Erasable Grain Marketing
Grain markets pushed through the middle of April with a lot of eyes looking to the weather as to whether or not it is “go time” in the fields. A few drills are going into the warmest/driest of places and while it is definitely a bit early, conditions are looking relatively decent in terms of soil moisture in Western Canada. Of course, you have the right to argue this point if you are looking at digging more than a few inches to find moisture in your fields, but I look at the big picture and things are relatively decent. That being said, we could start to see a bit of a weather premium get priced into the markets and with ideal weather conditions (i.e. rain in parts of Alberta and Saskatchewan), you can expect to see that weather premium erased rather quickly.
On that note, as per the PDQ grain price website (pdqinfo.ca), Western Canadian cash grain prices were relatively quiet this past week with basis levels widening about 18 cents for old crop hard red spring wheat and 12 cents for new crop wheat contracts. The catalysts for the basis drop-off was mainly due to the Canadian dollar pumping up to above the 78 cent level, which is part a result of oil prices climbing back above the $40 USD per barrel level. Canola managed the dollar appreciation better than its cereal brother as a bullish Malaysian palm oil report and neutral-to-bullish April World Agricultural Supply and Demand (WASDE) report from the United States Department of Agriculture (USDA) helped offset the currency factor.
In that WASDE report, U.S. wheat ending stocks were raised to 976 million bushels, the highest since 1987, mainly on account of lower feed and residual use demand, while corn was in the same boat as its carryout for 2015/16 was increased to 1.862 billion bushels. Globally, wheat inventories to end this current marketing year were also pushed up, mainly because the USDA raised production to a record of 733.14 million tonnes on account of revised production figures for the European Union and Argentina.
As for soybeans, U.S. carryout was pegged 3.3 per cent lower than its March number at 445 million bushels thanks to more exports. Case in point, China imported 6.1 million tonnes of the oilseed in March, a new record for the month and up 36 per cent from March 2015 numbers. In Q1, China imported 16.26 million tonnes of soybeans, up 12.5 per cent year-over-year. Worldwide, soybeans stocks were slightly raised to 79.02 million tonnes, which would be a 1.7 per cent increase year-over-year, but a 28 per cent increase from just two years ago. We were watching the vegetable oils number and things came in a little surprising to the highest side as production was raised by 0.5 per cent, while the 2015/16 carryout was increased by 3 per cent to 16.95 million tonnes available at the end of the marketing year (also -10 per cent from a year ago and -15 per cent from two years ago).
The notable analytical firm AgResource agrees, suggesting that the agricultural boom in emerging markets like Brazil and Russia will persist with weaker currencies making it very profitable to produce as much grain as possible. On the flipside, AgResource does not see demand matching the growth of the production, which is why the market has to work through the oversupply situation. Intuitively, with these in mind, AgResource is likely the loudest bear in the room right now, calling for $4 per bushel Chicago wheat, $2.75 corn, and $7.70 soybeans! Granted, I think these are extremes and just tend to create headlines for the firm. I would not be surprised if we have decent growing conditions this year, and we see low $4 and low $8 handles in Chicago for corn and soybeans, respectively.
As to where we sit today, the most recent U.S. crop progress report from the USDA tells us that U.S. winter wheat conditions remain above last year’s levels with 59 per cent of the crop in good-to-excellent condition. Meanwhile, just 4 per cent of corn acres were planted as of April 10th, a touch behind the five-year average of 7 per cent for the same period. University of Illinois Ag. Econ professors Scott Irwin and Darrell Good suggest that the market has not yet priced any production risk into new crop prices, especially for corn. From a math perspective, this would be roughly a nine bushel/acre drop for average corn yields and two bushels for soybeans to see ending stocks return to more normalized levels. Net-net, there are a few factors out there but we will need to continue to consider them all for any price direction (easier said than done). Mother Nature is obviously the trump card, especially over the next few weeks, and if you are looking for a Plant 2016 rally, erase the thoughts that we will go higher and higher and higher and higher if we get one, because the aforementioned supply will keep things in check.
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