Keeping Quality — This Week in the Grain Market

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Grains for the first week of October saw some see-sawing as the market dealt with some weather premiums and short-covering in wheat and corn pushing values higher. Compared to a week ago, oats are up 6.7%, canola gained 1.2%, corn prices improved by almost 1%, soybeans were up 0.5%, while wheat closed 1.7% lower as profits got taken. Durum wheat continues to be offered by farmers, especially in the U.S., and as long as that’s the case, international and domestic buyers haven’t felt the need to bump their bids for the quality they’re seeking.

Argentinian President Macri confirmed that they will not be dropping the soybeans export tax from 30% to 25% like they had promised in their campaign a year ago. Instead, the cut will be delayed a year until January, 2018, and then it will drop by 0.5% per month for the next two years. I, and many others, are doubtful that this promise will be fulfilled as Argentina still depends on ag export taxes for a large portion of their operating income, especially when inflation in the country is running at 35% (below the target of 20-25% set by Macri for the end of 2016).

With the soybean export tax still in place, we can expect fewer soybean acres and more corn and wheat, as the export taxes on those two crops have been killed completely. Monsanto, in their quarterly earnings report, also has expectations that Argentina will see even more than the 25% increase in corn acres this year. Currently, Buenos Aires Grains Exchange is estimating Argentine corn planting at 22% complete (vs. 13% last year). This in mind, rains in Argentina have been helping wheat condition2s and the soil moisture profile for corn and sunflower acres.

Next door in Brazil, CONAB says that Brazil’s soybean crop in 2016/17 could reach 104M tonnes, in line with expectations at the beginning of last year, but drier weather put a lid on output at 95.4 M tonnes. On the corn front, CONAB is forecasting up to 83.8 M tonnes, a solid 26% bumper from the 2015/16 disaster of 66.7M tonnes (again, due to the dry weather). As a result of limited supplies and soaring domestic prices, the Brazilian government recently announced that they will allow the import of US GMO corn until the first corn crop starts to come off in early 2017 (hurray for demand!).

Thus far in Brazil, soybeans have slowly started to get seeded, while the first corn crop planting is now at 25%, behind the 34% that was seeded by this time a year ago. We continue to watch South American weather as a potential catalyst for corn and/or soybean prices to improve a bit. However, challenging this theory is some of the strong yield numbers of 200 bu/ac corn and 70 bu/ac soybeans in Illinois, Iowa, and Minnesota (as per Allendale).

We do know the current average yield estimates by the USDA of 174.4 bu/ac for corn and 50.6 bu/ac for soybeans are well above trendline values. With this in mind, recent analysis by the University of Illinois concludes that we are more likely to see a lower final average corn yield number in January but a bigger soybean number. Obviously we could potentially get a little more clarity next Wednesday when the USDA puts out their monthly WASDE on October 12th. For soybeans, demand continues to be solid as there’s been buzz that China is likely to continue to buy until the South American crop comes off in early 2017.

What we do know is that corn and soybeans both fell short in terms of full-year exports in 2015/16 – by 4 million bushels for soybeans and 20 million bushels for corn. A record 52.7 million tonnes of soybeans got shipped out this past year but the 48.1 million tonnes of corn was mediocre at best (#19 on the list out of the past 50 years). In the current marketing-year-to-date, U.S. soybean sales are sitting at their 3rd-best levels in the past decade while corn sales thus far are just second to the pace seen in 2007.

soybeans_closeup 2University of Illinois ag economist Darrel Good is currently suggesting that now may be a good time to consider some soybean sales of the 2017/18 crop! Why? With corn prices likely having a tough time getting back to $4/bushel on the Chicago board, and demand for soybeans growing faster than corn’s demand, we may see even more acres of the oilseed in 2017 get planted in America. It’s not a bad idea, but it may be a bit of a premature call in my opinion as any hiccups in South American production could help create a decent rally.

One thing that could pressure both corn and soybean prices is China’s ag policy reforms as they’re trying to rid themselves of their ridiculously-large stockpiles, while also subsidizing more soybean acres. Between removing the minimum price support program for corn and holding weekly auctions, it’s becoming tougher and tougher for imports in the form of DDGS or soymeal to compete with the cheapest domestically-priced corn in the past decade (down 12% since the price support was removed in late March to $208 USD / MT).

While we know from last weeks’ USDA stocks report that there’s still a lot of wheat available in the U.S., on an export basis both American and Canadian wheat are having to compete with the Black Sea as their record crop is making things tougher on the international trade. Russian-origin wheat continues to win most Egyptian business these days, but it is also displacing North American, European, and Australian wheat in markets like Nigeria, Bangladesh, and Indonesia.

While U.S. wheat is starting to pile up outside of elevators, corn is next as big yields continue to be produced. Specifically, for those areas in the western corn belt that are getting combined, big yields continue to be reported with 240-250 bu/ac corn and 65-70 bu/ac soybeans. At the current levels, soybeans are profitable for most farmers so one could expect corn to win the war of storage on the farm in the US, with beans getting sold off the combine.

On the pulse crop front, we’ve seen lentils bids rebound a bit thanks to better understanding of this year’s crop’s quality, as well as some renewed overseas interest. However, pressuring the peas market is a very strong start to the Australian chickpea harvest, especially in #1 producing state Queensland where yields are 60% above the average at 37 bushels per acre. While there are some question marks about production in southern Aussie states because of weather issues, production estimates for the chickpea crop in the Land Down Undaa average around 1.3 million tonnes (about a 1/3 bigger than last year’s crop).

The wet, snowy weather that was received by the Western Canadian provinces this week still leaves a fair amount of crop in the field. Specifically, in Saskatchewan, per the most recent crop report, at least 1.4 million acres of spring wheat, 1.25 million acres of durum, and 2.5 million acres of canola have yet to be combined. Digging a bit deeper, only 10% of this year’s Saskatchewan crop harvested this far has graded #1 CW with 50% grading #2, but about a 1/3 of the crop going as #3 or feed, mainly because of disease.

With some late rains and now snow putting pressure on the North American crop, money signs seem to be getting painted on wheat bins of decent quality. Chatter of $6 USD and $8 CAD per bushel wheat has already started but I think it’s overblown right now. Between the carryout from last year and relatively big yields this year that still likely produced a proportionally-large amount, there will be lots of resistance against a major wheat rally. That being said, our call continues to look to contract lower-quality product (post on FarmLead today!) while holding onto the #1s and #2s in your bin yard.

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