Wrapping up July — This Week in the Grain Market


Grain prices this week pulled back on some benign weather and profit-taking by funds. ere able to gain a bit on not enough rains falling on key areas in North America. Chicago wheat was the biggest loser, down more than 3.5% for the week. Oats fell 2.3% while corn dropped 1.2% since last Friday. Soybeans losses were limited by some decent U.S. export sales, only losing 0.95% for the week. Canola was the only winner, up 0.85%. This was surprising since the Canadian Dollar gained 0.8% for the week. Wrapping up the July trade though, the Canadian Loonie was the best performing, up 4.2% for the month.

The weekly U.S. Drought Monitor released this week showed that drought conditions intensified across the central U.S last week. We already know that the Northern Plains have been dry but let’s try quantifying it. For total year to-date, North Dakota has only seen about 45% of their average rainfall. More than 79% of the state is experiencing moderate, severe, extreme, or exceptional levels of drought. More specifically, nearly 46% of the state is in extreme or exceptional drought. That’s technically worse than South Dakota. Only 15% of the state is rated in extreme or exceptional drought condition. However, there is another 65% is ranked in the moderate and severe drought columns. In Montana, nearly 24% of the state is rated in extreme or exceptional drought. About 33% of Iowa is ranked in a moderate drought.

The U.S. Wheat Quality Council’s spring wheat crop tour went down this week, showing us what we already know: lower yields. Their final estimate pegged the HRS wheat yield at an average of 38.1 bushels per acre. This figure would be the lowest yield since 2008.

And compare it to the following:

  • Last year’s tour forecast of 45.7 bushels per acre;
  • The 5-year average of 46.8 bushels per acre;
  • The 10-year average of 43.9 bushels per acre; and
  • The USDA’s July estimate of 40.3 bushels per acre.

Durum wheat prospects also came in low at 39.7 bushels per acre. During last year’s tour, that number was 45.4 bushels per acre. There are certainly many farmers out there who think the final number is lower for both HRS and durum wheat than what this crop tour is suggesting. Many are pointing to abandonment and the fact that the tour didn’t check into arid areas in western North Dakota and Montana. Right now the buzz is that somewhere between 10-13% of spring wheat acres won’t be harvested.

Saskatchewan good-to-excellent crop ratings (in blue) are well below the five-year average (click to enlarge)

Across the border into Saskatchewan, the most recent crop report said that the dry weather has “deleted topsoil moisture and damaged crops.” The provincial government suggested the just 40% of fields have a surplus or adequate supply of soil moisture. 38% of fields are short while 22% are very short. This trend surely corresponds to how the crop is faring. Good-to-excellent (G/E) ratings for the Saskatchewan spring wheat crop is just 58%. The 5-year average for this time of year is 80%. For durum wheat, it’s even worse with only 21% considered to be in G/E health across Saskatchewan. Other notables that are down significantly from the 5-year average is mustard at 21% G/E (74% is the 5-year average), flax at 32% (74%), soybeans at 40% (71%), and chickpeas at 71% (73%).

Saskatchewan Agriculture’s topsoil moisture map for the week of July 24 (click to enlarge)

Staying on the reporting front, the International Grains Council came out this week with their update of global production and demand. On canola/rapeseed, the IGC expects worldwide production to be up 2% from last year to a 3-year high of 71 million tonnes. They also noted that Australian canola exports to the European Union are on the rise. The IGC said that they’re expecting a moderate rebound in malt barley demand. This comes as global barley production is expected to drop 8% year-over-year to 138.1 million tonnes. Moreover, global barley stocks are set to drop from last year, especially in major exporting-regions like the EU, USA, Canada, and Australia.

Over in Russia, while the crop is looking similar, if not larger than last year’s crop. Further, while last year’s crop didn’t have amazing quality, it seems to be much of the same this year. From a price standpoint, 12.5% protein wheat is being offered out of Black Sea ports at $196 USD/MT (or $6.70 CAD/bushel). For 11.5% protein, FOB port prices are sitting around $185 USD / MT (or $6.30 CAD / bushel). On the barley front, Russian barley is being offered up at about $165 USD / MT (or $4.50 CAD/bushel).

In Argentina, wheat planting of the 2017/18 crop has been slowed by rains. To date, about 10.9 million acres of been seeded. With the rains though, it may be tougher to get in the other 2.5 million acres that the Buenos Aires Grain Exchange is forecasting (the planting window ends in August). Acres that are not seeded with wheat as planned will likely go to soybeans in September.

