Locking Things In
Grains entered May on the best highs of the year as the market enjoyed a great April, namely soymeal leading the complex (+30 per cent year-to-date) and soybeans (best one-month gain since October 2014) on the heels of production concerns in Argentina. With a 12 per cent gain last month, one has to wonder just how many more United States (U.S.) acres are now earmarked for soybeans than the United States Department of Agriculture (USDA) original estimate of 82.2 million acres. Overall, commodities in general enjoyed their best month since 2010, beating all other asset classes (i.e. stocks, bonds, currencies, etc.), mainly driven by the uptick in Chinese commodity markets as investors there have been locking in bets on futures for everything from rebar to soybeans to eggs. However, those investors seemed to have short-term needs as many have pulled out and locked in profits.
South American production estimates are dropping as adverse weather continues to grab the attention of much of the market. Fresh forecasts for Brazil’s safrinha second corn crop suggests colder temperatures mixed with the some rain, the latter of which is certainly welcome. Next door in Argentina, the government’s Climate and Water Institute is now estimating that the rains and subsequent floods over the first three weeks of April caused at least nine million tonnes of lost soybean production there. While this would put the total output closer to 50 million tonnes, the rest of the market is still sitting forecasting 55-56 million tonnes. Accordingly, canola has since been able to top $500 per metric tonne on the Winnipeg ICE futures and is now being further supported by a suddenly lower Canadian dollar (sitting below 78 cents U.S. for the first time since mid-April).
With the Canadian dollar falling and futures rising, as per the PDQ grain pricing website (pdqinfo.ca), net cash prices have seen a positive improvement for the most part across Western Canada. Although we’re seeing +$11/bushel targets get snapped up on the FarmLead Marketplace, basis has widened, yet net cash prices for old crop are up about a dime week-over-week , while old crop prices are up almost 20 cents/bushel from last week. Cash wheat prices gained back a lot of what they lost last week, up about a nickel (per bushel) for both old and new crop, albeit the best levels were seen at the beginning of this week before the Kansas winter wheat tour started on Tuesday, May 3rd with reports of big crops out there (bearish!).
More than anything, Plant 2016 is the focus right now across North America, and with some great weather in the forecast, the speed of seeding should accelerate through the first two weeks of May. On that note, good rains in the U.S. winter wheat-producing regions will likely boost production year-over-year by 10-15 per cent as crop conditions are noticeably higher at this time than a year ago. Further, the National Oceanic and Atmospheric Administration has officially called the end of the El Nino event and is now projecting an August entrance of The Girl to North America, which would likely have more of an effect on U.S. soybean crops than corn. For the Canadian Prairies, we’ll have to continue to watch rains in the forecast for the western half of the region, although a couple shots towards the end of April certainly helped things.
From a trend perspective, the U.S. dollar has a tendency to strengthen in the summer months, which will put further pressure on the Canadian dollar. However, the flip side to this is that the last two years, commodity indices have rose steadily from January until May/June before pulling back. While this recent rally has likely been 20 per cent because of fundamentals and 80 per cent because of money flows into ag commodities, there could be some further upside potential should more North American weather premiums get priced in. Nonetheless, ever the risk manager, I would recommend seriously reviewing these now-profitable levels, considering locking some price risk in, and protecting against the downside as there may be only one or two rallies like the past two weeks left in this calendar year.
President & CEO | FarmLead.com