Market Insider

Challenging the Rally

As per the grain pricing website, western Canadian grain prices ticked up for the most part for the major crops thanks to a little more weather premium getting priced in and some bargain buying on the account buyers. Nonetheless, weather is clearly becoming the most-watched factor with a side-eye from investors on the March 31st United States (U.S.) stocks and prospective acreage report. More than anything, we have seen some volatility in wheat trading as warmer temperatures from Kiev to Kansas are pushing fall-seeded crops out of dormancy much earlier than usual. Without colder temperatures returning over the next few weeks, or significant rain drowning out the crop, this is considered a plus for yields (obviously if that does happen, then it is bad for yields, but good for prices!)While durum, feed barley, and yellow pea prices are being dragged lower, canola, a hard red spring wheat, and prairie spring red wheat have been able to climb higher, thanks to both basis and futures values providing support. We may see a tick higher in the pulse markets in the coming weeks as Indian chickpea crops were hit by rains and hail (in addition to wheat and rapeseed), but the damage is still be measured. The safe bet is that the inclement weather will continue to support elevated levels of pulses and veggie oils by the world’s second most populous country. Speaking of oils, crude oil prices are starting to pull back a little bit after a clearer supply picture is emerging, with most countries freezing their production. However, Iran is being the troublemaker, increasing their production to about 3.1 million barrels per day, up from less than one million in January! Further, the Organization of the Petroleum Exporting Countries (OPEC) says that demand will taper off in 2016 and so, the ultimately bull-run killer comes back to the supply factor more than anything (see any correlation to grains here?).

While we have definitely been seeing purchasing on the lows by buyers, the United States Department of Agriculture (USDA) recently estimated Canadian canola crush at 8.1 million tonnes, up 560,000 from 2014/15 or +7.4 per cent. While crush is currently running about 12 per cent ahead of last year’s pace according to Agriculture and Agri-Food Canada (who thinks the yearly total for Canadian canola crush will come in at 8.2 million tonnes), the lower Canadian dollar has helped canola meal exports into the U.S. fly past the record levels set in 2014/15, with the pace about 13 per cent ahead of last year. This in turn is pressuring domestic U.S. soymeal prices down to their lowest levels in eight years (keep in mind that lower soybean values is also a factor here. On the flipside, canola exports were running at about 20 per cent ahead of last year’s pace up until the beginning of the month as the effect of the rising Canadian dollar in recent weeks. On that note, the market was expecting National Oilseed Processors Association (NOPA) crush numbers to show 139.9 million bushels in February, but the actual number came in at 146.2 million, the third largest figure ever for the second month of the year. The flipside of this is that U.S. soyoil stocks also rose, which puts negative pressure on the market.

Bringing it back to the wheat game, Kansas City hard red winter wheat futures are now trading at a six month high against the Chicago soft red winter wheat market and that may widen with temperatures getting below zero. Will it kill the entire crop in the Southern Plains? Absolutely not as wheat is a pretty hardy crop that can survive some of the worst that Mother Nature can throw at it. However, with the weather trade coming out in full force, more analysts are expecting more short-sellers to cover this position and help push values up. Once those short-sellers are out of their position and profits are locked in, we can expect a reversal back to the bottom.

One clear fundamental to keep in mind is where wheat and canola prices were about six to eight weeks ago with the lower Canadian dollar.  Should futures values pull back as a weather premiums starts to filter out, cash grain prices (especially in canola and the spring wheats) will intuitively pull back. Conversely, if the Canadian dollar were to start to head lower (cue the oil price check), cash grain prices could challenge and keep the rally over the past two weeks going.

To growth,

Brennan Turner
President & CEO |