After starting 2017 in the red, the grains market rallied quite well this week, however, corn and oilseeds are still below their highs seen in October and November. A couple of headlines that gained traction over the holidays were the South American weather (especially in Argentina), Egyptian wheat tenders, Black Sea winterkill risks, and continued U.S. export strength.
On Thursday, January 12th, we’ll get the USDA’s monthly WASDE installment, and expectations are for a bigger U.S. soybean crop, fewer U.S. wheat acres, and some moves lower for Black Sea export numbers. As we ended 2016 with reflection of the year that was, a new year brings a lot of new optimism to do better and so with that, we kick off our outlook for 2017 grain markets.
We’re sitting fairly neutral right now as the combination of another year of record global output and limited substitution of feedstuffs over to the cereal has kept values in check. There have been some good prices to take advantage of for higher quality prices but we still haven’t seen levels from 2012, and it’s almost a lock that we won’t. (So don’t expect them and/or even think about hoping for them!)
Given the spread between milling and feed levels right now, the higher-yielding feed wheat varieties may be worthwhile to pursue on some of your wheat acres in 2017/18. However, the demand for milling wheat will remain strong, but the challenge will be similar acreage numbers in Europe and the Black Sea region, and possibly Canada, as the only place acreage is likely to decline substantially is in the U.S.
We don’t expect wheat prices to improve too much in 2017 but there will be short-term rallies that will certainly prove profitable. This means selling into strength and making incremental sales as the price goes up – getting greedy will burn you and you’ll be kicking yourself later (perhaps you are already after missing making sales in November/December?).
Other cereals like barley and oats are likely to be rangebound around the levels we’ve seen since August, 2016, or so as they battle for acres in 2017. Rye and triticale have turned less attractive given the massive increase in production in 2016 and malt barley prices have pulled back a bit but we did see some increased values to end the year for product that met spec (getting under 0.5ppm vomitoxin seems to be the big issue for the 2016/17 crop).
Oats prices on the cash front may find a little more upside but it will be limited by substitution of European supplies while feed barley values definitely will not get back to last year’s values and those hoping for those should write down a list of why they could rise (I guarantee you my list of why they won’t is longer). My intent isn’t to be harsh here but help face the fundamentals – blowing smoke is only good when you’re stranded on an island, not trying to find the best price for your grain.
Like wheat, the world is awash in corn. Between big crops in Europe, South America, and, obviously, America, there’s no shortage of the coarse grain available for those who want it. As such, it is one of the main reasons keeping feed grain prices low and likely won’t start creeping up until we have a clearer picture of U.S. 2017/18 acres and the South American crop.
While the pursuit of the psychologically-relevant $4/bu handle on the Chicago futures board is real, we likely won’t see it until we understand more of South American production potential. With corn acreage in the U.S. still expected to stay above 90 million in 2017, and more than two billion bushels carrying over from this year, it’s more than likely that 2017/18 could end with more than two billion bushels as well.
In my opinion, what 2017 corn prices will come down to is demand and while the pace of U.S. exports is red-hot right now, we don’t expect it to the continue, and I think the market is pricing that in. If it does, expect values to creep up back to US$4 on the Chicago board and if any weather concerns get built up like they did last spring because of Argentinian issues, a $5 handle is not unrealistic, but today I would put that likelihood at about 10% to 15%. Manage your grain’s price risk exposure to the market accordingly.
For oilseeds, we’ve become increasingly bearish since November as South American headlines have subsided. Most eyes are on Argentina as cries of “there’s not enough moisture” has turned to flooding concerns with roughly 2.5 million acres of soybeans at risk of being lost, according to Dr. Cordonnier of the Soybean & Corn Advisor. However, as the market transitions its focus from South American weather to U.S. acreage in late March/early April 2017, we expect oilseed values to start to dip. The reason for it is that American soybean acreage is likely to jump again in 2017, with the final number landing somewhere between 86-89 million acres.
My guesstimate is that we’ll likely see at least 2.5 million more acres of soybeans seeded in the spring of 2017 than last year, and with the U.S. balance sheet showing ending stocks around 400 million bushels, the increase, assuming at least some demand increase, would mean around 600 – 800 million bushels to end 2017/18. Intuitively, the $6/bushel soybeans has already been forecasted and although we don’t expect things to dip that low, $7 handles aren’t out of the question. Those hoping for double-digits on the Chicago futures board to help your cash price have had the opportunities to take advantage of them in the past two months, as well as back in the spring. How many more chances do you need?
