No Shortage of Surprises
Grains pushed through the first week of September with a mix of bullish and bearish headlines, but mostly of the former as a weaker United States (U.S.) dollar, wet weather, and decent export numbers have supported prices a bit. In the cash market in Western Canada, canola basis widened over the past week but some strength in the futures market pushed net cash canola prices up a dime per bushel with $10 handles still not available until early 2017. For wheat, HRS values remain below $6/bushel but were up a dime as well over the past week, mainly thanks to futures bouncing off mutli-month lows. It has been pretty much the same story for CPS wheat but prices are still sitting below $5/bushel. As we have seen accurately the past few weeks at FarmLead, pulse and specialty crop prices continue to deflate with harvest pressures and there is many who have doubts (including us) that a bounce back to pre-Harvest 2016 levels is likely. That being said, we have seen some quality issues and so any shortage of higher grades could surprise prices and push them up, but gains will likely be limited.
Speaking of quality, there continues to be suggestions of quality spreads widening in the wheat market, more specifically, for Canadian durum as fusarium and vomitoxin issues are arising. This only confirms the need to get your cereals tested for disease – whether it is going to the milling or feed market, the buyer needs to know these factors. That being said, according to Statistics Canada, there’s apparently still 1.1 million tonnes of durum in Canada as of July 31st, 2016, 480,000 metric tonnes (MT) of which is held by farmers, and compared to the past five years, that on-farm ownership is about 22 per cent higher than usual. Total available wheat inventories as of the end of July 2016 was just 5.17 million tonnes, a 27 per cent drop over last year and 28 per cent below the five-year average, but this was much more than the 4.3 million tonnes the market was expecting.
The big surprise of a StatsCan report went again to canola as available stocks of two million tonnes came in well above the 1.27 million tonnes guesstimated before the report, but still a 21 per cent drop year-over-year (+11.6 per cent from the five-year average though). The significant difference was a result of StatsCan bumping their 2015 production number by 1.15 million tonnes for a 18.4 million-tonne crop last year. Many would take this revision and the numerous others as confirmation that StatsCan will also bump the 2016 canola output number from the current 17 million tonnes forecasted (most of the trade is estimating at least 18 million). Rounding out the rest the StatsCan stocks report, 1.44 million tonnes of barley were still available (+18.6 per cent over 2015, +5.4 per cent from the five-year average) and we know both lentils and peas stocks have dropped to basically nil, down to 73,000 and 176,000 MT respectively (-80 per cent from a year ago for lentils, -74 per cent for peas). Meanwhile oats and flax inventories remain quite plentiful (hence low prices) at 930,000 and 274,000 MT respectively, or a 38 per cent increase from last year’s stocks for oats (+25 per cent from the five-year average) and a whopping 183 per cent increase from 2015’s carryout for flax (+132 per cent from the five-year average).
Where there is a lot of quantity of grain is in Russia where more estimates are putting wheat production above 70 million tonnes. That being said, from a numbers standpoint, the same amount of #1 and #2 milling wheats is likely to be produced as years past but, it’s more spread out and, intuitively, tougher for grain exporters to “compose batches of good wheat” according the United States Department of Agriculture (USDA) attaché in Moscow. Nonetheless, most agree that Russia will be the top wheat exporter this year, shipping out around 30 million tonnes. However, I think that, much like 2015/16, currency will continue to be the trump card for the international wheat trade game. While the wheat prices on the Chicago Board of Trade fell to 10-year lows recently, when priced in Eurodollar terms, it is only a seven year low in Euros terms, and per Russian Rubles, a 23-month low, and finally, per the Argentinian Peso, a nine month low. The currency effects are playing out already as Asian wheat buyers are switching over to Australian origination versus the ultra-competitive Black Sea region. At least Asian buyers are not like Egypt where they have surprised the grains market again with the return of a zero ergot tolerance policy, a move The Economist is calling a “a stupid policy from an incompetent government” (a sentiment I have to concur with).