One Report to the Next — This Week in the Grain Markets

Grains started the month of April with a little bit of follow-through fanfare from the USDA’s stocks and acreage report on March 31st and some speculation over the start of the North American planting season and end of the first South American harvest.

For the week, canola was the winner, gaining 0.9% which was helped by the Canadian Loonie losing 0.85% over the past five sessions. On the flipside, oats lost 3.4% since last Friday while corn was down 1.25%. Finally, wheat and soybeans dropped 0.4% and 0.45% respectively with some bearish headwinds holding ground as we head into next Tuesday’s April WASDE report.

Towards the end of the week, the broader market was put on edge thanks a heightened level of geopolitical risk in the game after American President Donald Trump ordered a missile strike on Syria-government-controlled resources. The move comes in retaliation to a chemical bombing by Syrian forces on Syrian rebel areas on Tuesday, which killed more than 70 people, including at least 30 children. Since Russia has been backing the Syrian government, this compounds the tension between Putin and Trump, and with more uneasiness in the Middle East, oil hit a one-month high while gold touched levels not seen since November’s U.S. election as investors look to safer assets. Combine this with the fact that President Trump is having some very, very important meetings with Chinese President Xi Jinping in Florida which will obviously touch on trade.

While the ongoing struggle of peace and war in the Middle East is concerning from a humanitarian standpoint, the effect it has on the grain markets has been minimal…for now. If Russian and U.S. geopolitical tensions should escalate, you may see more trade issues coming out of Eastern Europe as the Kremlin tries to flex its muscle against president Trump. Accordingly, it’s very possible that if things continue to escalate, we might see a similar rally in the markets that we did two springs ago when Russia annexed Crimea from Ukraine might.

Staying in Europe, the French soft winter wheat crop is still rated 90% in good-to-excellent condition, indicating a good start there, albeit we did see similar numbers this time a year ago before rains depreciated the quality of the crop in May and June. The USDA’s attaché for the E.U. thinks that the bloc will produce a 151.7 million-tonne wheat crop (including durum), which is second in size to only Coceral’s large estimate of 153.2 million tonnes.

Despite the production rebound, European wheat exports in 2017/18 are likely to land somewhere between 29 and 30 million tonnes, mainly due to losing market share to the Middle East and North Africa. Also affecting E.U. barley exports is the decision by Saudi Arabia to switch from that to corn for animal feed as the country’s poultry and dairy industries are growing.

Switching continents, according to IMEA, Brazilian farmers have sold about 55% of their soybeans. Compare this against last year in largest-producing state, Mato Grosso, when 61% of the production was already sold. One thing to keep in mind though is the domestic price has dropped with the recent appreciation of the Brazilian Real (up 13% against the U.S. dollar in the past year), including in Mato Grosso where prices are the lowest they’ve been in over two years. Despite this, Chinese buyers are still in the market as crush margins in the People’s Republic have started to improve and “have a sizeable amount of requirements left to secure for the May to July loading period,” according to Commonwealth Bank of Australia.

Next door in Argentina, domestic soybean prices are up nearly 3% since the start of the week (versus CBOT values down almost 1% in the past week) as the traders there are starting get a bit more spooked on what rains in the forecast will materialize. However, it’s hard to expect prices to see the rally they did this time a year ago through mid-June as there’s plenty of supplies in the global pipeline still.

Further, key growing regions are likely to miss where the rain is heaviest and warmer/drier weather is expected to open up the fields for combines again next week. Average guesstimates by the market today is that the USDA will increase their estimate of the Argentinian soybean crop by 500,000 MT to 56 million, slightly below Beunos Aires Grain Exchange’s call of 56.5 million but way above the likes of TellusPlanet’s satellite-imagery-based forecast of 52.3 million tonnes.

