The first month of the 2017/18 marketing calendar finished with a bang on Friday after the USDA surprised us with bullish data for the corn and soybean complex.
Why didn’t we mention wheat in a positive light?
Because the USDA had to let someone down.
Each month, we look back on the performance of key crops the North American markets and offer you greater insight into our expectations moving forward into the next month and beyond.
Here is our look back on September 2017 grain markets.
Corn Stocks Hit 30-Year High
The December corn contract shed a few cents (or just 0.4%) over the last 30 days. But results were distorted just a bit by two pops:
1. Corn prices saw a nice rise over the final two days of August; and
2. Corn prices gained on bullish USDA stocks data on the last trading day of September.
It was just a little more than a month ago that we saw seasonal lows for corn prices. Spot prices in Chicago had bottomed out at around $3.01 per bushel, but we had noted the pouring of bearish factors during our August grain markets review.
There were two important things to consider over the month of September. First, was the string of data. The month featured key data figures that culminated with the announcement that U.S. inventory levels hitting their highest levels in 30 years.
Back on September 12, the USDA’s monthly WASDE report indicated that corn inventory levels were continuing to grow, to their most in 3 decades. We also received a bearish surprise by the USDA in that the agency didn’t alter its yield expectations.
Instead, they raised them to 169.9 bushels per acre.
The 169.9 estimate was fueled by yield gains in North Dakota, South Dakota, Missouri, Illinois, and Ohio. The 169.9 figure was well above the average analyst expectation of 168.2. If that yield holds, it will be the third largest on record, coming in behind last year’s record of 174.6 and 2014’s 171 bushels per acre.
The second factor was the slow progress of the harvest. On September 24th, the USDA reported that just 11% of U.S. corn had been harvested in the top 18 producing states. That figure trailed the 17% average over the last five years.
Quality remained unchanged during the month with 61% of corn rated good-to-excellent at both the start and end of September.
The World is Awash in Soybeans
The soybean harvest also got underway in September. By September 24th, the percent of soybeans harvested hit 10%. That figure trailed the five-year average of 12%.
The condition of the crop declined by one percentage point over the month from 61% to 60%.
While Friday’s numbers appeared bullish, it was just the result of scaling back extraordinary expectations for the American soybean harvest. In the WASDE report on September 12th , the USDA increased its yield expectations to whopping 49.9 bushels per acre. The uptick bolstered production expectations by about 50 million bushes at the time.
As our Doug Kirk noted earlier this month, there is a lot of variability across the Midwest. While no one seems to believe the USDA, it appears that we are seeing a larger crop than many had anticipated. This will create new price pressures as we turn our attention to the next WASDE on Thursday, October 12th.
Looking forward, the world remains awash in soybeans. The immense production figures in both North America and South America aren’t going to abate in this marketing year. In fact, soybean prices will remain under pressure for at least the next year.
For the month of September though, soybeans did gain 2.4% and 5.1% for the quarter. This despite soybeans stocks in America as of September 1st being 53% higher than where they were a year ago. While stocks are bigger, soybeans prices on the Chicago Board of Trade are still very similar to where they ended the September 2016 at.
Where you’re seeing these increased stocks factored is wider basis levels.
As such, right now is not the time to be selling off the combine.
As we noted in The Most Bearish Thing About Soybeans two weeks ago, Brazil remains the biggest influence on prices. There could be a bit of a bump later this quarter thanks to cyclical factors tied to weather and planting in South America.
But the rallies will be short — and for people paying attention — potentially sweet.
We’ve advocated for the fulfillment of pre-contracted bushels. We’re looking for selling windows during November and even December when South American planting premiums come into play.
Canola / Rapeseed Has an Asterisk
Canola markets are in a similar boat as soybeans. The crop is looking to be bigger than what was originally thought. And we think that, if history is any indicator, StatsCan will confirm its bigger within the next two years.
At the end of September, Brennan looked at how poor of a job Statistics Canada has done at estimating canola production in Canada. From 2013 to 2016, StatsCan has increased its estimate of canola production in the Great White North by an average of 3.2 million tonnes.
This is an average deviation of 24% to the upside from their first estimate. Using the deviation of the last 5 years – 17% bigger), it would suggest that this year’s Canadian canola crop should come in at 21.35 million tonnes.
Not the 18.2 million tonnes first forecasted at the end of August. Or the 19.7 million tonnes that the satellites estimated this month.
The bullish factors for the black gold though is a smaller crop out of Australia and a tight carryout in Canada. The latter is based off StatsCan’s production estimates though so this bullish factor has a bit of an asterisk next to its name.
Currently, canola stocks in Canada are expected to drop to a four-year low of 1.35 million tonnes to start off 2017/18. This is down 25% from the 5-year average. Average pre-report guesstimates were for 1.5 million tonnes. Accordingly, giving the diminished potential of this year’s Canadian canola crop, many farmers are optimistic about better prices.
Digging deeper, the allocation of canola stocks at the end season is usually a 50-50 split between farmers and commercials. However, going into 2017/18, commercials are holding more than 2/3s of all available inventories.
Despite this, we expect it to be business as usual for the buyers, but one certainly should not expect better basis for canola prices in the short-term.
