July 13 – Pricing Out The Heat

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“Truth often suffers more by the heat of its defenders than the arguments of its opposers.”
– William Penn (British philosopher)

Good Morning!

At 7:30 AM CDT in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.2753 CAD, $1 CAD = $0.7841 USD)

Sept Corn: -7.3¢ (-1.9%) to $3.783 USD or $4.824 CAD
Aug Soybeans: -20.3¢ (-2%) to $10.005 USD or $12.76 CAD
Aug Soybean Meal (per short ton): -$7.30 (-2.15%) to $328.70 USD or $419.21 CAD
Aug Soybean Oil (cents per lbs): -34¢ (-1%) to 33.18¢ USD or 42.32¢ CAD  
Sept Oats: -2.3¢ (-0.8%) to $2.798 USD or $3.568 CAD
Sept Wheat (Chicago): -13.5¢ (-2.5%) to $5.235 USD or $6.676 CAD
Sept Wheat (Kansas City): -13.8¢ (-2.55%) to $5.303 USD or $6.763 CAD
Sept Wheat (Minneapolis): -3¢ (-0.4%) to $7.798 USD or $9.945 CAD
Nov Canola: -12.2¢/bu / -$5.40/MT (-1.05%) to $9.044/bu / $398.79/MT USD or $11.535/bu / $508.60/MT CAD

Yesterday’s Winnipeg ICE Close
Sept Barley: unchanged at $2.39 USD or $3.048 CAD
Oct Milling Wheat: -10.9¢ (-1.3%) to $6.509 USD or $8.301 CAD

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Pricing Out The Heat

Grain prices are sitting a little lower this morning after a generally bearish WASDE report out yesterday and some healthy rains falling across a hot Midwest. Pressuring canola is a 78.5 cent Canadian Loonie, the highest it’s been in the past year, and the pullback in soybeans.

The USDA put out their estimates with data collected as of July 1[1]

In the nearly two weeks since then, it’s been pretty hot in most places across America.

As such, it’s suspected that the USDA couldn’t really do a good job of accounting for the heat that the market has been pricing out.. As such, there are expectations for further downgrades to crop yield and corresponding production in the August WASDE, out on Thursday, August 10th, exactly 4 weeks from today.

Over those next 4 weeks, the weather will dictate price direction as this USDA report didn’t alter too much of the market’s opinion. Adding some further bearish pressure is the rains falling across the Midwest, giving crops a nice, cool drink after more than a few days of intense heat.

I, for one, landed in Chicago after 9PM local time last night and it was still 30 Celsius / 86 Fahrenheit with 90% humidity. At that kind of heat, I’m willing to pay a little more for a cold drink.

Where’s the Wheat?

The hot topic heading into the report was wheat. The U.S. spring wheat yield was pegged at 40.3 bu/ac by the USDA, down 14.6% from last year’s 47.2 bu/ac.[2] Further yield downgrades are likely expected by the market though as U.S spring wheat crop ratings are the worst in nearly 30 years.

This means that total hard red spring wheat production in the U.S. will come in at 385M bushels (or 10.48M tonnes), down almost 22% from last year’s crop. The market was expecting around 409M – 416M bushels ahead of the report. With American HRS wheat ending stocks pegged at 122M bushels (or 3.32M tonnes) by the end of 2017/18, this is nearly half the supply that the 2016/17 crop year will end with: 235M bushels.

For durum, American production is pegged at just 57M bushels (or 1.55M tonnes). This is a more-than-statistically-significant drop in production from last year, down 45%. Take it with a grain of salt though as last year’s production figure was one of the best in terms of both yields and quality. U.S. durum ending stocks from 2016/17 to 2017/18 are expected to fall by 28% to 26M bushels (or just 707,600 MT).

On the winter wheat side of things, production of hard red winter wheat (that traded on the Kansas City board) is down 30% year-over-year to 758M bushels (or 20.63M tonnes). Chicago-traded soft red winter wheat output in America this year is expected to come in at 306M bushels (or 8.33M tonnes), down about 11% from last year’s nice yields. Aggregately, total winter wheat production of 1.28B bushels is down 23% from last year, but actually up 2% from the June forecast.

Kicking Corn & Soybeans Down the Road

For American corn and soybean production, yields went unchanged at 170.7 and 48 bushels per acre respectively. But, with the updated planted acreage for corn, total U.S. production of the coarse grain was raised by nearly 200M bushels from June’s estimate to 14.255 Billion bushels this month (or 362.1M tonnes).

The additional production was not offset by demand though. Feed and residual use climbed by 50M bushels from last month. Exports and ethanol use were left unchanged. The more interesting number I continue to watch is exports. With 1.875 Billion bushels forecasted by the USDA, this would be almost a 16% decline from the 2.225 Billion bushels expected to land on the books for 2016/17.

Overall, the higher production and lack of corresponding rise in demand pushes the domestic American corn ending sticks higher. 2016/17 corn carryout was raised by 80M bushels to 2.37 Billion bushels (meaning the 2017/18 crop year starts with 80M more bushels). With that extra supply added to the extra production the market wasn’t really pricing in, 2017/18 carryout is pegged at 2.32 Billion bushels.

 Last month the estimate was 2.11 Billion and before the report, the market was pricing in something closer to 2.18 Billion. Clearly, this is bearish and why corn fell yesterday by double digits, as our Garrett Baldwin mentioned in his afternoon market recap.