Chinese and other southeast Asian demand for oilseeds will surely increase again though in 2017/18, which will help things, but we can’t expect it to match global production gains in the short-term. We expect canola/rapeseed acreage to remain relatively stable in 2017, and with domestic and international demand creeping up, $500/MT values in the Winnipeg ICE exchange will be seen more often in the first half of 2017. However, canola prices are often tied to what palm oil and soy oil values are doing and thanks to rebounding production of the former in the second half of 2017 across Southeast Asia, we will likely see values pull back a bit.
Those looking for those $12/bu levels on their canola, I would put a 15% likelihood of that happening in 2017 (this means that it’s quite unlikely) as we expect values to dip back below $500/MT after June, especially considering the likely size of the 2017 U.S. soybean crop (another record).
For other oilseeds, flax supplies on a global level aren’t super huge but they’re enough to keep prices under $14/bushel in 2017 in my opinion. A lot of the price direction for flax though will depend on Chinese demand (it’s been slow for about a year now) and European production.
Jumping over into the pulses, we continue to see some very good values on in lentils, especially green lentils, and these are not levels that one should ignore. Can things get better? My guesstimate is that it will be very hard to because of the size of the global crop, especially with India’s production a record in 2016/17. As my pal Chuck Penner at LeftField Commodity Research points out, India’s pulse acres are up thanks to “good planting conditions, increased minimum support prices (from the Indian government), and strong market prices” in general. While rain is still needed in a few places across India, it’s not necessarily expected as the rabi planting cycle (the one we’re right now) is the driest part of the year and indications are that the crop can be quite big. Accordingly, we’re more bearish today on the pulse complex but still believe that they will be among the best returning crop again in 2017/18.
Given where lentils prices are today, it’s hard to see a significant reduction in acreage in North America and Australia in the next seeding season or any substantial jump in demand and accordingly, we expect values to pull back. Of course, prices can jump up thanks to weather concerns (i.e. poor weather to finish off India’s rabi crops) but we don’t expect today’s prices at this time next year. As such, looking to lock in up to 40% of your potential lentils production with an Act of God (AOG) clause is back on the table for us.
For yellow peas, new crop values are in the six-dollar-plus range right now but we expect those levels to drop into the $5+/bu over the course of an average growing season as, like lentils, we don’t expect acreage reductions or any rise in demand to be too significant, and so 40% AOG new crop contracted is a good place to be going into seeding. Green peas continue to be the red-headed step child of the pulse complex, not performing as nicely as many would hope and are expecting much of the same in 2017/18 but you’ll likely see some $10/bu targets get triggered like they were throughout this past year’s growing season. Chickpeas are the outlier as a big crop in Australia and India will more than make up for blunders in North America and if you can grow them, I’m looking to be up to 50% pre-sold before any drill scratches dirt in the spring.
From a currency perspective, we expect the Canadian loonie to stay above 70 cents U.S. as it deals with the challenge of the strengthening U.S. dollar thanks to new President Donald Trump. The return of the King Dollar as the new White House regime is looking to spend to grow in order to “make America great again”. While we expect the Canadian loonie to spend a lot of time in the 73 – 76 cents USD range, the stronger U.S. greenback will make it more difficult for U.S. exports (which have been super strong). With the readily available amount of grain in almost every corner of the globe, a couple cents difference can turn into millions when it comes to selling 50,000 MT-plus Panmax vessels of grain. This all translates to a relatively retained strong export potential for Canadian grains but, unfortunately, a weaker stance for American producers.
The ”Trump effect” will be the one variable that has the most potential to disrupt grain markets in 2017. New trade policies that The Donald starts to lay out will have a significant impact on global grain players, not just American ones. Not only does Trump pose a challenge to international trade, but the whole ethanol program may be under attack, which doesn’t help the average American farmer.
Overall, as we turn the calendar, 2017 starts with a lot more grain than what 2016 did and, intuitively, prices are mostly lower than where they were a year ago to start the 2016 calendar year. This supply gluttony sentiment doesn’t look likely to subside any time soon as demand hasn’t climbed proportionately to production and weather issues don’t look to play too much of a factor for the 2017/18 crop year. With grain output slightly outpacing demand again in 2017, we aren’t super bullish. Of course, just like any business, you have to play the game in front of you, and weather is the final variable that we try to account for but can’t truly always factor in 100% correctly. My perspective is built on average weather conditions that will produce bearish and bullish headlines but we can agree there will pops and rallies because of one-off events that create profitable opportunities. These sort of scenarios is exactly when you should look to sell on the rumour and profit on the fact.
P.S. we hope to see you in Saskatoon next week at the Crop Production Show and in Brandon the following week at Manitoba Ag Days.