Waiting for sparks (and rain) — This week in the grain markets

Grain markets worked with a four-day work week to end sideways or up from the week previous. Limited rains in Argentina and the U.S. Southern Plains helped add a few sparks.

For the May 2018 corn contract, prices moved just half a cent lower to end at 3.745 USD / bushel on the Chicago Board of Trade. The new crop December 2018 corn contract ended 0.25 cents higher to close at $3.973. Front-month oats closed at $2.635 in Chicago, down 3%, or about 8 cents, while December 2018 oats futures prices lost 4%, or 10 cents, to close at $2.57.

The May 2018 soft red winter wheat contract closed at $4.633, down about 7 cents or 1.5%. New crop September 2018 prices finished at $4.955 (-1.4% or 7 cents lower) while the December 2018 contract finished the week at $5.17 USD / bushel (-1.2%, or about 6 cents lower).

Kansas City-traded hard red winter wheat prices for nearby movement on the May 2018 contract finished at $4.848, down nearly 10 cents, or 1.8% lower. New crop prices on the September 2018 contract finished at $5.208 (-7 cents, or 1.3% lower), while the December 2018 contract finished at $5.415 (-7 cents, or 1.3% lower).

Finally, hard red spring wheat futures prices in Minneapolis finished at $6.133 USD / bushel, down 0.2% or 1.5 cents. For new crop December 2018 hard red spring wheat prices ended this past week exactly where they ended the week before: $6.39 USD / bushel.

Canola’s May 2018 contract closed at $516.30 CAD per metric tonne, up 1.3% or nearly $7 for the week. New crop November 2018 canola also gained, about $5 or 0.9%, to close just below $510 per metric tonne. Supporting it was soybeans, and the Canadian Loonie, which lost 0.65% for the week to finish at 79.2¢ USD. May 2018 soybeans finished the week at $10.475 on the Chicago futures board, up 15 cents, or 1.5%. New crop November 2018 soybeans were up 0.6%, or 6 cents, to close at 10.28 USD / bushel.

Soybeans continue to be the big story of the grain complex and the main driver of any gains (in addition to headlines). Multiple private estimates for the Argentine soybean crop were downgraded this week while they were raised in Brazil. Specifically, we saw AgroConsult say Brazil would produce 117.5 million tonnes of soybeans, up 3.4 million from their previous forecast. Safras e Mercado just raised its estimate for the 2017/18 soybean crop of 115.6 million tonnes. These numbers would both beat last year’s record of 114.2 million tonnes.

The problem the market is dealing with is whether or not these forecasts will be fulfilled considering weather conditions in the country. Current rains are slowing down the harvest (and affecting grain quality). IMEA estimated the soybean harvest in Mato Grosso is at 58%, compared to 66% a year ago. The soybean harvest in Parana, which accounts for 20% of Brazil’s soybean crop, is only sitting at about 9% complete. Last year at this time, 31% of the record crop was harvested.

Weather forecasts suggest that rain in Brazil will continue into March. As such, the second crop safrinha corn planting is behind. Specifically, in Parana, just 16% of the expected area has been planted thus far, well below the 48% seeded by this time a year ago.

Argentina, meanwhile, is experience conditions opposite to central Brazil with almost no rains in sight. Western parts of Argentina are supposed to see some moisture in the next week but the bulls are entirely focused on the 75-80% of Argentine production areas that are expected to receive nothing. Combined with temperatures in the mid-to-high 80s, and even some 90-degree Fahrenheit hours, there is certainly potential for further downgrades to Argentina’s soybean and corn crops.

That being said, the Rosario Grains Exchange slashed their estimate on Argentine soybean production to 46.5 million tonnes, a 5.5 million-tonne drop from their previous number. Agripac put its number at 47 million tonnes while Argentine consultancy Agritrend is expecting somewhere between 47 and 48 million tonnes.

Joining the forecast declines this week, Buenos Aires Grain Exchange lowered their soybean harvest estimate for Argentina by 3 million to 47 million tonnes. Comparably, the USDA seems steadfast at 54 million tonnes, as per the last WASDE report a few weeks ago (although the market largely expects this number to fall in the March WASDE, which is published on Thursday, March 8th).

As it relates to Argentine corn production, expectations continue to dip. The Rosario Grain Exchange dropped its estimate by nearly 5 million tonnes to peg things at 35 million tonnes. Comparably Agripac downgraded their estimate to 37 million while Agritrend is fluctuating between 37.5 and 38 million tonnes. The USDA is currently forecasting 39 million tonnes.

Speaking of USDA forecasts, the annual February Outlook Forum took place this week, where the government agency released its 10-year outlook for the agricultural industry. Included in them were some updated forecasts for 2018 acres in America. Soybeans came out at 90 million acres while corn’s 2018 U.S. acreage was also forecasted at 90 million acres.  Comparably, a Reuters poll had soybean acres at 90.6 million and corn at 89.9 million. In the Bloomberg survey, 90.7 million acres of soybeans and 90.1 million acres of corn were forecasted.

Except for the USDA, it seems, the market (including farmers) thinks more soybeans will get planted into American soil in 2018. With a price ratio of about 2.6 to 1 for soybeans to corn, this is above the inflection ratio of 2.5, suggesting soybeans are more profitable to plant. In many fringe areas, soybeans and spring wheat are clawing back area that’s been mostly planted to corn the past few years. This is especially true in places like the Dakotas, where dry soils have farmers a bit concerned about producing decent yields on a crop like corn, which tends to need more moisture.

That being said, the USDA is forecasting U.S. wheat acres in 2018 to climb to 46.5 million acres. This is the second-lowest total wheat number on records, and up 500,000 acres from last year’s 46 million acres, which is the record low for history books.

For U.S. winter wheat, conditions are fairly bleak. Rain will be needed soon, or shortly after the crop exits dormancy to avoid large yield losses. The most recent U.S Drought Monitor report puts 100% of Oklahoma in moderate, severe, or extreme drought. In Texas, that percentage is 99%. It’s 72% in Kansas and 42% in Colorado.

New 2018/19 production forecasts out from the International Grains Council are also having an impact. The IGC is calling for more barley, corn, and rapeseed, but less wheat to be harvested for the 2018/19 global crop.

Overall, the market continues to be focused on dryness, namely in Argentina and major U.S. wheat producing regions. Will we continue to see sparks fly if Argentina’s weather forecasts materialize and moisture stays in short supply across the U.S. Plains? Most analysts would say yes. Let’s not forget though about where prices are today relative to where they’ve been the past year. While I do think that there are some legs left in this rally, it could take one good rain to wash all the gains away.

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