Market Insider

Salt in the Wound

Coming back from the long weekend, funds liquidated more long positions after a wet weekend that alleviated moisture concerns in many areas across North America. Sure, there were a few places under review that have gotten too much but I (and you) should take this with a grain of salt entering the second half of the growing season.

Ahead of the weekend, the market did get a shot in the arm with the United States Department of Agriculture (USDA) quarterly stocks and acreage report on Thursday, June 30th. Going into the report, the market was expecting about two million more soybeans than the 82.2 million forecasted in their March 31st report, and about 600,000 less acres of corn from the 93.6 million March estimate. However, the USDA seems to believe that there will be no “Prevent Plant” acres and that American farmers are literally only planting corn, wheat, and soybeans this year.

Why? Every estimate for the three major crops went higher. For wheat, total area planted was pegged at 50.8 million acres, above both the 49.6 million estimate in March and the pre-report average guesstimate of 49.9 million. However, this is still 7 per cent below last year’s acreage. American durum acres are up 11 per cent year-over-year to 2.15 million, but winter wheat and spring wheat are both lower by 2.9 million and 1.1 million acres, respectively. On the inventory front, stocks of the cereal were in line with estimates (+30 per cent year-over-year to 981 million bushels), reminding us with subtlety that there’s a lot of wheat still available, in addition to potential of another record crop globally. In no surprise, wheat is down 18 per cent in the past month, 15 per cent since the beginning of 2016, and down 31 per cent since this time a year ago.

The 94.1 million acres of U.S. corn that the USDA forecasted in the report is up from the 92.9 million expected and the 93.6 million forecasted back in March. This would represent a 7 per cent increase from 2015 and the third largest area planted to the coarse grain since 1944. Stocks were a little more bearish as the 4.72 billion bushels still available as of June 1st was higher than the 4.53 billion guesstimated by the market ahead of the report, and 6 per cent higher than June 1st, 2015’s numbers. With the aforementioned rains coming at a time when the crop is pollinating, growing conditions in most places are pretty much ideal (as confirmed by yesterday’s good-to-excellent crop ratings remaining at 75 per cent). As such, the market has been bullying corn, literally down 21 per cent in the past month, only down 8 per cent since the beginning of 2016, but 25 per cent lower than a year ago.

Finally, soybeans are poised to take the cake to the downside in my opinion, as fund buying has been aggressive since the March 31st estimate of just 82.2 million acres of the oilseed. According to the USDA, despite the $3/bushel increase by early June, only 1.5 million more acres were apparently bought for a total of 83.7 million acres. This would still in fact represent a 1 per cent increase of 2015’s numbers, but a record number of acres are forecasted for fringe areas like Michigan, Minnesota, New York, North Dakota, and Pennsylvania. On the stocks side of things, 870 million bushels supposedly were still available at the beginning of June, which represents a 39 per cent increase compared to last June’s stocks (very bearish when the market was expecting 829 million bushels). Overall, given weather conditions, higher acres, and higher available stocks, soybeans are down 8 per cent in the past month, but it’s still up 20 per cent for 2016, and 6 per cent from this time a year ago.

To round out our comparative analysis, canola is down 12 per cent in the past month, about 2 per cent lower since the beginning of 2016, but about 12.5 per cent lower than where we were a year ago when the highs of the 2015 growing season were seen. On the cash front, the website tells us canola prices are down over a dollar a bushel in the past month with spot prices near $10/bushel and 4Q2016 delivery for new crop around $10.15/bushel. On the wheat side of things, CPS prices continued to be pressured by good-looking crops and general bearishness in the wheat market, now sitting at an average of $4.50/bushel through the end of 2016 across the Canadian Prairies (-15 per cent month-over-month). Hard red spring wheat prices have fared better, down about 10% from a month ago to an average of $5.75/bushel for fall movement, with the only $6 handles being seen later in the first quarter of 2017. Pulse crop prices have continued to be pressured by good growing conditions, but there’s more than a few acres lost due to wetness / disease.

Ultimately, we think that soybeans will continue to be pressured to the downside as funds move out of the market and weather premium gets erased, but that canola downside won’t be as large. We have been calling since the spring that La Nina are highly unlikely to affect North American crops this year, and the closer we get to taking the crop off, this call is getting validated. Accordingly, we think that oilseeds and pulse crops have the best option to make sales on in the next three to six months, but this should be spread out in 10 per cent intervals. Cereals will continue to stay pressured with a bigger global crop likely coming off than what was originally predicted, but instead of piling stuff on the ground this fall at Harvest, look at moving your lower quality/value cereals and make some bin space for higher quality grains. While it might feel like salt in the wound if you did not price anything out in this past rally (or maybe not enough), we think that there is still some decent opportunities to still do so in the aforementioned areas (as confirmed by activity on the FarmLead Marketplace).

To growth,

Brennan Turner
President & CEO |