Lower Grains and Doubt on Crop Production Estimates

Grains have traded relatively lower this week as a relatively bearish outlook from the U.S.D.A. last Friday but a bit of a damper on the market. Corn and wheat prices have taken the biggest hit week-over-week as positive planting progress across the border in the U.S. pulled back some of the premium built into the market. Further, while the U.S. winter wheat crop still isn’t looking great, investors seem to be finally realizing that 1. the U.S. is not the only supplier of winter wheat in the world and 2. there’s still a lot of grain available up here in Western Canada. The canola trade got pumped up on thoughts of delayed seeding in the Canadian Prairies and a new crusher in Quebec needing 500,000 tonnes a year. However, a bullish run of six straight positive closes could not stretch to a seventh and we’ve seen prices fall back over three percent from their Tuesday highs. Ultimately, things are starting to warm up (finally) and crops are getting into the ground, offsetting negative thoughts about a late state in the field.

Following the U.S.D.A.’s May installment of the W.A.S.D.E. on Friday, May 9th, grain markets are feeling some downside pressure from what was widely considered a bearish report on bigger expectations for production and carryout in the long term. U.S. corn production in 2014/15 will help replenish domestic stocks but also reinforce global supplies as other countries see lower output. While the 2013/14 carryout for corn and soybeans came in below pre-report expectations at 1.146 billion and 130 million bushels respectively, 14/15 ending stocks for the two major crops are seen growing significantly to 1.726 billion and 330 million bushels. This is due to a 13.9 billion bushel corn crop (165.3 bushel/acre average, up 6.5 bushels from 2013) and a 3.64 billion bushel soybean crop (45.2 bushel/acre average, up 1.9 bushel from 2013). Accordingly global ending stocks are seen growing to 181.7 million tonnes for corn (up 7.9 per cent from the 168.4 million tonnes carryout in 13/14) and 82.2 million tonnes of soybeans (up 22.7 per cent from the 67 million tonnes carryout in 13/14).

As always, there are some questions about the validity of the U.S.D.A.’s estimates though, especially for the 14/15 marketing year as this was the first report showing new crop forecasts. Specifically, there are questions surrounding soybean and corn exports, whether or not the corn feed usage numbers are too low, if the average corn yield is too high, and that planted acres are far from certain. As for wheat, the U.S.D.A.’s estimate for winter wheat production came in at 1.403 billion bushels and ending stocks will drop from 583 million bushels in 13/14 to 540 million bushels in 14/15. With less U.S. production, the E.U. is slated to become the world’s number one wheat exporter in 14/15, shipping out 27.5 million tonnes (supposed to do 30 million tonnes in 13/14) compared to America’s 25.86 million tonnes forecasted (32.25 million tonnes estimated in 13/14). The change at the top of leader board is the first since the 1960s and is due to the smaller winter wheat crop coming off in the U.S. while conditions in Europe are very positive. Rounding out the top five wheat exporters for 14/15 are Canada (21 million tonnes, down from 22 million this year), Russia (19 million tonnes, up from 18.2 million in 13/14), and Australia 18.5 million tonnes, below the 19 million in 13/14). On the import side, Brazil & China are expected to need less wheat in 14/15 at 6.5 million and three million tonnes respectively (down from 7.4 million and seven million tonnes this year). Comparatively, wheat needs in the Middle East are seen growing in 14/15 as Turkey will import 5.5 million tonnes, Syria will look for two million tonnes, and Egypt will again be the world’s top player on the field, importing 10.8 million tonnes.

Switching gears, Alliance Grain Traders is suggesting that due to the lack of clarity on pulse crop conditions in India, there are a “high degree of variability” in the production estimates. Combine this with the dry conditions in the Middle East (AKA Turkey), the Canadian-based pulse trader expects strong international buying demand through into the second quarter of 2015. Nonetheless, there’s going to be plenty of lentils and peas going into the ground this year to help fill that demand. Hedging some of this production through incremental sales is worth considering (i.e. 10 per cent at a time – a couple of goals over the course of the game will win you the game).

To growth,
Brennan Turner
President, FarmLead.com

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