Soybeans Driving Moves in the Grain Markets

Grain markets ended the second week of January a little higher than they started things, mainly thanks to a relatively bullish WASDE report from the USDA, on Thursday, January 12.

The January report tends to provide some fireworks, and it did not disappoint this year, helping guide futures values higher. Soymeal, up 7.1% for the week, lead the complex higher on Argentine soybean production concerns, helping soybeans climb 5%.However, soyoil up just 1.65% and a stronger loonie (+0.95% to above 76.5 cents) only propelled canola 1.05% higher. Oats did well, up 6.6% week-over-week, while wheat lost some gains to end up 0.75% since last Friday, versus corn while lost some lustre, down 0.2%. Overall, the soybean markets continues to move things the most.

What didn’t really move was the record production of corn and soybeans in the U.S. in 2016, pegged at 15.15 Billion and 4.31 Billion bushels respectively. This was technically down a bit from the November estimate as average yields were felled a bit to 174.6 bu/ac for U.S. corn fields with 86.7 million acres getting combined (+7% from 2015) while the average U.S. soybean yield came in at 52.1 bu/ac (4.1 bu/ac or 8.5% higher than the previous record set last year) with harvested acres up one percent year-over-year to a record 82.7 million acres.

While we know there’s a lot of grain, how has demand fared? U.S. soybeans crush and export numbers remain unchanged at 1.93 billion and 2.05 billion bushels respectively, but with the slight decline in yield, 2016/17 U.S. bean ending stocks are pegged 60 million bushels lower at 420 million bushels (technically, that’s a 113% increase year-over-year), with the USDA calling for an average farm price between $9 – $10 / bushel. For U.S. corn, feed use was actually dropped by 50 million bushels, ethanol was up 25 million bushels, but again, exports was left unchanged at 2.23 billion bushels, implying America ends 2016/17 with 2.36 billion bushels of corn still available (that’s a 36% jump year-over-year).

The number that’s probably catching the most amount of attention is that from winter wheat, which came in at 32.8 million acres, down 10% or 3.8 million acres from last year, and the 2nd lowest on record and lowest since 1908! This drop is about 2 million acres more than what the market was forecasting, hence the bullish optimism surrounding the complex. This include drops of 10% alone in states like Texas and Oklahoma, but also North Dakota and South Dakota, down 50% and 24% respectively, and lake states like Wisconsin and Michigan, down 19% and 23% each.

When producers are being offered per bushel prices that start with US$2 like we saw this fall, it’s clear that the market is not buying any more wheat acres in America. While there are less winter wheat acres in the U.S., but acres are expected to be relatively the same in Europe, down a bit in Ukraine, up a bit in Russia, and down a bit in Canada (but not by much albeit definitely less durum acres). As such, a Bloomberg survey suggests that the market is expecting wheat prices to rise in 2017, something I tend to agree with, but I’m not expecting a 20-30% jump, but something closer to the 10% higher level from today’s values.

Outside of America, total world wheat output is up 2% year-over-year to a record 752.7 million tonnes, meaning global wheat ending stocks for 2016/17 are expected to climb 5% YoY to 253.3 million tonnes with some swapping of trade origination as Aussie and EU wheat exports are up 500,000 MT each, while Canada is down 500,000 MT. With global corn production up 8% from last year to a new record of 1.037 Billion tonnes, global carryout will be 5% higher from last year at 221 million tonnes with most numbers unchanged on the balance sheet from December’s WASDE, including Brazilian & Argentinian corn production staying at 86.5 and 36.5 million tonnes respectively.

The USDA also kept their estimate for soybean production in Argentina at 57 million tonnes despite everyone else dropping their forecasts, including Informa down to 56 million and the Rosario Grains Exchange down to 52.5 million tonnes. Conversely, the USDA raised Brazilian bean output by 2 million tonnes to 104 million tonnes, more in line with private estimates. This equates to global soybean production climbing 8% from last year to a record of nearly 338 million tonnes.

Argentinian soybean demand was raised by a collective 2.7 million tonnes, we should expect a record global soybean carryout of 82.32 million tonnes (+6.5% year-over-year). With Argentina guiding the bulk of any weather premium, as some people are estimating as much as 10% of the soybean crop there has been damaged or lost.  On the other hand, Chinese crush margins come crashing down from the more than US$40 MT back in early December to the $6/MT today. This doesn’t mean that China is going to slow its bean import program, but it may wait for the South American supply to become more available and numbers to head lower before binging again.

Staying in China, the American feedstuff exporter got some negative trade news from the People’s Republic as they increased their import taxes on American DDGs as the US-China trade war heebie-geebies start to build. This follows just days after China raised import tariffs on U.S. ethanol, making it clearer that Beijing is trying to cater to more domestic growth (i.e. the build-up of their ethanol industry) versus the reliance on other countries (which, for the record, will never be entirely possible from a food perspective because the Chinese need to import foodstuffs to feed its massive population).

While China hasn’t changed import taxes on soybeans, they’ll still to continue to buy them. Nonetheless, with soybeans acres likely going up again in 2017/18 around the world, any bullish surprises like yesterday’s report, will likely be masked in the long-term by the relatively bearish fundamentals that is the amount of supply still available around the world. Aggregately, as we get into acreage planning for the 2017/18 crop, we continue to hear more thoughts of more canola as well, and combined with somewhere between 85 to 87 million acres of soybeans in the U.S. this year, it’s hard to see these current levels remain supported if we have average growing conditions (sure, you can chuckle and asked “what’s average growing conditions anymore?” but we must use a baseline).

More specifically, I’m uber-cognizant of the fact that despite ending stocks expected to more than double from last year to this year, we’re sitting above US$10/bushel on the Chicago futures board compared to being below $9 a year ago. We do think there’s some upside to the wheat market but it’ll likely be more like 10% higher, not 20%-30% like some are really hoping for. There may be more optimism for durum acreage as those plagued by disease issues are more interested In not dealing with fusarium again for the nth year in a row. From a cash perspective, Western Canadian grain prices have generally all faded lower except for wheat, which is getting some support from the futures markets. While we think there’s a good chance the highs of the oilseed market may be in for 2016/17, wheat may still surprise us.

Switching gears to pulse crops, this week the Indian government announced that they are trying to make the country more self-sustainable when it comes to pulse crops (AKA rely less on imports) and one state, Madhya Pradesh is aiming to boost production by 60% in the next three years! This means that they would go from the current five million tonnes they produce annually to nearly 8 million tonnes, taking more acres away from wheat and rice which are supported through minimum support pricing programs from the government. That being said, it may be hard to argue against this state reaching their 60% target but Madhya Pradesh has seen 18% farm growth annually versus 4% on the national level, mainly thanks to new wells and a focus on micro-irrigation!

Overall, for the grain markets this week, while many WASDE numbers came in below what the market was expecting, suggesting some bullish bias to the report, the fact remains that we still have record numbers, albeit slightly less than what they were pegged at in the past few months. With this report out of the way though, the market will re-focus back on moving South American weather and U.S. acreage numbers over the next couple of months, as well as trade deals with the new U.S. president officially in office.

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