Yesterday vs. Tomorrow
Crop conditions continue to look really good across North America, despite the doom and gloom of hot temperatures hitting major growing regions throughout most of June. One of the main arguments for the latter is the continued calls for a devastating La Nina drought this summer. One of the best in the weather game (in our opinion), Drew Lerner from World Weather Inc. says that commercial forecasters are pumping up this “drought” headline too much. Yes, the National Oceanic and Atmospheric Administration (NOAA’s) extended forecast continues to show some warmer-than-average temperatures, but they are also calling for average precipitation across the United States (U.S.). Across most of North America though, the rains missed in the past are now getting forecasted and realized, and tomorrow’s prices are similarly falling.
Eastern Ontario remains dry, whereas the large majority of crops in Saskatchewan and 80 per cent of the crops in Alberta are rated in good-to-excellent condition. A few pockets in Manitoba and South Eastern Saskatchewan are wetter than most would like and there are some pockets of dryness in the corn belt, namely northern Indiana, south central and northeast Iowa, and parts of Nebraska. From a historical perspective, whenever there are major weather premiums getting priced into the market (like we have been seeing), increased volatility comes with it. While there are definitely still many unknowns at this point in the growing season, given the good start to the crop, there are only so many premiums that can be priced in before the market pulls back and starts to correct itself, as we saw this week.
Complicating things is the June 30 United States Department of Agriculture (USDA) acreage update. It has been suggested that up to two million acres could be dropped from the forecasted corn number, but this still means more than 90 million acres were planted, and likely a 14 billion bushel crop in the U.S. On the soybeans side of things, up to three million more acres have been suggested, meaning more than 85 million acres for the oilseed, which, at current demand levels and trendline yields, means a 2016/17 U.S. carryout back above 300 million bushels. This would intuitively put pressure on canola prices, and this could explain some of the Canadian oilseed’s pullback. However, we will also get Statistics Canada’s acreage report the day before on June 29, and that will likely show some changes (above 19 million acres of canola, not below, makes more sense in today’s market today).
With these fundamentals in mind, funds headed for the exit signs in droves this week, pushing corn back below $4/bushel on the futures board, canola below $11/bushel, wheat to new monthly lows, and soybeans into the bottom half of the $11s. On the cash front in Western Canada, hard red spring wheat basis dropped about a dime for both old and new crop, and with the futures board pullback, net week change was a loss of about 15 cents per bushel to $6.30 on new crop. Although basis was unchanged, canola faired much worse with a few days of major selling, dropping more than 6 per cent on new crop prices to below $10.60/bushel. With the generally good growing conditions, prices continue to be pressured as funds sell off and weather premium is removed.
Overall, this pull back is something we have been suggesting for the past few weeks as our call has been that the complex was overpriced (it is timestamped in the past 2 weeks of market commentaries). This in mind, our call since the beginning of the year that there may be one or two opportunities to take advantage of in terms of significant rallies, and this was certainly one of them. That being said, old crop opportunities still exist and if you are looking to clear bin space before Harvest 2016 starts up, we would recommend contract things within the next week or two, versus moving something last minute for a less-than-optimal price. Consider Abraham Lincoln’s thought, “You cannot escape the responsibility of tomorrow by evading it today.”
President & CEO | FarmLead.com