Swimming with WASDE: This week in the grain market

This past week’s grain markets were highlighted by the USDA’s March installment of the monthly WASDE report. Going into the report, the market was looking for some big changes to South American production possibilities, but it wasn’t necessarily expecting the American balance sheet to provide the surprises.

The USDA dropped its estimate of the Argentine soybean crop from 54 million to 47 million tonnes, 1.4 million tonnes higher than what the average pre-report guesstimate was. Most private estimates continue to be below this number, which suggests that we may see a further cut to Argentina’s soybean production number in the April WASDE, out on Tuesday, April 10. (Mark the calendar!)

Next door in Brazil, soybean production was raised by 1 million to 113 million tonnes. This was slightly below the 113.8 million tonnes the market was expecting. CONAB, basically the USDA in Brazil, also pegged the soybean crop there at 113 million tonnes.

The bearish surprise in the WASDE soybean numbers was U.S. 2017/18 carryout being raised 25 million bushels. Most of the increase was attributed to smaller exports.

Thanks to Argentina’s smaller crop, soybean carryout worldwide was felled by 3.7 million tonnes to 94.4 million. Overall, the report wasn’t exactly bearish, but given the move in soybean prices in the past 36 hours since the report, hours, one could easily argue that indeed it was bearish.

This was highlighted by a significant sell-off on Friday of 24 cents USD/bushel on front month contracts and 15 cents on new crop soybean contracts at the Chicago Board of Trade. The May 2018 contract lost 3%, or nearly 32 cents USD/bushel for the week to close at $10.393. Comparably, November 2018 new crop soybean prices lost only 7 cents though, down 0.7% to close at $10.30.

Canola prices followed soybeans lower this week, highlighted by Friday’s move to the downside. Losses were about $6 – $7 CAD / metric tonne on this day alone. For the May 2018 contract, canola prices lost about 2.3% or $12.20 to close at $512. For the July 2018 contract, canola prices lost 2.4%, or early $13 to end the tumultuous week at $518.50. On new crop canola prices, the November 2018 contract closed at $507.80, down 1.9% or $10 from last Friday’s close.

The bullish news of the WASDE report was seen in corn, as US corn exports and ethanol use were increased, which intuitively dropped carryout numbers by 225 million bushels month-over-month to 2.127 billion bushels.

Also playing a role in the bullishness was Argentina’s corn crop being dropped by 3 million tonnes to 36 million. Brazil’s corn production number was lowered by 500,000 tonnes to 94.5 million, a number that was still much higher than the 92.2 million-tonne average pre-report guesstimate. This all added up to global inventories of corn being lowered by nearly 4 million to 199.2 million tonnes.

Accordingly, May 2018 corn prices in Chicago gained 1.3%, or more than 5 cents USD / bushel this past week to end it at $3.905. For the December 2018 contract, corn futures improved by 0.7% or 3 cents a bushel to close at $4.073. Both old and new crop would’ve had a better weekly performance if it wasn’t for the Friday sell-off which saw corn contracts lose 3 cents.

For wheat, the USDA lowered hard red winter wheat exports by 15 million bushels and hard spring wheat exports by 10 million bushels. This meant the U.S. wheat ending stocks were raised by 25 million bushels month-over-month to 1.034 billion bushels.

Internationally, global stocks for the end of the 2017/18 crop year were raised by nearly 3 million tonnes to almost 267 million (reminder: this is a record). This, despite Russia’s exports being hiked from 36 million tonnes in the February WASDE to 37.5 million tonnes in the March WASDE.

Much like soybeans, winter wheat prices saw double digit losses on Friday, while hard red spring wheat prices were able to weather the storm a little better. May 2018 spring wheat in Minneapolis dropped more than 7 cents to close at $6.175 USD/bushel. This would put the weekly performance at 0.4% lower, or down about 3 cents.  For new crop prices off the December 2018 contract, spring wheat prices closed were quite volatile but closed all of a half cent lower at $6.413

For Chicago soft red winter wheat, prices on both the May and December 2018 contracts lost a dime on Friday. Specifically, May closed down nearly 11 cents for the week, or 2.2% lower. On the new crop December prices, Chicago SRW wheat prices ended the week at $5.42, or down 5 cents from last Friday’s close (-0.9% for the week).

Kansas City hard red winter wheat prices performed worse. The May 2018 HRW wheat contract in KC lost nearly 13 cents on Friday alone to close at $5.205. For the week, this makes it more than a 13 cent net loss, or down 2.4% from last Friday. On the new crop December 2018 contract, prices lost nearly 12 cents on Friday to close at $5.733. This would be more than an 11 cent loss for the week, or down about 1.9%.

Ultimately, the flood of capital that came into the market seemed to pull out of its positions on Friday. Is the bullish run done yet? It’s hard to say but we know a few bearish things going forward. First, there is rain in the forecast for Argentina next week, but it’s likely too little to late for the soybean and crop there. There will likely be another reduction by the USDA to the Argentine soybean crop in the April WASDE but that’s another month away.

Another datapoint: it remains dry in the U.S. Southern Plains, but it does look like there’s also rain in the forecast for that region too. Nowhere is the moisture events more evident than in Western Canada and the Northern Plains where a recent huge dump of snow this past week will add anywhere from an inch to two inches come spring time.

Overall, the market built up a South American weather premium, aided by a lot of speculative money joining the market. However, as the saying goes, when the tide goes out, you can see who is swimming naked. Thus, what was generally considered a boring day of swimming with the USDA may have turned into a volatile and panicky day for some at the beach, or rather, on the futures boards.

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