Playing Teeter-Totter — This Week in the Grain Markets

Grain markets through the first full week of February swayed a bit on geopolitical risk and the market digesting the February WASDE report from the USDA. Wheat was the biggest winner of the week, thanks to smaller-than-expected global stocks in the report, up 4% for the week while, on the flipside, oats was the worst performing, down 1.15% on the Chicago Board of Trade. Soybeans and canola both performed well and solid demand fundamentals, up 3% and 2.7% respectively, while corn got some support from healthy ethanol demand, up 2.35% for the week. Overall, the market continues to teeter-totter on South American weather and when demand is going to fully switch to that part of the world as harvest comes off.

Digging into the WASDE report, U.S. corn inventories for the end of 2016/17 were dropped by 35 million bushels from January to 2.32 billion bushels, mainly thanks to ethanol used being increased by 25 million bushels. US corn exports were unchanged at 2.23 Billion bushels and despite actual to-date shipments tracking 65% ahead of last year’s pace, whereas this forecast from the USDA is only calling for a 17% increase year-over-year. Net-net, ending stocks are up 33.5% from 2015/16’s balance sheet, and the USDA is expecting U.S. corn prices to stick around $3.20 – $3.60 USD / bushel.

For soybeans, the U.S. balance sheet went untouched, despite shipments clocking in at 21% ahead of 2015/16 versus the office forecast of a 6% increase. This disappointed many of the bulls who were hoping for an increase in exports but the USDA said that US shipments going forward would be well-below last year’s levels because of South American production and competition, levelling out the strong start to this year. With the status quo theme in mind, the soybeans price target stayed put at $9.10 – $9.90.

On the international front, most grain market participants were watching what South American numbers came up, but it was a bit more bearish than expected. Argentinian production was finally dropped to 55.5 million tonnes (still above the private market estimates of 52.5 – 54.5 million tonnes).while Brazilian soybean production remained at 104 million tonnes. It’s worth noting that, according to the U.S.D.A. numbers, the combined South American crop is 6.2 million tonnes bigger than last year but there’s some skepticism around Brazil’s numbers being too low and Argentina’s being too high.

(Marcelo Camargo/Agência Brasil)

That being said, CONAB, the Brazilian USDA, just increased their forecast to 105.6 million tonnes compared to their previous estimate of 103.8 million tonnes, while Informa Economics is the most bullish at 106.5M tonnes. Brazil is already on a record pace for shipping out soybeans with estimates calling for more than 4.5 million tonnes put on outbound boats in February, which would be double what it did last February! However, farmer sales have been slowed by the fact that the Brazilian Real is touching 19-month highs, pushing domestic prices down to less attractive levels. This is being viewed optimistically by the market for the American farmer as international buyers may come back to the US at a time of year when export sales slow.

On the wheat front, the February WASDE pushed U.S. wheat exports higher by 50 million bushels to 1.03 Billion bushels but 2016/17 ending stocks are still sitting at 1.14 Billion bushels, the largest in nearly 30 years. Globally though, the bulls got charged up on stocks dropping by 4.7 million tonnes to 248.6 million total mainly because of a smaller Indian crop, a smaller Kazakhstan crop, and less available supplies out of Ukraine due to increased exports there. The market was expecting a number above 250 million tonnes so the bullish surprise pushed a lot of short-sellers to cover their positions, hence why the market moved higher.

Speaking of India, their wheat imports are already above 5 million tonnes thus far in 2016/17, which means that they could be in competition with the 2006/07 season when they imported 6.7 million tonnes. The headline that more Canadian producers are watching though relates to pulse crops and fumigation. The Indian government’s policy requires all agricultural goods to be fumigated at the country of export. However, because it’s often too cold to properly fumigate in Canada, the Great White North has had an exemption on this issue since 2004 but India recently announced that it will not extend the exemption. With concerns over the ability to export, combined with the impending rabi winter harvest starting up soon, lentil markets in Western Canada have gone quiet. Overall, if the fumigation issues persists, the cost of doing business to export to India will likely increase, and this will put pressure on prices.

(courtesy Viterra)

Staying in Canada, Canadian wheat exports continue to drag behind last year by more than 21% (and the lowest for all wheat including durum since 2011) as shipments to Peru, China, Indonesia, and Bangladesh are down 33%, 36%, 36%, 62% respectively. Conversely, U.S. wheat exports are up almost 30% year-over-year and places like Brazil are clamouring for good product. The concern that there’s not a lot of good quality out there continues to be made but without prices climbing, it seems like supply remains relatively decent.

On the production front, Russia likely won’t be producing as much grain as last year’s 73.3 million-tonne bumper crop as yields reverse back more trendline levels, with IKAR calling for a 67.5 million-tonne crop in 2017/18. However, IKAR is expecting exports to stick at the 28 million-tonne level. More angst is building around the temperature in the Black Sea region and the negative effect it could have on winter crops there. However, I take the concerns with the grain of salt as every year we see this same pattern: crop gets planted in the fall, many market participants cry wolf over cold temperatures and inadequate snow cover, and the crop emerges okay, sometimes even in record fashion (case-in-point, last year).

More simply put, I’m not going to be easily swayed to the aggressively-bullish camp after one week of colder temperatures or one region out of dozens being impacted. Nevertheless, we have seen some higher prices lately and that’s likely been impacted more by geopolitical risk, a swaying U.S. dollar, & U.S. winter wheat acres down. On the geopolitical risk front, the war of words between Ukraine & Russia on the political front is boiling over into physical action (unfortunately), giving way to thoughts of spring 2014 when Russia annexed Crimea and wheat prices climbed $1.50 USD / bushel on the futures boards on concerns of wheat shipment disruption.

However, nothing really got disrupted and I’d expect that to be the same in 2017 so any wheat rally should be viewed as a lucky marketing opportunity and should be taken advantage of to sell on the rumour and profit on the fact (one of key grain marketing themes here at FarmLead). Kicking those grain sales down the road and hoping for a summer rally (like some analysts are suggesting) is, in fact, not a good risk management strategy and we want you to avoid the mentally-taxing exercise of shoulda, woulda, coulda.

Overall, this week was highlighted by the WASDE report but it came in a bit blah. There’s a theory that a new market dynamic may be emerging as despite the threat of a large South American crop, the market was able to hold up on small bullish wins, suggesting that the market is already pricing in that competition in the southern hemisphere.

Moving forward, we’ll be looking for more estimates on 2017/18 acreage in the coming weeks, while keeping an eye on weather in Argentina and India as they get closer to their soybean and pulse crop harvests respectively. With this in mind, the back and forth action is likely to persist with any significant moves to the marketing-year highs (or close to it) to be considered a good opportunity to lock in a sale (it’s more fun being on the high-side of the teeter-totter anyways).

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