Nonetheless, with the International Grains Council recently raising their estimate of Canadian canola exports to 11.1 million tonnes for the 2016/17 crop year, we should expect that sort of demand to consistent in 2017/18, meaning higher canola prices in the longer term.
Wheat Prices Catch Bearish Wave
This month, Russia dominated the headlines again with its infrastructure blowout along the Black Sea.
Wheat exports from Russia are expected to top 30 million metric tonnes in the upcoming year, crushing its previous year figure and easily making the nation the largest exporter of wheat.
This trend isn’t going to slow down, as we explained earlier this month in a special insights piece. Russia is emerging into a global agricultural power, and proximity to key markets has made its exports attractive (particularly with a weaker currency).
Over the long term, Russia has been one of the few countries that is actively embracing climate change as a positive force in economic development. At a time that the world is slashing emissions expectations, one could bet that Russia is willing to let the atmosphere turn into a kettle if it opens new agricultural land.
While Russia’s breakout filled headlines all throughout September, it was the USDA who offered the final hammer to the wheat markets at the end of the month.
The Small Grains Report out on Friday, September 29th came in a bit more optimistic on spring wheat production than analysts had expected.
Double-digit declines followed at the MGEX and basically was responsible for the loss for the month. Minneapolis-traded hard red spring wheat futures lost just 2.6% in September, but it did fall 18% for the quarter.
Hard red winter wheat prices, traded on the Kansas City futures board, fared worse. The December contract lost 24% of its value over the course of the third quarter of the calendar.
Chicago soft red winter wheat did the opposite this month, improving 3.35% since end the of August. However, like its Minneapolis and Kansas City brethren, December Chicago wheat lost almost 18% from where it ended June at.
Durum wheat prices were met with some harvest pressures this month as well. This was amplified by a bearish USDA report on Friday, September 29th.
The USDA thinks that American output is down 47% year-over-year to just 55 million bushels (or just under 1.5 million tonnes if you’re using GrainUnitConverter.com). The market was expecting 50 million bushels.
Moving forward, we’re still cognizant of the USDA’s report in December of how many wheat acres didn’t get harvested in the Northern Plains, but baled instead.
Today, we continue to be sellers of winter cereals but are holding on for better prices for spring wheat and durum. While we wait for better values in the latter, we strongly recommend getting your wheat tested for important quality parameters like protein, moisture, HVK, Falling Number, and vomitoxin or DON levels.
We’ve built GrainTests.com to help you do this.
Broader Market September Updates
Federal Reserve Interest Rate Policy
The Federal Reserve announced during its September FOMC meeting that it will begin the unwinding of its $4.5 trillion balance sheet.
The decision will be a long, slow process and will likely require that the central bank operates with complete transparency and signaling in order to prevent a market tantrum like the one we saw in 2013.
The central bank did not raise interest rates this month. However, Federal Reserve Chair Janet Yellen said during a speech a few days after the meeting that the central bank may have underestimated the rate and impact of inflation.
The central bank may increase interest rates again in 2017 with December as a target month. For December, the test will be the S&P 500 and Dow Jones performance over the next 60 days and whether Congress is able to take steps toward tax reform. The Fed does not want to create a similar situation to May 2013’s Taper Tantrum.
This will be a calculated effort, and interest rate normalization will continue to be a long, steady process.
Of course, markets will also be looking at the impact of the balance sheet adjustment. As we noted in our Insights blog, the impact of the Fed’s actions could have a similar impact to two interest rate hikes of 25 basis points.
Oil Prices Hover Near Two-Year High
The world’s largest oil cartel, OPEC, has been working diligently over the last year to reduce excessive production and support crude prices around the globe. The cartel had seen prices fall around the globe as countries like the United States ramped up production and benefited from lower production costs. OPEC’s long battle against the United States’ energy sector failed to pay off.
However, improving demand around the globe is helping to bring the supply and demand balance back into equilibrium. Brent crude prices had their strongest third quarter in more than a decade.
Oil prices are poised to test $60.00 per barrel for Brent and $55 for West Texas Intermediate in the fourth quarter. A stronger US dollar will weigh on prices, but it appears that OPEC has enough resolve to press its production agreement further into 2018.
September’s Can’t Miss Stories
This month, FarmLead ramped up its content output to provide insight to farmers on how to get the best price for your grain anytime, anywhere.
Here’s a recap of the top stories from September.
With the harvest underway for corn and soybean growers across America, the “easy” part is almost over. Now, you must sell your grain in an over-supplied market. Grain marketing is a critical function of getting the best price possible, but is your consultant looking out for you? We break down the five most important attributes that you should be seeking from a consultant this year.
Corn, soybeans, and wheat capture all the headlines and capture all the attention from buyers across North America. But where are the tools for pulse crops? What happens if you’re growing lentils and need access to a bigger market? FarmLead has you covered. Here’s more on how our tools help specialty crop growers find more buyers and access markets they didn’t know existed.
Last month, we covered a disturbing trend of grain elevator closures around the country. The closure has put new pressure on farmers who already had limited options to sell their grain. While the mainstream press has ignored this market trend, we exploit it, and help you find buyers across North America.