Fundamentals vs Speculation — This Week in the Grain Markets

Grains finished the first full week of March on a lower note, mainly due to a stronger U.S. Dollar and a relatively bearish WASDE report from the USDA on Thursday. Oats was the only real winner of the week, up 2.15%, whereas as soyoil was the biggest loser, down 5.5% since last Friday as WTI crude oil prices were down 9.25% for the week. Corn lost 4.2% while wheat and soybeans were down 2.8% and 2.9% respectively.

Canola was able to weather the storm, dropping only 1.85% for the week, mainly thanks to the Canadian Loonie dropping 0.5%. With South American grain production a little more known this week, the market is starting to trend more towards trading fundamentals instead of speculation.

Ahead of the report, all eyes were on South American production numbers and the bears were rewarded with record soybean and corn production from Brazil. Accordingly, new crop November soybean prices on the Chicago Board of Trade dipping its toe back into single digits while new crop December corn tried to hold its ground, still hovering slightly below the psychologically-significant $4 USD / bushel.

The USDA announced Brazilian soybean and corn production at 108 million (up 4 million tonnes from last month) and 91.5 million tonnes (also a 4 million-tonne increase from last month) respectively. This is slightly above CONAB’s updated forecasts of 107.6 million tonnes of soybeans and 88.9 million tonnes of corn. Next door in Argentina, the USDA kept soybean production at 55.5 million tonnes but raised corn production to 37.5 million tonnes. This comes in slightly below the local forecast from the Rosario Grain Exchange, who is pegging soybean and corn production in the country at 56 million and 38 million tonnes respectively.

Globally, the bigger South American crops mean that soybean ending stocks were raised by more than 2.4 million tonnes to 82.8 million tonnes, and world corn carryout for 2016/17 was increased by 3.1 million tonnes to 220.7 million tonnes (both records). Global wheat ending stocks for 2016/17 was increased by 1.34 million tonnes to almost 250 million tonnes (another record) as bigger crops from the Southern Hemisphere (Argentina & Australia) offset some readjustments lower in the European Union.

Domestically in the U.S., the 2016/17 soybean carryout was raised by 15 million bushels to 435 million bushels as exports were lowered by 25 million bushels to 2.025 Billion bushels but domestic crush was increased by 10 million to 1.94 Billion bushels. Corn put into ethanol in U.S. was increased by 50 million bushels, but feed & residual use was lowered by 50 million bushels, making the changes mute, while exports stayed firm at 2.225 Billion bushels, despite the fact that exports are currently 68% higher than where they were a year ago.

On the wheat front, U.S. ending stocks were only lowered by 10 million bushels as the USDA lowered the import number by the same amount. From a price standpoint, corn and Chicago wheat futures prices were unchanged at $3.40 USD / bushel and $3.85 / bushel respectively, while soybeans were bumped up by 10 cents to $9.60 / bushel.

French winter crops are looking pretty good, with 93% of France’s wheat crop rated good-to-excellent (G/E), 90% of barley considered in G/E health, and 82% of the durum crop in G/E condition. In Russia, winter grain conditions are “better than normal” per the Hydromecentre, suggesting that portion of the crop that gets categorized as winterkill will be lower this year. According to UkrAgroConsult, 81% of the Ukrainian winter crops are in good or satisfactory condition as the crops start to come out of dormancy.

On the export front, Ukraine has now shipped out over 30 million tonnes of grain in the 2016/17 year, whereas Russia has now export 24.6 million tonnes of grain (down 3.5% compared to this time a year ago), including 19 million tonnes of wheat. The strength of the Russian Rouble thus far in 2017 and the Egyptian ergot policy kerfuffle on wheat imports in September / October are some of the main reasons as to why Russian grain export volumes aren’t hitting the targets that everyone had in mind at the beginning of the marketing season.

While Egypt stifled their imports early in the season because of uneducated policies (and also rejected a couple of Russian and Argentine wheat boats this week because of quality issues), India’s government went the other direction, opening up their doors to wheat shipments in 2016/17. This year, India will likely import the most amount of wheat in a decade as import duties were dropped for the past few months, helping get up to 5.5 million tonnes (already more than 5 million shipped in through their ports since June). However, Russia is stopping its wheat exports to India as the Indian government is expecting to buy 32-33 million tonnes of the upcoming harvest for state reserves, a big jump from the 23 million tonnes bought by the government last year.

Switching in pulses, the Canadian government is winding up its trip to India to try and solve the fumigation exemption (or lack thereof) issue, but nothing has been heard yet. Accordingly, some companies are coming back with new crop bids of 30¢ CAD / lbs for #2 large and small green lentils, 26¢ for medium green lentils, and 22¢ for #2 or better small red lentils (post your new crop lentil deal on FarmLead today to let buyers coming back to the market see your deal!). The lower bids also are a result of the larger carryout of supplies expected, now that India has changed their import policies and not as much is getting shipped out during the question period that is “how are we going to export this product?”.

Speaking of lower levels, ABARES is expecting Aussie wheat production to pull back substantially from this past year’s bumper crop of 35.1 million tonnes to just 24 million tonnes in 2017/18, mainly because of yields returning to more trendline values and acres falling 1.1% year-over-year (YoY) to 31.9 million. On the export front, ABARES thinks that 2017/18 wheat exports from the Land Down Undaa will come in at 20.9 million tonnes, a drop of 8.4% from this year’s 23 million tonnes. Wheat isn’t the only crop pulling back, as Australian barley production is seen dropping 37% YoY to 8.5 million tonnes on more average yields but thanks to better returns and higher prices, canola acres in 2017/18 are expected to climb, keeping production elevated.

That being said, demand continues to support the canola market but soybeans have some mounting pressure from South America that it’ll have to start dealing with. More concretely, this week’s WASDE report confirmed what a lot of the market already knew: South America is producing a large crop. The two questions I have though still are (1) how will this impact 2017 acres in North America and (2) will the USDA eventually acknowledge the strong pace of U.S. grain exports in 2016/17? Clearly there’s time before the Argentine crop has to come off and we still have to put a crop into the ground without issue in North America.

That in mind, time is winding down on what farmers will plant in 2017/18 and the price ratio of new crop soybeans to corn is still sitting above 2.5 but the recent improvement in corn prices has some thinking that there could be a few more acres flip back to the coarse grain. Given that the major of acreage decisions have been made, there may be 1 or 2 million acres that could swing back towards corn if the weather conditions are good, but corn seems to be more of a gamble than soybeans right now. As we get closer to drills rolling though, those switches will be harder to make, but in the meantime, speculation about those acres will likely start to increase.

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