Working it Out
Grain markets through the middle of January continue to be driven by South American weather challenges, namely flooding in parts of Argentina just as the soybean crop down there is starting to emerge. As per www.pdqinfo.ca, canola prices see-sawed a bit week-over-week but have largely driven back to December levels from a month ago, thanks to the Canadian dollar giving back some of its gains this week after the Bank of Canada announced that it is not ruling out further interest rate cuts. As such, cash canola prices across Western Canada remain in the high $10s CAD to low $11s CAD per bushel, depending on the area, with some buzz that Manitoba crushers have been buying even higher. On the wheat front, we have seen basis widen a bit, but futures climbing by about 5-10 per cent over the month (dependent on the futures’ contract month) are keeping prices elevated. Also being factored in is the improvement of Canadian wheat and canola exports as of late as international supplies are getting worked through and new contracts are being sought for a few months from now.
However, while Chicago and Kansas City winter wheat futures values have been rising on the news that acreage in America in 2017 could hit a 108-year low, there are a few points to suggest things may be a bit overpriced on the board. The first reason is that we continue to hear similar acreage numbers in Europe and the Black Sea as last year and that the conditions are relatively decent right now. Second, United States (U.S.) wheat inventories by the end of the 2016/17 crop year are still likely to sit at 1.19 billion bushels, the most in nearly 30 years. Third, even with less acreage in 2017, this would likely only suggest a pullback of about 150 million bushels in output compared to 2016’s crop. This all translates to a grain that still has inventories that are almost double the 590 million bushels that were available when we saw the best prices in years in 2013/14 (not to mention, the global carryout is also significantly higher).
Switching gears to South America, more private estimates of the Argentinian soybeans crop are being dropped to 50 – 52 million tonnes, well below the United States Department of Agriculture (USDA’s) current forecast from last week’s World Agricultural Supply and Demand Estimates (WASDE). This is because the weather there has clearly been wet for the past month, but this is technically just the start of the growing season in Argentina and the drier weather in the pipeline to finish out the month of January will certainly help the crop. Yet the rally we have seen is starting to look eerily like what we saw last spring, as with other markets like equities or currencies not necessarily providing the returns, speculation money continues to drive this soybean move to the upside. The drop in soybeans production in Argentina means though that there is less to process for soy meal and soy oil, of which Argentina is the largest exporter in the world of both! This means that international buyers will start to look elsewhere for options, namely the U.S.
While the focus may be on Argentina right now, neighbouring Paraguay and Uruguay appear to be heading for their own record crops! In the latter, Dr. Cordonnier of Soybean and Corn Advisors is calling for a record 3.2 million tonnes off of about three million acres, while Paraguay is likely to bring in more than nine million tonnes off of the 8.2 million acres planted there. Much like last spring’s rally, the worst tends to get priced in first, creating opportunities to sell into strength. Although there are a lot of questions still regarding production and little pops here or there are likely on planting concerns / speculation, locking in a sale (or sales) in the next couple days (or weeks) should not be ignored for beans and/or canola (new crop or old crop). Why? Even with a healthy stocks-to-use ratio, we are still looking at a record global carryout for soybeans and with record canola acres in Canada looming for the 2017/18 crop, in addition to the likelihood of record U.S. soybean acreage and palm oil production rebounding from two bad years thanks to El Nino, there is likely more oilseeds to work through this time a year from now.
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