Putting on the Pressure
Grain markets continue to trade sideways through February as South American weather and 2017/18 acreage estimates are the focus of most participants. Cash prices in Western Canada have been trending higher on the canola front thanks to strong demand fundamentals and following soybeans with $11 CAD/bushel available for old crop almost everywhere. Conversely, hard red spring wheat prices remain in the mid-$6 CAD/bushel range as export demand remains subdued (exports are down 21 per cent year-over-year). Last week we got the United States Department of Agriculture (USDA) February World Agricultural Supply and Demand Estimates (WASDE) report, which saw United States (U.S.) corn inventories for the end of 2016/17 dropped by 35 million bushels from January to 2.32 billion bushels, mainly thanks to ethanol used being increased by 25 million bushels. U.S. corn exports were unchanged at 2.23 billion bushels and despite actual to-date shipments tracking 65 per cent ahead of last year’s pace, whereas this forecast from the USDA is only calling for a 17 per cent increase year-over-year. Net ending stocks are up 33.5 per cent from 2015/16’s balance sheet, and the USDA is expecting U.S. corn prices to stick around $3.20 - $3.60 USD/bushel, values that will put pressure on many balance sheets if anything less than trendline yields are seen.
For soybeans, the U.S. balance sheet went untouched, despite shipments clocking in at 21 per cent ahead of 2015/16, versus the office forecast of a six per cent increase. This disappointed many of the bulls who were hoping for an increase in exports but the USDA said that U.S. shipments going forward would be well-below last year’s levels because of South American production and competition, levelling out the strong start to this year. With the status quo theme in mind, the soybeans price target stayed put at $9.10 - $9.90. On the international front, most grain market participants were watching what South American numbers came up, but it was a bit more bearish than expected. Argentinian production was finally dropped to 55.5 million tonnes (still above the private market estimates of 52.5 - 54.5 million tonnes), while Brazilian soybean production remained at 104 million tonnes. It is worth noting that according to the USDA numbers, the combined South American crop is 6.2 million tonnes bigger than last year, but there is some skepticism around Brazil’s numbers being too low and Argentina’s being too high.
That being said, Companhia Nacional de Abastecimento (CONAB), the Brazilian USDA just increased their forecast to 105.6 million tonnes compared to their previous estimate of 103.8 million tonnes, while Informa Economics is the most bullish at 106.5 million tonnes. Brazil is already on a record pace for shipping out soybeans with estimates calling for more than 4.5 million tonnes put on outbound boats in February, which would be double what it did last February! However, farmer sales have been slowed by the fact that the Brazilian Real is touching 19-month highs, pushing domestic prices down to less attractive levels. This is being viewed optimistically by the market for the American farmer, as international buyers may come back to the U.S. at a time of year when export sales slow. On the wheat front, the February WASDE pushed U.S. wheat exports higher by 50 million bushels to 1.03 billion bushels, but 2016/17 ending stocks are still sitting at 1.14 billion bushels, the largest in nearly 30 years.
Globally though, the bulls got charged up on stocks dropping by 4.7 million tonnes to 248.6 million total mainly because of a smaller Indian crop, a smaller Kazakhstan crop, and less available supplies out of Ukraine due to increased exports there. The market was expecting a number above 250 million tonnes so the bullish surprise pushed a lot of short-sellers to cover their positions, hence why the market moved higher. Something to note (as per the charts shown), the U.S., Canada, Australia, the European Union (E.U.), and Black Sea will account for about 55 per cent of global production this year, but will claim ownership of over 85 per cent of all global exports!
Speaking of wheat imports, India’s are already above five million tonnes thus far in 2016/17, which means that they could be in competition with the 2006/07 season when they imported 6.7 million tonnes. The headline that more Canadian producers are watching though relates to pulse crops and fumigation. The Indian government’s policy requires all agricultural goods to be fumigated at the country of export. However, because it’s often too cold to properly fumigate in Canada, the Great White North has had an exemption on this issue since 2004, but India recently announced that it will not extend the exemption. With concerns over the ability to export, combined with the impending rabi winter harvest starting up soon, lentil markets in Western Canada have gone quiet. Overall, if the fumigation issue persists, the cost of doing business to export to India will likely increase, and this will put pressure on prices.