Touching Bottom? — This Week in the Grain Markets

We’re halfway through the month of September and almost at the end of 3rd quarter of the calendar year, a point when we start to usually see lows priced into the market and the end of harvest in sight. A mostly bearish September W.A.S.D.E. report at the beginning of the week on Monday, the 12th, forced the bulls to dig into any headline they could to limit losses. For the week, wheat was the winner, trading sideways/flat, while corn, soybeans, and canola all dropped a bit, down 1.4%, 1.45%, and 2% from the end of last week. Is there more downside or have we reached a bottom?

In the W.A.S.D.E. report, the U.S.D.A. called for a record U.S. soybean crop with average yields of 50.6 bu/ac (+1.7 from August’s number and +1.4 above the pre-report guesstimate), meaning total output would be 4.2 Billion bushels. Given the tick up in both domestic and export demand towards the end of the 2015/16 crop year, U.S. ending stocks for 2015/16 were dropped to 195 million bushels. While it’s clearly a big domestic crop, both domestic demand and export demand are expected to increase year-over-year to (including a record 2 billion bushels in exports), 2016/17 will end with 365 million bushels still available.

For the U.S. corn crop, average yields were pegged at 174.4 bu/ac (-0.7 from last month, +1 from the pre-report guesstimates), meaning a record crop of 15.09 billion bushels (albeit the forecast is down from last month because of the reduction in the yield forecast). Globally, corn carryout was generally unchanged at around 220 million tonnes, but the noticeable difference was in Brazilian and Argentinian production, pegged at 82.5 million and 36.5 million tonnes respectively (or +23% and 30% year-over-year!).

For Canadian canola, the U.S.D.A. is calling for an 18 million tonne crop, but with some significantly revised ending stocks from years past, exports at 9.6 million tonnes, and domestic consumption at 8.55 million tonnes, 2016/17 carryout is still sitting close to 2 million tonnes. For wheat, production upgrades in Canada (now forecasted at 30.5 million tonnes), Australia (27.5 million), and Kazakhstan (16.5 million tonnes) lifted the total 2016/17 global output but stronger demand as it competes with corn in domestic and feed markets will push the 2016/17 carryout below 250 million tonnes.

On that note, meteorologists are saying that a La Nina event making landfall in the next couple months could compromise the quality of the Australian crop. A La Nina event would mostly impact the Eastern seaboard of the Land Down Undaa via excessive rains, but given that this year’s weather phenomena isn’t expected to be as intense as it was in 2010 when a lot of Aussie wheat was downgraded to feed quality, this isn’t necessarily a bullish catalyst of huge proportions.

To the northwest, there have been a few issues with India’s wheat crop, leading some to believe that they’ll import more than the 2 million tonnes currently forecasted. However, some good rains have fallen in many places and, as a result, the Indian government is estimating a record year of 270 million tonnes of grains, oilseeds, and pulses getting taken off. Of note for those not heeding our multiple calls in the past month to make some sales off the combine of lentils or peas, it’s expected that India will produce 8.22M tonnes of pulse crops in just the current kharif season, up 48% from last year’s 5.54 million tonnes (albeit it was a drought-ridden crop). With adequate soil moisture, there’s still expectations that more acres than last year will get planted with pulses and specialty crops (i.e. mustard) in the rabi winter crop.

Speaking of our calls being realized, we’ve been making mention for the last few months now that said seeding issues would be one of the major bullish oilseed themes in 4Q2016, between said drier soil moisture conditions, buzz about lack of seed supply to access, and tougher credit situations. Further, the current domestic price ratio of soybeans to corn is 1.9 (vs 2.7 a year ago), suggesting planting corn instead may be the more financially-rewarding decision in 2016/17 in Brazil.

With significant rains possibly not falling until the second half of October, there will be some hard decisions to be made by farmers in Brazil as to when to hit the fields. Despite the likely delay in Brazilian soybean planting, there’s buzz that China is switching back over there to purchase new crop soybeans after a few weeks of strong US origin buying. The main factor behind this though is the slight uptick in the US Dollar, making American beans a tad more expensive.

Next door in Argentina, the Rosario Grain Exchange has put a lid on their expectations for a much bigger corn crop than the USDA, who is calling for a 28% increase year-over-year in acres whereas Rosario is calling for just 18%. As such, corn production out of Argentina is being forecasted by Rosario at 33 – 35 million tonnes (Dr. Cordonnier is at 35 million tonnes, U.D.S.A,’s at 36.5 million tonnes, and the International Grains Council is at 39.2 million!).

On that note, we told Ontario growers all week at Canada’s Outdoor Farm Show in Woodstock, ON (great show by the way!) that we’re neutral-bearish on corn prices. With prices trading in the past week in Chicago at the lowest levels since 2009, more analysts are agreeing with us, with suggestions that not only futures will tumble, but basis will worsen as well. With 15 Billion bushels (or close to it) likely coming off in America, South American planting issues may not be enough to help levels rebound off the lows in the next couple of weeks (or possibly months).

Coming back to beans, Societe Generale doesn’t think that the record 4 billion bushel US soybean crop will not be able to offset La Nina effects in South America. Many thought that would be the same thing with the French wheat crop where exports outside of the E.U. are likely to fall 63% year-over-year to 4.7 million tonnes, and the lowest in almost a decade, but then everyone else took off a huge crop (especially in nearby Black Sea), limiting the impact. While the French crop’s quality is up in the air, across the Channel, the quality of the UK Harvest has been decent with average protein at 12.8% but Falling Numbers are a little bit below the norm at 259.

In the corporate world, Hanjin, the 7th-largest shipping company in the world declared bankruptcy recently, which has pushed up the prices of containers significantly as remaining solvent carriers try to extract as much value from the market as possible with one of their competitors now out of the picture.

Obviously the big news this week though was on the M&A front as Bayer to purchase Monsanto for $66 billion USD and Agrium and PotashCorp doing a $36 billion USD merger, the 3rd and 4th major Big Ag announcements in the past 12 months (the others being Dow-DuPont and Syngenta-ChemChina deals). While regulation scrutiny remains, according to the CEOs of each company, the combined business will offer end-to-end services, from seeds to crop protection to digital and analytical tools, the last of which has become more of a focus on the horizon for many companies.

Durum headsFrom a harvest progression standpoint, things continue to be stop and go in a lot of places because of intermittent rains. We continue to see variable quality but because the size of the crop is bigger than last year, but the absolute amount of #1 or #2 quality seems to be comparable to last year. This just means that grain buyers are going to have look harder to put batches of good quality together, but it will get done (the same could be said for the lentils market!). This intuitively means though that the with a larger portion of the crop going to #3 or worse grading, feed grain prices are expected to remain low, with not much upside through the end of 2016 in our opinion. That being said, we continue to reiterate that the best way to extract value for your grain this year is to know its quality (order your SGS tests today!).

Coming back to the question we asked at the beginning of your reading (“are we at the bottom?”), the answer, in my opinion, should be irrelevant for your grain marketing at this point because why are you thinking about selling at or close to the bottom? (If you’re in a position that you have to sell, literally put a calendar note in your phone 10 months from now titled “start considering locking in off-the combine sales so I’m not forced to make poor sales like I did last year”). Ultimately, I’m just trying to remind you that it’s important to make sales when can, not when we’re touching the bottom of the price pendulum.

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