Market Insider

One More Push?

Grain prices across Western Canada pulled back this week as the market takes into account new supply and demand forecasts, 2017/18 acreage estimates, and South American weather. Most traders and analysts agree that there is really no fundamental reason why wheat and corn values on the Chicago futures board should not pull back from their recent highs, and perhaps Western Canadian prices are leading the trend a bit. Week-over-week, average prices for hard red spring wheat and durum wheat across Western Canada dropped by 2.75 per cent and 4.25 per cent respectively, sitting in the low $6s and $7s CAD per bushel. Despite some bullish headlines from demand and smaller carryout, nearby canola prices are still sitting above $11 CAD/bushel in many places but we have started to see new crop contracts dip closer and closer to dropping below $10/bushel. Overall, we have seen prices pull back a bit from some of the winter highs and with a fair amount of grain locked up for movement over the next few months, there may be just one rally left in the bag before North American crops emerge from Plant 2017.

On that note, the United States Department of Agriculture (USDA) came out this week with their estimates for the 2017/18 United States (U.S.) acreage and without disappointment, a lot of soybeans are going in. Last year the American farmer planted 83.6 million acres of soybeans, but this coming season that number is expected to jump 5.5 per cent to 88 million (trade was expecting 88.3 million acres). Where are those acres coming from? Quite simply, corn and wheat. U.S. corn acreage is expected to drop 4.3 per cent from the 94 million last year to 90 million in 2017/18. For wheat, total acreage is expected to drop significantly by 8.3 per cent year-over-year to 46 million, with most of the decline coming in winter wheat acre reductions. Societe Generale might have the most stoic perspective on 2017 planting, although in that “soybeans still makes economic sense, but corn remains the traditional crop for US farmers.” Overall, lines will be drawn by the USDA and whether you think they are accurate or not, that is what the market will trade.

Speaking of believable forecasts though, Agriculture and Agri-Food Canada (AAFC) updated some of their Canadian grains supply and demand numbers this week, raising their domestic canola crush demand by 100,000 to nine million tonnes and exports by 500,000 to 10 million tonnes. Of note is that AAFC figures that whatever is still in the field that needs to get harvested will wind up as feed or waste, so they dropped their 2016/17 ending stocks number to 1.1 million tonnes (was two million previously). Given the bigger than expected and better than expected quality, durum wheat stocks were raised by 200,000 to 2.8 million tonnes and other wheat carryout was raised by 500,000 to four million tonnes. Finally, the pea carryout number remained flat (and higher than a year ago), while lentil exports were increased by 200,000 to push ending stocks down to 425,000 MT (is AAFC not accounting for the risk of a new Indian fumigation policy exemption for Canada not getting done? It does not appear so).

Finally, the European Commission recently admitted that winterkill on fall-seeded crops in the European Union (EU) will remain limited and that most areas hit by extremely cold temperatures likely had a good layer of snow for protection. While that is good news for farmers with fields that are “in play,” it also means relatively decent production, especially in the E.U. bloc where a subpar 2016/17 led to a significant decline in production, especially in France. However, with output expected to rebound in 2017/18 in the EU and Russia looking pretty similar, the two European players are likely to go head-to-head as top exporter in the next marketing year. Looking more long-term, the USDA just suggested that grain area in Russia and Ukraine will likely grow by five to 10 per cent in the next decade, and the crop planted with oilseeds should expand by much more. What we do know is that there is literally millions of untapped acres in Russia that have not been farmed in decades, but as trade with Asia becomes more important, it would be dumb of Russia not to develop and push into these areas.

To growth,

Brennan Turner