Grains saw some fresh liquidity come into the market to start October but just because more people are interested in buying paper, doesn’t mean more physical product is moving. Canadian cash grain markets continued to be pressured over the past week as a result of the Canadian Loonie climbing back near 75 cents USD thanks to the U.S. Dollar weakening a bit on different risks associated around the U.S. Presidential election. While the futures board only lost about a nickel in Minneapolis over the past week, basis levels across Western Canada dropped about a nickel for CPS and more than 15 cents/bushel for HRS wheat, with the most pain being felt in new crop delivery periods per the PDQ Cash Grain pricing website). Durum took a big hit as well with the Canadian Loonie falling and Algeria buying up a ton of product from Mexico, instead of Canada, suggesting our prices our too expensive! Finally, canola also continued its slide on concerns over Chinese imports and the Canadian Loonie decline, with a double whammy of both futures and basis dropping, averaging almost 3% lower across all delivery periods in just the past week. Maybe the only saving grace is that with road bans coming on, the late-date contract months have more time to rebound, making the pain of these lower values, hurt a little bit less (for the time being at least).
More wheat bulls are looking to Europe for the condition of the winter crop there, with concerns for winter hardiness the loudest in Ukraine, Poland, and parts of Germany and Romania. The U.S.D.A. recently pointed out that warm temperatures across Black Sea is melting snow and leaving crops exposed to late-winter or early spring cold shots. Temperatures in Ukraine and southern and central Russia are more comparable to that of mid-to-late April, with crops in the southern regions greening about 5 weeks ahead of their usual timing. More specifically, we’ve seen estimates for the 2016/17 Ukrainian wheat crop to come in at 17.3 million tonnes, a 36% declines from what the U.S.D.A. said was a 27 million tonne crop in 2015/16! In my opinion, this headline continues to be best possible catalyst to a bump in prices (in addition to Western Canadian soil moisture concerns), but it’s be tough for us to see more than 8 - 10% gains from today’s levels, given the global supply and cheap ocean freight available.
The U.S.D.A. also had their annual Ag Outlook Forum at the end of February, and their outlook isn’t much rosier than many others. The bureau is forecasting 90 million acres of corn (+2 million from 2015), 82.5 million acres of soybeans (-200,000 from last year), and 51 million acres of all wheat (-3.6 million acres year-over-year) with both spring and winter wheat down considerably. The U.S.D.A. says that given this acreage numbers and trendline yields of 168 bu/ac for corn, 46.7 bu/ac for soybeans and 45 bu/ac for wheat, only soybeans won’t see their 2016/17 carryout climb from the end of 2015/16. From a pricing perspective, the U.S.D.A. is putting out some harsh realities, forecasting average crop year prices on the futures board for corn to come in at $3.45 USD / bushel, $8.50 soybeans, and $4.20 Chicago wheat.
A.B.A.R.E.S., the Aussie version of the U.S.D.A., recently echoed the their American counterpart suggest export values out of the U.S. Gulf for corn at $4.06 USD per bushel in 2016/17, $9.50 for soybeans, and $5.72 for wheat. They did buck the trend with canola though, as its value is supported by higher veggie oil prices, to a 2016/17 average price of $9.75/bushel in Hamburg (roughly $13/bushel CAD at today’s exchange). With freight costs accounted for (which are low right now), this would equate to around a $12.25 - $12.50 CAD / bushel Western Canada price. Can we see those levels by this time next year? Anything’s possible! However, given current market fundamentals, I would estimate that there’s only about a 20% chance of us seeing those levels in 1Q2017. Keep in mind that if the USD-CAD trade narrows (which it is doing with the U.S. presidential election nearing), this will put further pressure on canola prices. While it’s certainly tough to know 100% where the market is going to be in 3-, 6-, 9-, 12-, and 18-months from now, we can associate a likelihood of it being at some price point. Regarding the 20% mentioned above, it doesn’t mean that there’s an 80% chance that prices will go down, but rather, I would speculate that there’s an 80% likelihood that prices will be below the A.B.A.R.E.S. forecast, relative to future Canadian Dollar terms.
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