Squeaking Out Bullish Factors
Societe Generale says that the ag commodities aren't likely to find some bullish winds to be swept away by. Instead, the French bank expects prices to stay near or below today’s prices for most crops. For example, a year from now, they are expecting 4Q2018 corn prices to be $3.50 USD / bushel on the Chicago Board of Trade. Today, the December 2018 corn price on the futures board is closer to $3.90. The main reason is ample domestic supply. They expect 2.56 Billion bushels still available at the end of 2017/18, or 70 million bushels more than the current USDA forecast.
Thanks to another strong year of production, SocGen sees Chicago soft red winter wheat prices at $4.20 USD / bushel a year. Today, those Chicago winter wheat prices are closer to $4.95. Considering the large short position in the wheat market today, can there be more bearish pressure? The answer is yes, especially if we’re using corn’s record short position by managed money as an indicator.
One thing that might be pushing the thesis behind SocGen’s wheat call is the International Grains Council is forecasting global wheat area in 2018/19 to shrink by just 0.3% to 542 million acres. That’s a drop of just 1.5 million from 2017/18. The drop includes about 741,000 less acres in Russia. Yet, favorable returns on wheat production Russia means 65.5 million acres of both winter and spring wheat are still expected to get harvested in 2018/19.
In Europe, the IGC is forecasting nearly 68 million acres of wheat (including durum) to get harvested in 2018. Compared to 2017, this would be a small increase of 0.2%. The IGC notes that there were more farmers who looked to switch over to rapeseed for some of their acres this fall. But rains in the north (Germany, Poland, and other Baltic states) and dryness in the south (Italy and northern Spain) led to the old faithful – wheat – getting seeded instead.
In Canada, the IGC is suggesting a rebound to more than 22.2 million acres, up 2.3% year-over-year. We would note that with likely less Canadian peas and lentils in 2018/19, the most likely substitute is wheat or canola. Finally, the IGC is expecting to American acres to drop by just 0.1% year-over-year to 37.6 million acres. This would be the lowest on record since 1890! We would, however, note that North American cash wheat prices have started to pick up again.
More specific to Western Canada, cash values for hard red spring wheat continue to toy with $7 CAD / bushel for movement in 2018. That being said, protein discounts continue to be a bit tough and anything under that $13.5% protein is being penalized aggressively. This is another way of saying that the market isn’t looking for low protein wheat because there seems to be a lot of it. To be clear though, these protein discounts should not be interpreted as if there isn’t a lot of high protein wheat, because there is a fair amount of that as well..
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