Conversely, rains in the U.S. have been helping improving dry soil conditions, providing a bearish counter to the U.S. national winter wheat crop rating of 51%, down eight points year-over-year. Across the 49th Parallel, the Commodity Weather Group is expecting the last two weeks of April to be wetter-than-normal in Western Canada, creating some tough conditions to get field work in before the rush to roll drills starts. This is obviously compounded by the fact that there’s a lot of work that wasn’t done in the wet conditions of last fall, especially considering that there’s about 2.3 million acres of uncombined fields still sitting out between Alberta and Saskatchewan alone.

That being said, the UN is forecasting grain markets to be relatively tranquil in 2017/18, thanks to the bounty of grain available, although they do see less wheat but more coarse grains (including corn, barley, sorghum, etc.) to a new production record of 1.353 Billion tonnes. What’s been the opposite of tranquil is the possibility that India might not renew the fumigation exemption that Canada’s been enjoying. However, at the 11th hour, a new exemption was granted and we started to see some bids come back to life across the Canadian Prairies.

With the India elephant out of the room, the only one left is how much the market believes the numbers from the USDA last Friday. The big surprise came in the form of U.S. soybeans acres getting pegged at 89.5 million, 1.3 million higher than what the average pre-report guesstimate was and a whopping 6.1 million acres bigger than last year (or a 7.3% jump year-over-year). Accordingly, as the market priced in more acres, soybean prices have dropped nearly 9% in the past month.

However, we started getting bearish on the oilseeds markets all the way back in January (see our timestamped call here on the 2017 outlook), cognizant that there could be some good pops to take advantage of, but knowing in the long-term things were poised to head lower because of large expected oilseed acreage in both America and in Canada (somewhere between 21 and 22 million acres of canola? Yes.). This has only been compounded by the fact that the Brazilian soybean harvest has been coming in bigger than expected and crop development in Argentina has been more smoke than fire.

Not to drag It out more but the USDA’s stocks report on Friday shows that there’s also 1.735 Billion bushels of soybeans still in the U.S., a 13.3% jump from March 1, 2016! This number came in a little bit above pre-market expectations but given the record U.S. crop that came off in 2016, and despite relative decent domestic and export disappearance, we already knew there was a lot of beans still available.

For corn, the existing inventories are a bit more puzzling as with 8.616 Billion of still unused bushels in America, that’s 10% higher from last March, but the pace of feed use, export volumes, and ethanol crush suggests this number should be in fact lower and we expect to be revised lower in the next few months. U.S. wheat stocks jumped 20% year-over-year to 1.655 Billion bushels, thanks to a massive winter wheat crop, and because of the corresponding drop in wheat prices over the past year are down about 20% (crop type dependent), acres are down significantly as well.

More specifically, U.S. winter wheat acres dropped 3.5 million or nearly 10% to 32.7 million while spring wheat acres fell 5% or 600,000 to 11.3 million for Plant 2017. The biggest impact though on wheat was seen in the durum side of things as acreage is forecasted by the U.S.D.A. to decline 17% from last year to an even two million acres. Combine this with Canadian durum acreage likely dropping closer to 5 million acres from the 6.2 million last year, we could start to see prices stabilize, albeit the European crop is looking pretty good right now.

For corn, 2017 U.S. acreage came in a little bit below pre-report guesstimates at 90 million acres, which is a 4 million or 4.3% drop from 2016. As both stocks and acreage numbers for corn are looking bullish, futures and cash values have been holding their own. This is likely also to do with the fact that there will clearly be less acres going into feed grains in 2017 in the U.S. While corn and wheat acreage are both down from last year, U.S. sorghum acreage is forecasted to fall 14% to 5.76 million while American oats and barley will drop by 119,000 and 504,000 acres respectively. This doesn’t mean feed prices are going to climb up because we still have a large supply available, but yields will be something to watch for during Harvest 2017.

Finally, with the spread between November soybeans and December corn futures now below $2.50, is it possible that we see a slight bump in corn acreage when all is said & done? There’s more reports coming out that could intuitively swing decisions but if weather is decent, it’s more than likely that American corn drills will continue to roll. If you’re waiting for the Plant ’17 rally, just keep in mind that if weather markets do materialize, the highs are usually found somewhere between mid-June and early July) with the July WASDE report providing enough insight for the market to work with.

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