In Europe, the agronomy division there says that corn yields are going to come in smaller than expected, thanks to summer heat. MARS is calling for average yields across the continent of 108.8 bushels per acre. This figure is 3.4% below last year’s 112.6 bu/ac average yield. For soft wheat, MARS is calling for an average E.U. yield of 87 bushels per acre. In France, expectations are for a 101.7 bushel per acre crop. Comparably, Agritel recently pegged France’s crop at an average yield of 105.9 bushels per acre. This translates to a 36.64 million tonne crop, or a significant 33% improvement in production over last year. These yields are still below the average, but higher acreage is compensating to produce the bigger crop.

We can all agree that we do not have last year’s crop in North America either. We can probably also agree that the worst areas of production won’t be balanced by the best areas. It is hard though, to ignore the size of the carry out to not only start the 2017/18 crop marketing year but also where supply will be at the end of said crop season. Soybeans might the outlier on this front. Rababonk suggests that the market could be a in shortage situation if yields decline 3-4 bushels per acre from where they’re currently forecasted (48 bpa is the USDA’s estimate).

We can all agree that U.S. soybean yields won’t be anywhere near last year’s records. Still, David Widmar at Agricultural Economic Insights, explains that the most important factor right now is harvested acreage. U.S. and Brazil accounted for 48% of total global soybean acres in 2016 (and more than half of all production). Looking at acreage expansion since 1990 though, Widmar notes that U.S. soybean acres are 46% higher than they were in 1990, or a 1.5% average growth each year.

In Brazil though, 248% more acre were seeded to soybeans in 2016 versus 1990. This figure represents a 5% increase every year. One more notable point from Widmar is that there are six other countries who had even bigger acreage growth rates than Brazil. They are Argentina, Paraguay, Uruguay, Ukraine, India, and Canada. If area growth continues to trend the way it is, we’ll continue to take off larger soybean harvests globally.

Karen Braun from Reuters points out that a reduction in U.S corn yields and correspond production does not correlate perfectly with a reduction in carryout numbers. She argues that a cut in production during the growing season usually corresponds with a drop in demand as well. In the past 20 years, the USDA has plugged in an average corn yield estimate in the August WASDE report that is below their long-term trend yield. 7 out of those 8 times, U.S. corn demand also fell. Braun expects consumption numbers for corn to fall in August if the USDA downgrades the average corn yield.

The categories of exports and feed and residual are the likely targets. However, with a smaller wheat crop coming off this year, 2017 might be comparable to 2001. That year, the USDA did downgrade corn yields. However, that year’s corn demand for feedstuffs did increase because less wheat went into the feed market. The other thing we can expect is U.S. corn stocks by the end of 2017/18 to fall a bit. Currently, projected stocks going into 2017/18 of 2.37 billion bushels (60.2 million tonnes) which would be the largest nearly 30 years.

Even with a smaller crop this year, the current projection is for 2.325 billion bushels (using 170.7 bu/ac yield). With a yield reduction to 165 bu/ac, this would suggest a 2017/18 carryout closer to 1.85 billion bushels (47 million tonnes). But knowing that carryout and yield reductions don’t go 1-for-1, as Braun successfully notes, better estimates would suggest something closer to 2.1 billion bushels (53.3 million tonnes).

If anything, we’ll likely see U.S. corn exports pull back a bit. 1.875 billion bushels (or 47.63 million tonnes) is a lot of corn to ship out of America. Especially considering that the combined Brazilian and Argentinian crops are expected to be 44% bigger than what they were a year ago. 97 million tonnes of corn will come off this year in Brazil, while Argentina will combine 41 million tonnes. Last year, the corn crops were just 67 million and 29 million tonnes respectively. Further, South American corn exports are most active in the July-November months.

Overall, we expect the USDA to downgrade their average corn yields in 2 weeks in the August 10th WASDE report. I expect that after this week’s crop rating downgrade, we’ll see the yields come in somewhere around 167-168. Any negative weather from here on in won’t be counted towards the August WASDE. Please understand that really, the next few weeks are negligible when it comes to the USDA’s numbers. There’s some variability in the crop – some areas received too much rain, some areas haven’t received enough.

Overall though, corn prices are responding right now to two things: weather forecasts and the crop mentioned above ratings (you could argue that part of the latter could also include drought percentages). Mathematical models are trying to plug in all these factors to produce a yield number, corresponding carryout number, and more importantly, appropriate prices. By the end of July, the margin of error that these models have a much smaller margin of error. This means that the understanding of the size of crop (at least in the U.S.) is getting appropriately priced in.

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