What will catch the falling knife?

Soybean futures ended the week at 10-year lows.

Grain markets lost a fair amount in the second week of July and heightened geopolitical risk (read: trade war) and some decent-looking crops have negatively impacted grain prices. The latter factor was surmised by this week’s July 2018 WASDE report, which provided a reset of the goalposts when it comes to global agricultural supplies and demand.

Specifically, for corn, the USDA’s July WASDE report told the market that American farmers will produce 14.23 billion bushels (bbu) of corn in 2018. This figure is 190 million bushels (mbu) higher than June but still below last year’s crop and the five-year average. Most eyes were glued to demand numbers in the July WASDE but the byproduct of this is ending stocks: U.S. 2018/19 corn carryout will come in at 1.55 bbu. This would be a 23% decline from last year’s carryout of 2.03 bbu!

The lower U.S. corn carryout was because of better exports, to the tune of 3.2 million tonnes (MMT) more than what the USDA was estimating in June. The agency says that 2018/19 global ending stocks will come in at 151.96 MMT. This is 2.7% lower from the pre-report average guesstimate of 156.27 MMT. While these numbers should be considered bullish, corn prices still lost about 20 cents for the week, with the December 2018 contract closing just under $3.55 USD/bushel in Chicago.

For soybeans, a major sell-off saw prices on the Chicago Board of Trade fall 60 cents to now sit at 10-year lows. This means that the November 2018 contract closed at priced at $8.34 USD/bushel on Friday. The main reason for the decline (other than the trade war) is bean carryout. Average trade expectations before the report were 471 mbu still left in the U.S. pipeline as of the end of 2018/19. However, the USDA said there’ll be 580 mbu available. This is up 51% from the June report and 25% more than where the 2017/18 crop year is supposed to end.

Looking globally, the USDA said that 2018/19 global ending stocks will come in at 98.3 MMT. This is significantly higher than the 88.15 MMT estimate among trade analysts ahead of the report and the 87 MMT seen in the June report. This is mainly because U.S. soybean exports were felled by nearly 8 MMT to just 55.5 MMT for 2018/19. Also bearish for soybean was increased production out of South America: Brazilian production at 120.5 MMT and Argentina at 57 MMT. Most expect these 2 numbers to increase in the next few reports if more Chinese demand for soybeans heads to South America instead of the US.

For canola/rapeseed, U.S. production was increased, but globally, production was felled by 2.63 million tonnes in this July WASDE report from last month’s. The decline of world rapeseed production was mostly attributed to production cuts in EU (down 9% year-over-year), Canada (down 2% year-over-year), and China (down 1.4% year-over-year). Comparably, India’s 2018/19 rapeseed production is expected to increase by 11% year-over-year. Despite some of these slightly bullish datapoints, canola prices followed the soybean complex lower, with the November 2018 contract losing more than $26 CAD / metric tonne on the week – or 5% – to close at $485.10.

For wheat, what a difference a year makes. The portion of the U.S. spring wheat crop rated good-to-excellent (G/E) are 40 points higher right now than last year, and we saw a big uptick in spring wheat acreage. The question, moving forward, is how the weather will hold. Spring wheat prices have faced renewed pressures thanks to trade and weather concerns. Unlike winter wheat — which took a hit from Southwestern drought conditions – spring wheat is looking more robust.

On that note, winter wheat prices dropped 15 -20 cents on the Chicago and Kansas City futures boards. This meant that December 2018 contracts closed for the week at $5.12 and $5.16 respectively. For spring wheat prices in Minneapolis, the December contract dropped nearly 26 cents this week to close under $5.50. Why?

The USDA set production of hard red spring wheat for 2017/18 at 385 million bushels. This week, we found out that the UDSA is estimating the 2018/19 American hard red spring wheat crop up by nearly 52% year-over-year to 584 million bushels. What we already know is that the US area planted into hard spring wheat is up 27% year-over-year at 12.9 million acres. With the bigger crop, this means US spring wheat ending stocks will balloon to 283 million bushels. That’s up, 48% year-over-year!

In Western Canada, the hard red spring wheat crop is looking pretty good right now. And it’s bigger than last year as, at 17.3 million acres of spring wheat in Canada, it’s up 9%. It is only about 1% higher than the five-year average though and it is 5% lower than what Statistics Canada was originally thinking in their April estimate. However, last year we did get some surprising yields that pushed the size of the crop higher.

The U.S. barley balance sheet also had some notable changes to it, especially around ending stocks, which more than doubled from the June report to this, the July WASDE report. This contradicted what was seen on the international stage as global ending stocks were lowered for both 2017/18 and 2018/19 crop years.

Overall, the market continues to try to figure out where the new price equilibrium should land. Put another way, at levels/what catches the falling knife in grain markets. Usually, this price equilibrium is just a function of supply and demand, with some currency risk mixed in. However, when governments start to intervene in the markets, the result is usually very negative. When this is the case, trying to understand where the market is headed becomes more difficult.

And when that happens, people exit the markets because they’re more likely to lose than win. And when people sell out of their positions, the market drops. Overall, there are definitely some changing trade winds, which the USDA accounted for a bit in this report, but the question I’m asking now is might we see even more changes in the next WASDE report, out on Friday, August 10?

 

Brennan Turner

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, he spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email ([email protected]) or phone (1-855-332-7653). @FarmLead

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