Waiting on Wheat
As we close out the month of July and prep combines for Harvest 2016, crop conditions in the Canadian Prairies have dropped a bit with the recent rains. However, many market players, including grain companies, are still optimistic that we will see an above-average crop this year. The most common phrase heard at this time of year is always “it’s not in the bin yet.” Given the risk that still remains from getting the crop off, there’s a good chance that prices will stay near current levels until more about the crop is known. There is a high likelihood though that the crop can only get smaller in Western Canada from here on out as we wait for final numbers, but one MUST factor in other global competition.
From a cash price front in the Canadian Prairies, the PDQ grain pricing website pdqinfo.ca is telling us that elevators are factoring what is going on outside of the Great White North, so why shouldn’t you? Elevators have basically gone no-bid on CPS wheat as we are now starting to hear reports of $3s in front of their per bushel bids. Canola cash prices dropped more than 2 per cent in the past week to below $10/bushel as United States (U.S) soybean conditions are still looking incredible (the United States Department of Agriculture (USDA) $46.7 bushel per acre (bu/ac) yield forecast is looking low) and the concern over China’s 1 per cent max dockage import rule change starting September 1st. Durum prices across the Prairies have all dropped below $7/bushel as harvest pressure is creeping in while hard red spring wheat prices won the past week, mainly thanks to the futures market. However, cash HRS wheat prices still remain below $6/bushel for the most part, even for deferred delivery. Yellow peas prices are also dropping below $8/bushel as crops are holding up (for now) in Western Canada but also in places like America, Australia, India, Ukraine, and Russia.
A fair amount of rains are helping the Russian wheat crop look bigger too, now estimated at up to 69 million tonnes (almost 2.5 times last year’s Canadian wheat crop and three million above the USDA’s estimate in their July World Agricultural Supply and Demand Estimates Report (WASDE report). Further, with investment in the sea port exportability increasing to 37.7 million tonnes (a 100 per cent increase in the past decade), Russia is sure to win the global title for top wheat exporter again in 2016/17. The bigger question though is the quality and size of crop coming off in Europe, with a wide variance in estimates for average yields and total production. It has been suggested that Europe’s largest wheat producer, France, will have some of the lowest yields in the past decade (81.8 bu/ac is the lowest we have seen, with consensus around that 90 bu/ac number). Overall, the European wheat crop is set to be about 11 per cent lower than last year’s record production (key here being “last year’s record.”)
Given the poor quality coming off in Europe, there is some buzz that U.S. wheat exports could win back some market share but I have two words in response to that: U.S. Dollar. If the Greenback stays elevated relative to other currencies, why would an international buyer pay 20 to 40 per cent more than what they could pay if sourcing from Australia, Canada, or Russia (thanks to currency effects)? While early indications from this week’s U.S. Wheat Quality Council’s crop tour are for a bit smaller spring wheat crop in the U.S. than the norm, the American winter crop is the monster, and while yields are down in France, they are up in the Black Sea, and likely Australia as well, with Rabobank coming out with a new estimate of 26.7M tonnes for the Land Down Unda.
On that note, Rabobank is also in the camp that wheat and corn and currently racing to the bottom to see which feedstuff can be the cheapest. The Dutch agrobank has suggested that the U.S. corn carryout at the end of 2016/17 could rise to a 30-year record of 2.3 billion bushels, meaning Chicago is likely to trade in the bottom half of the $3s per bushel versus returning to the $4s. For wheat, there’s going to be a lot going into the feed market this year, as it is seemingly the cheaper alternative (for now) and livestock margins have gotten a little thinner. Ultimately though, there is just a lot out there, not just in North America, but globally, and betting the farm on wheat values (for a base quality) rallying over the next nine to 12 months is a fact I would instead bet against. As such, we continue to press you to A) know your cash flow requirements over the next six to 12 months (when do you have bills coming due or expect them to?!?!), B) knowing what is in your bins (take good samples and get your grain tested!), and C) selling in 10 per cent increments is a best risk-managed approach for grain marketing success in 2016/17. Having a plan in place is 100 times better than just waiting and waiting until it is last minute and being forced to sell something when you do not want to (rack your brain and I am sure you will remember a time or two you have done that).
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