drop off? Most analysts are now conceding that the weather that’s on the horizon in August is unlikely to provide many problems for U.S. soybean development, likely leading to more reduction in the long positions of managed funds. Those betting on corn are also under the gun that is a large crop in the U.S. and there’s a lot of wheat in the U.S. that will compete with it in the feed market.
While Canadians were still sipping (better) beer on their holiday Monday, American markets were open and INTL FC Stone threw a bearish tomahawk at the grains complex to start things off. The firm pegged average U.S. corn yield at 175 bu/ac and soybeans at 48.8 bu/ac, a strong lift from the USDA’s current forecast of 168 and 46.7 bu/ac, respectively. Using the USDA’s current estimates for harvested acres, this would equate to a massive U.S. corn crop of 15.146 billion bushels, and 4.054 billion bushels of soybeans, well above its call for 14.54 billion and 3.88 billion bushels, respectively.
FC Stone’s forecast is likely at the top end of estimates for the year, but will likely end up pretty accurate.
Other estimates this week from Farm Futures pegged corn at 168.6 bu/ac and 46.65 bu/ac for soybeans while Informa (usually bearish) put their estimates out for 169.8 bu/ac for U.S. corn yields and 47.7 bu/ac for soybeans. Right now, my guess is the market is pricing in somewhere around 170-171 for corn and 47-47.5 for soybeans.
Average yields in Canada look like they’re falling, as wild/windy/weak-in-the-knees weather in the west, and hot temperatures in Ontario, are not adding to any yield estimates.
The market will start to price in lost acres to Mother Nature and disease in the next couple weeks as we get into fields. This is why we stress getting your grain tested as quickly as possible once combined to immediately put you in a stronger marketing position.
In the Black Sea, 88% of the wheat harvest is compete in Ukraine, with 22.7 million tonnes taken off so far. In Russia, only 38% of the wheat crop is off, but it has produced 41.9 million tonnes so far, with an average yield of 58.6 bu/ac — an increase of 15% year-over-year. Also coming off in Russia right now is a kabuli chickpea crop that’s double last year’s size and being sold for half the price of Australian desi chickpeas. This just reconfirms our call that we’re cautious on further decline of peas and chickpeas prices from current levels and that one should manage price risk accordingly.
Looking west, wet weather continues to hamper production and quality potential in the wheat crops. German producer organizations have suggested a 10-20% drop in wheat production this year in their country, Poland is likely down around 10% year-over-year to less than 11 million tonnes, and the U.K. will likely pull off around 14.5 million tonnes vs last year’s 16.4 million-tonne monster. The biggest loss is surely in France though, where the smallest crop since 2003 is likely coming off, with the final number likely below 30 million tonnes.
Currently, only 35% of the French wheat is rated good-to-very good with only 62% of the crop taken off so far, a long throw from the 82% combined by this time last year. With the poorer quality coming out of Europe’s largest wheat producer, feed wheat use across the EU Bloc is expected to climb 3.4% year-over-year to 57.9 million tonnes, the biggest number since 2007-08 and 15% higher than the 5-year average. Furthermore, corn feed use in the EU will fall to its lowest in 4 years at 57.6M tonnes as it’s more expensive than wheat options.
As far as the E.U. rapeseed harvest goes, Strategie Grains cut its estimate for the 3rd straight month to 20.7 million tonnes, mainly due to cuts in France, Poland, and Germany. As such, import forecasts for rapeseed/canola in 2016/17 was increased by Strategie Grains to 3.3 million tonnes and the International Grains Council to 3 million tonnes, both a healthy improvement from last year’s 2.86 million tonnes imported by the bloc
For South America, the world’s eyes are on Brazil as they open up the 31st Summer Olympics this weekend. U.S. exporters though, they’re looking at Brazil’s tight corn supply situation as ripe for the taking. While Brazil will likely look to Argentina or Paraguay or even Ukraine before the U.S., it’s hard to ignore a potential 15 billion bushel corn crop coming off on this side of the equator. There’s also buzz that they’re looking at bringing in some ethanol as well (for the record, Brazil’s ethanol industry runs off sugar but a smaller harvest and higher sugar prices will force refineries to switch to making sugar instead of ethanol with the sweet stuff).
While the industry ponders its supply caching, South American producers are looking at what effects La Nina could bring to their planting schedule. The “Little Girl” tends to bring wetter-than-normal conditions to northern Brazil but cooler temperatures and drier weather to eastern and southern states. Similar dry weather is possible in Argentina, which is currently seeing a delay in their wheat planting because of persistent rains.
As such, corn acres may not increase in Argentina by the 30% spike that some analysts were initially pegging, but a 20% increase year-over-year would still be more than 10.3 million acres. In Brazil, the start of soybean planting season is September 15 and for 2016/17, consultancy firm Celeres is forecasting 83.5 million acres going in (+2.6% year-over-year), producing 103 million tonnes of the oilseed (+5.3% YoY). For corn, thanks to high domestic prices, Brazilian farmers are likely to see a much larger area, with total nationwide production pegged at 100 million tonnes.
In China, state reserve auctions have been pressuring markets globally but recent buying this week has helped global prices a bit. However, for the first time in 13 years, it looks like China will be pulling back on their corn production in an attempt to drop the level of the more than 250 millioin tonnes of corn in reserves. Also, China is potentially looking to limit other feed grain imports like DDGs, with most feed demand continuing to go into soymeal producers’ pockets.
Overall, some strong U.S. export sales lately, and there’s some small positive indications we’re seeing demand coming around for soybeans and corn. Keep in mind those aforementioned yield forecasts though — if these numbers materialize, there’s likely more downside yet to play out.
Price is dictated by supply and demand. When demand stays flat (or barely increases), and there is bigger supply, prices will intuitively have to move lower. While wheat seems to be stabilizing a bit, we don’t know the real impact of the northern hemisphere’s harvest just yet.