Market Insider

Record Surprise?

Grain markets over the holidays traded mostly sideways, with things focused on what is happening in South America. Most recently, we got the United States Department of Agriculture’s (USDA) January World Agricultural Supply and Demand Estimates (WASDE) report, which tends to provide some fireworks and it did not disappoint this year. While many numbers came in below what the market was expecting, suggesting some bullish bias to the report, the fact remains that we still have record numbers, albeit slightly less than what they were pegged at in the past few months. With this report out of the way, the market will re-focus back on South American weather and United States (U.S.) acres over the next couple of months, as well as trade deals with the new U.S. President officially in office.

What did not change in the report was the record production of corn and soybeans in the U.S. in 2016, pegged at 15.15 billion and 4.31 billion bushels, respectively. This was technically down a bit from the November estimate as average yields were felled a bit to 174.6 bushels per acre (bu/ac) for U.S. corn fields with 86.7 million acres getting combined (+7 per cent from 2015), while the average U.S. soybean yield came in at 52.1 bu/ac (4.1 bu/ac or 8.5 per cent higher than the previous record set last year) with harvested acres up one per cent year-over-year to a record 82.7 million acres. While we know there is a lot of grain, how has demand fared? U.S. soybeans crush and export numbers remain unchanged at 1.93 billion and 2.05 billion bushels respectively, but with the slight decline in yield, 2016/17 U.S. bean ending stocks are pegged 60 million bushels lower at 420 million bushels (technically, that’s a 113 per cent increase year-over-year), with the USDA calling for an average farm price between $9 – $10/bushel. For U.S. corn, feed use was actually dropped by 50 million bushels, ethanol was up 25 million bushels, but again, exports were left unchanged at 2.23 billion bushels, implying America ends 2016/17 with 2.36 billion bushels of corn still available (that is a 36 per cent jump year-over-year).

The number that is probably catching the most amount of attention is that from winter wheat, which came in at 32.8 million acres, down 10 per cent or 3.8 million acres from last year, and the second lowest on record and lowest since 1908. This drop is about two million acres more than what the market was forecasting, hence the bullish optimism surrounding the complex. This include drops of 10 per cent alone in states like Texas and Oklahoma, but also North Dakota and South Dakota, down 50 per cent and 24 per cent respectively, and lake states like Wisconsin and Michigan, down 19 per cent and 23 per cent each. When producers are being offered per bushel prices that start with $2 USD like we saw this fall, it is clear that the market is not buying any more wheat acres in America. Offsetting the bullish acreage number is the fact that the rest of the world is not necessarily pulling back as much as America (or maybe even Canada).

Aggregately, as we get into acreage planning for the 2017/18 crop, we continue to hear more thoughts of more canola, and combined with somewhere between 85 – 87 million acres of soybeans in the U.S. this year. It is hard to see these current levels remain supported if we have average growing conditions (sure, you can chuckle and asked “what is average growing conditions anymore?” but we must use a baseline). More specifically, I am uber-cognizant of the fact that despite ending stocks expected to more than double from last year to this year, we are sitting above $10/bushel on the Chicago futures board compared to being below $9/bushel a year ago. We do think there is some upside to the wheat market but it will likely be more like 10 per cent higher, not 20-30 per cent like some are really hoping for. There may be more optimism for durum acreage as those plagued by disease issues are more interested in not dealing with fusarium again for the nth year in a row. From a cash perspective, Western Canadian grain prices have generally all faded lower except for wheat, which is getting some support from the futures markets. While we think there is a good chance the highs of the oilseed market may be in for 2016/17, wheat may still surprise us.

To growth,

Brennan Turner