Market Insider

Pricing Premiums In

The grains markets got a wonderful World Agricultural Supply and Demand Estimates (WASDE) report on Tuesday, May 10, as the United States Department of Agriculture (USDA) dropped United States (U.S.) ending stocks for both this year and next year for corn and soybeans, sending markets into a frenzy. New premiums needed to be priced in accordingly, especially for the oilseed market, which basically limit up with front-month canola contracts surpassing summer 2015 highs to over $12/bushel ($530/metric tonne (MT)) and new crop values not far behind at $520/MT. Canola did pull back a bit though in subsequent days, with soybeans holding relatively strong, as currency effects weather premiums, and speculation around just how many acres got bought in last two months.

The USDA dropped Argentine soybeans production to a 56.5 million tonne crop (a bigger drop was expected), but they also cut Brazil’s output to a 103 million-tonne crop (still a record, eh). In the U.S., soybean yields this year are pegged at 46.7 bushels/acre, 2.7 per cent lower than last year’s monster 48 bushels per acre average. However, the USDA did not change its planted area number from its 82.2 million acres back in March, which seems ridiculous considering that November soybeans have gained nearly 23 per cent since March 1st, or almost two full dollars per bushel. As such, U.S. 2015/16 soybean ending stocks came in at 400 million bushels, 26 million less than expected. Further, 2015/17 U.S. soybean carryout was pegged at 305 million bushels, a whopping 100 million bushels lower than pre-report average expectations.  Globally, soybean stocks to end 2016/17 are expected to be 68.21 million tonnes, significantly below the 73.23 million tonnes expected (and hence limit up). 

For corn, U.S. production was pegged at a record of 14.4 Billion bushels, 214 million bushels bigger than the 2014/15 crop, mainly because of more acres getting planted and a trend line yield of 168 bushels an acre. Thanks to stronger demand to end the 2014/15 marketing year though, ending stocks are projected to be 1.8 Billion bushels (about 34 million below expectations) and with that demand carrying over into the 2016/17 crop year, the U.S. carryout is forecasted to be 2.15 Billion bushels, a significant 140 million bushels less than what was expected. Globally, 2016/17 corn stocks are seen falling to 204 million tonnes versus the 211.5 million tonnes expected. For wheat, U.S. yields are expected to come in 7 per cent higher than a year ago at 46.7 bushels an acre, but lower acres puts total American production at nearly two billion bushels, down 3 per cent year-over-year, yet ending stocks are still quite large at over one billion bushels by the end of 2016/17. Globally, wheat inventories are set to rise 6 per cent from 2015/16 to 2016/17 at to 257.3 million tonnes, mainly thanks to a 727 million-tonne of output in the latter, the second largest ever.

Staying in reporting mode, Statistics Canada’s March 31 stocks report showed us total Canadian wheat stocks were down 24 per cent from last year and almost 20 per cent from the five-year average for the end of March. With a potential carryout number below four million tonnes, many analysts are saying this equates to basically nothing for Canada, but the amount of aforementioned other wheat available around the world, ideas of $10/bushel wheat is far-fetched (especially given how much U.S. wheat is still available and even then, British feed wheat is now being sold into the U.S.). Of note was that canola stocks were about 10 per cent lower (but 10 per cent higher than the five-year average), flax is about 50 per cent higher than a year ago and nearly 70 per cent more than the five-year average, while pulse crops are obviously significantly lower.

On the cash side of things, as per the PDQ grain pricing website (pdqinfo.ca), old crop spring wheat futures prices dropped 2.5 per cent from last week and with basis across Western Canada improving by about a nickel, as the net loss to cash prices is only a nickel. New crop wheat prices on the futures board dropped less, and with a similar basis improvement, the net cash loss was only a couple pennies. Canola, as mentioned had another strong week with futures prices in Winnipeg up about 3 per cent. However, old crop basis took a bigger hit, down about 15 cents a bushel from last week, making a new cash gain over 20 cents (AKA if not for the basis drop, it would have been a 35 cent increase). For new crop canola, basis losses were about as half as bad, meaning the net cash price jumped about 30 cents a bushel! Overall, we are getting close to the May 15th planting cut-off date where you historically see U.S. corn yield potential start to decline and coupled with the relatively drier weather in the Alberta and some snow falling in other parts of the Canadian Prairies, you may start to see some more North American weather premium get priced in.