For U.S. soybeans, production was barely changed, climbing 5M bushels from the June report to 4.26 Billion bushels (or 115.94M tonnes). This was because of slightly higher harvested acreage. It also narrowly beats out the 114M-tonne crop out of Brazil. Further, the U.S. bean crop this year is just 1.2% behind last year’s record crop of 4.307 Billion bushels (or 117.2M tonnes).

2016/17 carryout was lowered by 40M bushels from the June estimate though to 410M (and the trade’s estimate of 430M bushels). There’s 2 reactions I have to this: First it’s slightly bullish (“obviously Brennan” you’re saying to yourself). The second is that it’s a bit ridiculous, considering the size of the South American crop.

On the demand front, 2017/18 numbers stayed the same. With the additional 40M bushels to start 2017/18, this meant that ending stocks for the crop year will be 35M bushels lower than the June number at 460M bushels. The trade was expecting things to stay flat at 495M bushels.

What About Global Corn and Soybean Players?

For soybeans, global 2017/18 ending stocks are expected to come in at 95.53M tonnes. This is up from the trade’s expectations of 92.14M tonnes and June’s forecast of 92.22M tonnes. It’s also barely unchanged from 2016/17’s carryout of 94.78M tonnes.

On the demand front, Chinese bean imports were raised by 1M tonnes from last month’s forecast to 94M tonnes. In case you aren’t keeping track of the trend, that’s a new record.

 China’s June soybean imports came in actually lower than expected at barely 7.7M tonnes. As we outlined in last Thursday’s Breakfast Brief, the market was pricing in 8.5M – 9M tonnes. The difference is the nearly 700,000 MT sitting in port waiting to dump, likely due to an import tax dropping by 2 points to 11% on July 1st.

For corn, global production was raised from June by more than five million tonnes, mainly thanks to bigger U.S. production. This means that the 1.037 Billion tonnes expected to be produced in 2017/18 around the world is just a 3% drop from last year’s record crop. On the flipside, it’s also 7% larger than the global crop from 2 years ago.

Production in South America is expected to be large again in 2017/18. Between Brazil and Argentina, the USDA is forecasting 135M tonnes of production, down just three million tonnes from 2016/17 record crops.

Carryout-wise, global corn inventories of 200.8M tonnes should be nearly 12% lower year-over-year. However, this is because of China extinguishing some of its multi-year leftover supply.

Wheat Export Kings

In Australia, persistent dry weather forced the USDA to drop it’s estimate by 1.5M tonnes to a 23.5M-tonne harvest in 2017/18. I won’t compare it to last year’s crop because it was a monster but the forecast, if realized, would be nearly 3% lower than the 24.2M tonnes produced 2 years ago. That year, the Aussies exported 16.1M tonnes of wheat. 2 years later in 2017/18, the USDA is estimating they’ll ship out 19M tonnes.

Canadian wheat numbers were left untouched at 28.35M tonnes of production, 22M tonnes of exports, and a carryout of 5.16M tonnes in 2017/18. Compared to last year, production would be down 10.5%, exports are up 10%, and ending stocks are 28% lower!

European Union wheat production was felled by 800,000 MT from last month for a 150M-tonne crop. This is mainly due to smaller production in Spain and France. European exports were also dropped by 500,000 to an even 30M tonnes.

Moving east, the USDA acknowledged some drier conditions in Ukraine, dropping their wheat crop by a million to 24M tonnes. They also dropped Ukrainian wheat exports by 500,000.

Next door though, Mother Russia is more than making up for this as the USDA acknowledged that crop conditions in Russia are similar to last year, Thus, wheat production was raised by 3M tonnes to 72M. Exports were raised by 1.5M tonnes to 30.5M for 2017/18! This would make Russia the king of global wheat exporters again after losing its crown last year to America (albeit by less than 1M tonnes).

But harvest is behind schedule.

As of Tuesday, Russia had only harvested 5.2M acres of grain collecting 9.1M tonnes.lk[3] A year ago at this time, 7.9M acres had been combined, collecting 13.8M tonnes of total grain. If you’re doing the math, Russia’s harvest is behind. The figures show they are about 1/3 behind on acreage harvested and total tonnage collected. Yields are nearly similar but it was a bit of a faster harvest last year.

Overall, total global wheat production in 2017/18 is forecasted at 737.83M tonnes. This would be more than 2% lower than last year’s record crop but very similar to the 737M tonnes produced in 2015/16 (something we suggested back on June 28th).  Worth noting though is that global inventories continue to grow, up 1% year-over-year to 260.6M tonnes.

July WASDE Report Conclusion?

We (and likely the rest of the market) expect more yield and production downgrades to the American crop before the end of summer. Whether this means downgrades in August and then again in September, I’m not sure.

What’s certainly definitive is that in the next 4 weeks, weather forecasts will be over-analyzed and heavily compared to past years. More specifically, the bears will likely overprice the benefit of the rains. Meanwhile, the bulls will overprice the potential yield loss of the heat.

And so we end up somewhere in the middle of expectations and the market finds an equilibrium. But likely we’ll find lower production numbers in the U.S. than what we saw yesterday.

To growth,

Brennan Turner
President/CEO | FarmLead
1-855-332-7653 (Toll-Free)
www.FarmLead.com
@FarmLead (on Twitter)

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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