Grains continued to trade sideways to lower through the end of February as the data points that keep coming do not support a reversal of the bearish market fundamentals. The most significant thing we saw at the end of the month was canola dropping like a baby giraffe out of the womb thanks to 3 main factors: the Canadian Loonie climbing higher (+8 per cent so far from its bottom in mid-January), soybean oil trading quietly, and, most importantly, China suggesting that they’re changing their dockage tolerances for imports. While this is not 100 per cent set in stone yet, the Chinese is trying to rid itself of its built up inventories, and so the market is doing what it always does: pricing in the risk of all variables related to the trade of the commodity. By dropping they’re max tolerance from 2-2.5 per cent to 1 per cent, this increases the cost of exporting product, mainly via cleaning. Intuitively but unfortunately, this cost, roughly about 20-30 cents/bushel, will be passed onto the farmer.
More wheat bulls are looking to Europe for the condition of the winter crop there, with concerns for winter hardiness the loudest in Ukraine, Poland, and parts of Germany and Romania. The U.S.D.A. recently pointed out that warm temperatures across Black Sea is melting snow and leaving crops exposed to late-winter or early spring cold shots. Temperatures in Ukraine and southern and central Russia are more comparable to that of mid-to-late April, with crops in the southern regions greening about 5 weeks ahead of their usual timing. More specifically, we’ve seen estimates for the 2016/17 Ukrainian wheat crop to come in at 17.3 million tonnes, a 36 per cent declines from what the U.S.D.A. said was a 27 million tonne crop in 2015/16! In my opinion, this headline continues to be best possible catalyst to a bump in prices, but it’s be tough for us to see more than 8 - 10 per cent gains from today’s levels.
The U.S.D.A. also had their annual Ag Outlook Forum at the end of February, and their outlook isn’t much rosier than many others. The bureau is forecasting 90 million acres of corn (+2 million from 2015), 82.5 million acres of soybeans (-200,000 from last year), and 51 million acres of all wheat (-3.6 million acres year-over-year) with both spring and winter wheat down considerably. The U.S.D.A. says that given this acreage numbers and trendline yields of 168 bu/ac for corn, 46.7 bu/ac for soybeans and 45 bu/ac for wheat, only soybeans won’t see their 2016/17 carryout climb from the end of 2015/16. From a pricing perspective, the U.S.D.A. is putting out some harsh realities, forecasting average crop year prices for corn to come in at $3.45 USD / bushel, $8.50 soybeans, and $4.20 Chicago wheat.
All in all, these numbers shouldn’t come to you as a surprise as the bearish fundaments have existed for a while & we’ve continued to preach the gospel of good risk management practices. If you haven’t already adjusted your expectations for your marketing plan to account for the aforementioned, the real surprise may come when you’re making sales near the bottom when you have to (for cashflow or bin space purposes) versus when you can / could have in the top 20-25 per cent of the market. The buck literally stops at your farm.
To growth,
Brennan Turner
President & CEO | FarmLead.com
Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, Mr. Turner spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available) that has moved almost 150,000 MT in the last 2.5 years. His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email (b.turner@farmlead.com) or phone (1-855-332-7653).