Holding Wild Cards
Through mid-May, eyes continue to watch the weather forecasts for frost events (and any subsequent damage or replant needs) and whether or not enough moisture will fall on the western half of the Canadian Prairies. Nonetheless, field activity continues ahead of the normal average on both sides of the 49th parallel, which puts pressure on the markets without any new headlines to chase. The Canadian dollar has quieted a bit despite oil creeping up to multi-month highs on production concerns, but the market still believes supply holds the wild card over demand.
A lot of discussion continues to be had around the soybeans market as this month’s World Agricultural Supply and Demand Estimates (WADSE) report still has people scratching their heads. There are obviously bullish thoughts out there, but something to keep in mind is that the United States Department of Agriculture (USDA) demand pump-up for beans was based on a price range of $8.35 to $9.85 (or an average of $9.10). With markets much higher than that, one could argue that some of this demand will be lost and that the highs are in. Complimenting a bearish thesis is the fact that with cooler temperatures, some soggier weather, and now being past our May 15th optimal corn yield planting date, those acres that didn’t get into corn could very well go into soybeans instead.
The even money may be on Dr. Cordonnier of Soybean and Corn Advisor, who has lifted his soybean area to 84 million acres, 1.8 million above the USDA’s projection in their March 31st report. This would peg U.S. bean output at 3.88 billion bushels off of a 46.7 bushel per acre (bu/ac) average yield. For corn, the Doc dropped corn acres by 1.6 million from the USDA’s estimate to 92 million acres, and at a 166 bu/ac average yield, this would peg production at 14 billion bushels on the nose. With current USDA demand projections, one can expect a 1.72 Billion bushel carryout for corn and 385 million bushels in ending stocks for soybeans (levels that would imply higher corn prices and lower soybean values).
On the wheat front, most of the wheat complex is looking at crop conditions in North America and whether it will continue to add more bushels to the world supply. We have seen a widening spread between hard red spring and hard red winter wheat values, with the price for the latter dropping off with the size and quality of the crop looking decent. While some rain could affect quality in the U.S. Southern Plains, most fields welcome the drink. A similar forecast is on the radar for southern and central Alberta into the weekend of May 21st, a much-needed moisture event for the area. From a cash grain perspective, the PDQ grain pricing website (pdqinfo.ca) says that values for most crops across Western Canada increased last week. Wheat prices bumped two to three per cent week-over week, specifically hard red spring wheat prices inching up by about eight cents per bushel over the last week, with old crop enjoying a bit of a stronger bump. Canola values have also increased about a dime week-over-week on the cash front, thanks to the futures market in Winnipeg remaining elevated.
Overall, we stated earlier in the year that given the global supply of grain out there, there may be two or three rallies to take advantage of in this calendar year. Definitively, we are in one of those rallies for the oilseed markets, and given the continued buzz in the markets about acreage switches, the upside seems unknown but the downside is omni-present. Not to be the doom and gloom guy, but I am about managing price risk exposure. Profiting to the upside on 100 per cent of inventory for sale is one way to look at it, but leaving profit exposed to the downside on 100 per cent of said grain is another. With futures values increasing lately, we have seen basis levels widen a bit and if futures pull back a bit, you’d likely see basis improve (assuming currency effects are mute for now). Sure, weather can intuitively be the wild card, but over the next two to three months, playing “sky roulette” and gambling on the clouds (or lack thereof?) is not necessarily the way a pro would play their hand.