United States Department of Agriculture (USDA): Rain Makes Grain
Grain markets are headed into the middle of July with one thing on its mind: weather. We have seen rain fall on the Canadian Prairies and subsequent suggestions of quality issues/production losses, while hot, dry temperatures are expected in the United States (U.S.) Midwest, creating concerns of corn pollination and negative yield effects on soybeans. However, corn crops across the U.S. are rated 76 per cent good-to-excellent while 71 per cent of soybeans are good/excellent, the highest since 1999. Alas, it looks like funds will look to add in some weather premium to the market as temperatures rise, but just remember that a combination of rain and heat makes grain. On the other hand, one without the other does not.
On Tuesday, July 12, we got the USDA’s monthly World Agricultural Supply and Demand Estimates (WASDE) report, which showcased bigger crops pretty much everywhere, but also stronger demand (they say low prices cure low prices!). Forecasted average U.S. corn yields of 168 bushel per acre would equate to a 14.5 billion bushel American crop (massive!) but, despite increased exports, the 2016/17 carryout is pegged at 2.08 Billion bushels, 22 per cent higher than 2015/16’s close. The additional U.S. exports comes at the hands of Brazil’s smaller program of just 18.5 million tonnes in 2015/16 and 22 million tonnes in 2016/17, a drop of 46 per cent and 36 per cent, respectively from 2014/15’s exports of 34.5 million. In Canada, corn output was dropped by 1.25 million tonnes to 12.5 million, as the month of June in Ontario was one of the driest in the past 30 years.
For wheat, total U.S. production came in at 2.26 billion bushels, 10 per cent higher than last year (despite less acres) thanks to higher yields pretty much everywhere. This means a 1.11 billion bushel carryout in the U.S., but thanks to feed use globally rising to its second largest level ever, world wheat inventories by the end of 2016/17 were lowered by more than four million tonnes from the June forecast to 253.7 million tonnes (albeit, that is still a record carryout). Internationally, Russian and Ukrainian wheat production were each upped by one million tonnes from last month to 65 million (+6.5 per cent year-over-year) and 25 million tonnes respectively (-8 per cent year over year (YOY) but much less of a drop than everyone was expecting). With decent conditions, Canadian wheat output is now pegged at 29 million tonnes (+5 per cent YoY), Australia is estimated at 25.5 million (+4 per cent YoY) thanks to good rains, and, with the removal of export taxes encouraging more acres, Argentinian production is pegged at a huge 15 million tonnes (+25 per cent YoY).
As for the oilseeds, a bigger 2016 U.S. harvest (3.88 billion bushels) is being overcome by more domestic use and exports, the latter sitting at a new American record of 52.25 million tonnes (+7 per cent YoY but still below Brazil’s expected 59.7 million tonnes). However, the bigger crop will mean a bigger carryout than initially expected of 290 million bushels in the U.S. (-17 per cent YoY) and globally, at 67.1 million tonnes (-7 per cent YoY). China’s rapeseed/canola imports are seen declining 10.5 per cent year-over-year in 2016/17 to 3.8 million tonnes, despite domestic production dropping by one million tonnes to 13.3 million tonnes. While Canada was pegged at exporting 10 million tonnes of canola in 2015/16, that number is seen falling 12 per cent in 2016/17 to 8.8 million on a 16.4 million tonne crop (a 4.7 per cent drop from last year’s surprising 17.2 million tonne crop).
This drop in demand is not necessarily supporting of canola prices, especially with crops looking relatively decent and that large elephant across the border (the U.S. soybean crop). More specifically, as per the PDQ grain prices website pdqinfo.ca, Western Canadian canola prices have rallied a bit with the soybean markets as most of the nickel or so that was added to prices over the past week was due to the futures markets up, with deferred delivery into 2017 rising a bit more. Month-over-month cash canola prices across the Canadian Prairies are still down about three per cent on average. Hard red spring wheat prices were relatively unchanged compared to a week ago as futures dropped late last week but then rebounded with the aforementioned WASDE report demand numbers. Those new data points certainly helped Canada Prairie Spring (CPS) wheat as it was up an average of nearly 4 per cent (AKA about 20 cents a bushel) since last week, with both basis and futures improving nearly a dime each. On the other hand, durum prices dropped about 2 per cent since last week into the low $7’s (per bushel) for a #1 as farmer old crop selling and decent crop conditions have pressured the market. If not for those recent rains that plagued a few production areas, the losses may have been bigger, and while grain companies are pricing in that risk accordingly, the underlying factor remains there are more acres in North American compared to last year and, thanks to rains that likely have not done too much damage, better yields too (the USDA agrees).
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