Grains entered the month of August with little fanfare as the market continues to sit at multi-year lows. Hedge funds continue to pile on their bearish bets in the grain markets, especially on wheat and corn which are sitting at net short positions that are echoing last summer. Most analysts are now conceding that the weather that’s on the horizon in August is unlikely to provide many problems for U.S. soybean development, likely leading to more reduction in managed money’s long positions. Those betting on corn are also under the gun that is a large crop in the U.S. and also that there’s a lot of wheat in the U.S. that will compete with it in the feed market. Simply put, there are new supply realities here in North America that the market now has to work through.
Globally, the Black Sea harvest is ahead of last year’s pace with average yields anywhere from 5-10% better than a year ago. As such, Russian and Ukrainian grain production estimates continue to rise. To the west in the European Union, the wheat market is trading a little sideways until there’s a full understanding of the quality of the crop coming off. While German producer organizations have suggested a 10-20% drop in wheat production there, France looks to be coming in below 30 million tonnes. As far as the E.U. rapeseed harvest goes, Strategie Grains cut its estimate for the 3rd straight month to 20.7 million tonnes, mainly due to cuts in France, Poland, & Germany. As such, import forecasts for rapeseed/canola in 2016/17 was increased by Strategie Grains to 3.3 million tonnes and the International Grains Council to 3 million tonnes, both a healthy improvement from last year’s 2.86 million tonnes imported by the bloc
Speaking of imports, it’s been suggested that with the big crop coming off in the U.S., American exports are poised to increase. While North American wheat still has to compete with currency and geography effects against the Black Sea, futures markets are trading at a discount to Paris bourses. For U.S. corn, Brazil may need some but it’s likely they’ll source from Ukraine, Argentina, or Paraguay first. The real bullish factor we’re watching for is La Nina affecting South American planting conditions in the 4th quarter of 2016. The “Little Girl” tends to bring wetter-than-normal conditions to northern Brazil but cooler temperatures and drier weather to eastern and southern states. Similar dry weather is possible in Argentina, which is currently seeing a delay in their wheat planting because of persistent rains.
At this point, if we don’t see above average yields in the majority of crops grown in North America this year, it would be a shock. Recent yield estimates for corn and soybeans has been as high as 175 and 48.8 bushels per acre (U.S.D.A. at 168 and 46.7 respectively). Should these numbers materialize, there’s a lot more risk to the downside yet to play out in corn and soybeans in our opinion. Add in that oil prices are moving back to April levels, while cash prices in Western Canada may be near or start to stabilizing in some crops, those trying to catch the falling knife in the futures markets face the harsh reality of potentially being badly cut.
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 300,000 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).