Returning to the average — This week in the grain markets

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On Thursday the United States Department of Agriculture (USDA) came out with their monthly world agricultural supply and demand estimates (WASDE). Usually, November is a bit of a sleeper month, but given the delayed corn harvest in the U.S., there were some ideas that the USDA might provide the market something in line with the pre-report average expectations. Unfortunately, it didn’t.

The grain complex was trending higher to end this week, until the USDA came out with some bearish data. Thus, corn ended 1.35% lower, and January soybeans dropped from the $10 handle it was nudging to end the week where it started around $9.87. Canola was similar: down just 0.3% for the week (mainly thanks to the Canadian Dollar improved by 0.6% for the week). Kansas City hard red winter wheat gained 1.5%, outpacing Chicago soft red winter wheat, which gained 1.15%.

Other than oats (up 3.4% for the week), spring wheat was the big winner, gaining 3.2% to close at its highest in nearly two months on the Minneapolis Grain Exchange. The rally was because the market is pricing in more American acres as “abandoned”. More specifically, the USDA is pegging the U.S. spring wheat area harvested at 9.7 million acres, with just 8% abandonment.

While abandonment is up 2.6% from 2016/17, this year’s number is driven mainly by South Dakota’s 31% abandonment. For North Dakota, it’s pegged at 5%; in Minnesota at 2.5%; and in Montana, at 8%. We’re still a month away from the USDA’s announcement on that though.

The USDA didn’t change too much on the wheat balance sheet in this week’s WASDE. We were looking for some production downgrades from the southern hemisphere in Australia and Argentina, but they never came. The only update from the southern hemisphere came from CONAB, which dropped Brazil’s wheat production estimate to 4.57 million tonnes. That’s a five-year low and nearly one-third lower than last year’s record crop.

The USDA did increase U.S. wheat exports by 680,000 metric tonnes (or 25 million bushels), but they increased Russia’s too. It’s expected that the Black Sea nation will be the global leader in wheat exports at 33 million for the 2017/18 crop year. Egypt recently bought another 120,000 MT of wheat from Russia. The price paid, however, was the lowest since August, at $210 USD per metric tonne (or $5.70 USD and $7.30 CAD per bushel). This brings Egypt’s total wheat purchases thus far in 2017/18 to 3.8 million tonnes. Russia has accounted for 64% of this (or 2.42 million tonnes).

Total Russian wheat exports are tracking about 13% ahead of last year with 9.54 million tonnes shipped out in the first 3 months of the 2017/18 marketing year. From a January to September measurement though, nearly 21 million tonnes were shipped out. That’s 18% better than what was done in 2016 over the same timeframe.

What’s more interesting though is that the Russian Ag Ministry recently announced that they’re aiming to increase their grain export capacity to 7.5 million tonnes per month within the next three years. Currently, they’re only able to ship out five million tonnes, meaning this infrastructure expansion would increase grain export capability by 50%. For 2017/18, total Russian grain exports are forecasted to hit 45 million tonnes. Already, exports-to-date are up 23% from where they sat a year ago. For reference, in the past 15 years, Russian grain export capacity has increased nine-fold.

Coming back to the WASDE, the USDA pegged U.S. corn yields in their October report at 171.8 bushels per acre. Ahead of this week’s report for November, traders were expecting to see an average U.S. yield of 172.4 bushels per acre. Instead, the USDA blew all expectations out of the water with a new record yield of 175.4 bushels per acre. The previous record was set last year with a yield of 174.6 bushels per acre.

What’s interesting is the last corn rating of the year pegged this year’s crop at 66% good-to-excellent (G/E), 23% fair, and 11% poor-to-very poor (P/VP). The last corn rating of 2016 pegged the corn crop at 74% G/E, 19% fair, and 7% P/VP. Clearly, the fringe producing states are no longer bringing down averages.

While the record corn yield is clearly bearish, corn prices dropped less than 7 cents on the day. Most people, including yours truly, were expecting more of a drop. Why didn’t it happen? Managed money is already extremely bearish on the market with nearly 200,000 short positions. With such little volume in the trade, perhaps no one is willing catch that knife.

Globally, we saw the USDA bump ending stocks as well, increasing them by almost 2 million tonnes to nearly 98 million tonnes. This is up more than 3% year-over-year. Brazil’s soybean production and exports number was increased by 1 million tonnes each for 2017/18 to now sit at 108 million and 65 million tonnes respectively. On the flip-side, the USDA increased Chinese imports by 2 million tonnes to 97 million tonnes. While that’s certainly a positive, we continue to think that there’s other bullish things about soybeans.

This week, we also got the heads-up from India that they’re going to start taxing the importation of peas by 50% and wheat by 20%. This is bad news for Canada considering India is the number one destination for pea exports — by a long shot. Last year, In the 2016/17 crop marketing year, Canada export 2.02 million tonnes of peas to India. The next closest was China at 755,000.

From a different perspective, Canada produced a little more than 4.8 million tonnes of peas in 2016/17. Canada also exported nearly 3.35 million tonnes of peas (to all destinations) in 2016/17. Thus, India got 60% of all Canadian pea exports or. Or, India received 42% of all Canadian peas produced in 2016/17.

Maybe last year as an anomaly? Average total Canadian peas exports in the five years preceding last year’s record campaign barely averaged 2 million tonnes. Further, India usually only accounts for about 50% of all Canadian pea exports. Thus, while the Indian peas import tax is certainly bad news, perhaps the exportation of Canadian peas is going to return to more normalized levels. Case in point: to date, only about 850,000 MT of peas have been shipped out. Last year at this time, almost 1.5 million tonnes of peas had sailed out of Canada.

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