This weekend, we’re looking back over the month of July.
Deep in a Weather Market
Since the beginning of June, the percentage of the continental US that’s considered at least abnormally dry or worse jumped from 17% to 33%. (1)
Brennan and I sat down to recap the weather and commodity performance on Saturday. Here’s what you need to know.
“The Eastern Corn Belt looks decent, but it’s a different story in the western half,” Brennan said. “In the past two months, Iowa has gone from only 1% being abnormally dry or worse to 64% of the state ranked this way. While none of the Hawkeye State is considered to be in a state of severe, extreme, or exceptional drought, 35% of Iowa is considered to be in moderate drought. At the end of June, this number was just 1.3%.”
Brennan went on to explain that in Nebraska, 86% of the state is abnormally dry or worse. If we look deeper at the numbers, we find 42% is said to be in moderate drought. Nothing was ranked this way at the end of June.
“Where things get dicey is heading into the Northern Plains (but you already knew that),” he said. “In North Dakota, at the start of May, 9% of the crop was rated abnormally dry or worse. At the beginning of June, it was 100%, and it hasn’t changed since.”
He also pointed out that there’s been a huge shift in North Dakota.
“Starting July, zero percent of North Dakota was considered to be in a state of extreme or exceptional drought, but heading into August, that number is now 46%,” he said. “Another 35% of the state is still considered as moderate to severe drought.”
In Montana, since the beginning of July, the percentage of the state rated abnormally dry or worse has nearly doubled from 48% to 82%. A quarter of the state is ranked in moderate-to-severe drought while another quarter is rated as extreme-to-exceptional drought. Only 7% of the state’s drought rating was extreme-to-exceptional at the end of June.
Like its northern brethren, 100% of South Dakota is abnormally dry or worse. Only 15% of the state is ranked in the extreme-to-exceptional drought columns, but this is up from just 2% at the end of June, 65% is said to be moderate-to-severe drought. At the end of June, this number was about 55%.
Corn Prices Slips after Early July Gains
It was a wild month for corn prices. A quick run up from the final week of June led to a monthly July high for the December corn futures contract at $4.173/bushel in Chicago. Corn futures finished last week off about 5.5 cents.
But a reversal of sorts came as the USDA failed to revise yield expectations in the July WASDE report downwardly. This week, the December contract closed out at $3.88. For the month of July, corn is sitting 1.5% lower. Bargain shoppers continue to speculate that the USDA is going to lower yield expectations and more hot, dry weather enters the U.S. forecast.
We can look directly at the July WASDE report as a key driver in the downturn in futures prices. The USDA projected an increase in stocks by 75 million bushels, an increase in national production, and a yield average that matched its previous report.
The reversion also wasn’t surprising given that we started to see a lot of bad financial journalism on the topic. With prices rising at the beginning of the month, we begun to see extremely bullish calls that were treated with few questions. Barron’s conversation with Shawn Hackett was a good example. He suggested that prices could top $5.00, but the financial newspaper took the high end of his range ($6.00) to attract eyeballs to the cover page.
They are 100% of the USDA projection for final 16/17 exports vs. the average of 103% and last year’s 104%. On Friday, China sold 1.51 MMT of the 3.66 MMT of corn offered from state reserves.
On the international front, we’re keeping a close eye on Argentina. Not only has the nation become a preferred supplier to the Mexican market as the United States attempts to shake up NAFTA, but Argentina is also expected to produce a massive crop this year. On Friday, the Buenos Aires Grain Exchange said that about 63% of their crop had been harvested. The USDA had already said it was expecting a higher output in 2016/17 production.
Soybean Prices Push Higher
Soybeans have gained 6.1% in July, but the high of the November contract was of the month was seen on July 11, topping out at $10.47 / bushel on the Chicago board. It closed out Friday at $10.13. The high so far this year was back during the 3rd week of January, hitting $10.80. “$12.085 was the high hit last June but there was smaller carryout numbers then, and this was before a record crop came off in both the US and South America,” said Brennan.
One thing we have found interesting is that the current marketing year has seen a significant spike in export commitments here in the U.S. Export levels are projected to be nearly 17% higher than last year. The latest figures project that export commitments are 106% higher than the official estimate by the U.S.D.A.
Once again, South America has generated a significant amount of buzz. In Brazil, farmers don’t have enough storage space for their grain – and stocks are already estimated to be around 30 million metric tonnes.
Still, weather challenges around the globe have leading economists predicting a tighter market than previously expected. This week, the International Grains Council lowered its 2017/18 estimates for global soybean production by three million metric tonnes. The IGC now projects total production of 345 million metric tonnes.
A Month of Wheat Volatility
“The wheat complex has easily been the most volatile of the grains complex for the month of July,” Brennan said Saturday. “The start of the month saw wheat prices nearly hit a two-year high. Dry weather and increased concerns about drought and crop quality led to a monster run for wheat prices in June. The 30% uptick that we saw in the previous month was just not sustainable.”
And funds began to take profits off the table while the retail money came in late and was left holding the bag on lower prices.
Hard red spring wheat traded on the Minneapolis Grain Exchange closed out at $7.51 on Friday.
This is a far cry from the high seen on July 5 when the December contract hit $8.43 / bushel. Technically speaking, from where the HRS wheat opened at the start of July, prices on the MGEX futures board are only down 3.8%.
Chicago wheat dropped nearly 3% since the calendar switched from June to July. Like HRS wheat, soft red winter wheat prices for the December contract topped out $5.745 on July 5th. It closed at $4.81 / bushel on Friday, July 28.
The Hard Red Winter wheat variety traded on the Kansas City futures board topped out on July 5th as well, touching $6.02 / bushel. On Friday, it closed at $5.083. For the month of July, HRW wheat prices have dropped 9.2%.
Again, the rally just didn’t look like it was going to hold. We knew production levels weren’t looking strong. This year, U.S. hard red winter (HRW) wheat production is forecasted to hit around 758 million bushels. That’s a 25% decline from 1.08 billion bushels produced in 2016. It’s also a pretty big decline from the five-year average of 880 million bushels.
Our team had a long conversation about the contrarian indicator that played into our expectations that the cropped had topped out during the first week of July.
There was no shortage of speculative talking heads in the financial media pushing retail investors into ETFs during the price rally.
We saw several recommendations for the Teucrium Wheat Fund (NYSEArca: WEAT) for the week ending July 7.
From the opening of trading on July 10 until July 28, that fund fell by 11.52%.
Let this be a lesson.
That said, it is reasonable to expect another short-term pop.
Yesterday, the Wheat Quality Council tour announced a underwhelming yield estimate. In Eastern portions of the Dakotas, we hear that in some cases 10 bushels per acre was considered a success. As the tour moves west, all that’s in the way are wild fires, extreme drought conditions, and emergency conditions.
Following a tour of North Dakota and neighboring states, the WQC said that the hard red spring wheat yield registered at 38.1 bu/ac. That’s a rather big drop from the 45.7 bu/ac that was reported in 2016.
According to the executive vice president of the WQC, abandonment rates are as high as 40% to 50% of the crop in the region.
It isn’t the yield number that we’re interested in these days. It’s the quality. You’ll recall that we spoke to Courtney Boryski, a grain trader with Hansen-Mueller. Boryski said that in this tighter market, she is looking to do business with independent producers who may have higher quality grain available. The premiums are well-worth your time to do grain testing and shop around using FarmLead’s marketplace.
Canola Prices Slump
Canola has been the worst performer in July, dropping 7.65% since the end of June.
The November contract closed at $510.30 CAD / metric tonne on Friday, July 28.
It started the month below $500 though and topped out during July just above $530.
This lower move in canola is mainly due to the appreciation of the Canadian Dollar.
With an interest rate increase by the Bank of Canada and no matching move by the Federal Reserve, the Loonie has gained 4.2% since the start of July against the US Dollar.
Oats Surprise with July Gains
Oats was a solid performer at 1.5% improvement.
The highs of July for the December contract was seen on July 18th, hitting $3.028 / bushel on the Chicago Board of Trade. It closed on Friday, July 28 at $2.918.
Looking Ahead to August
Global grain traders have August 10 circled on the calendar. That day, the USDA will release its updated WASDE report. Expectations are that we should see a reduction in yields to accompany existing concerns about grain quality.
This week, we’ve got a big announcement at FarmLead. We’re also going to talk more about how we can help you improve your grain testing options and find more buyers on the platform.