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Market Commentary

By Scott Krakar

May 16 2016

 

Even though it feels as if spring has been slow to come, planting has been progressing well throughout Ontario and in the US.  The recent May 16th planting progress report indicated that 75% of the intended US corn crop is in the ground, ahead of the 5 year average pace of 70%.  Early planting is of course typically viewed as being beneficial for yields.  With early planting the corn can utilize a longer growing season, potentially pollinate before the hot and dry summer heat and is more likely to reach maturity before fall frost. 

The same is often true of early planted soybeans, however as we all know, early planting is not as necessary with beans as it is with corn.  Nevertheless an early start is often a good beginning to produce high yielding soys.  On May 16th the US growers had a reported 36% of their soybean acreage planted, just slightly ahead of the 5 year average of 32%.  

With good planting progress in the US and Ontario we have the opportunity to grow large crops this season.  Typically market prices would fall on good planting progress as the market anticipates high yields.  The market is indeed anticipatory:  prices are influenced by supply and demand expectations.  The market expectations change rapidly and dramatically.  As the outlook changes, so do the markets.   We know that the crop is being planted in a timely manner and yet the market has seen a sharp and dramatic rally during this “ahead of normal planting pace”.  While the market does have some concern about a potential La Nina (hot and dry) growing season developing it is likely that we are too early in the year to see much strength due to this possibility.  What then does the market anticipate to cause the recent strength?  The market anticipates solid demand for US exports, most notably in the case of soybeans. 

It has been well documented that parts of Argentina have suffered major soybean losses due to flooding recently.  Offsetting these losses, other areas of Argentina have produced exceptional yields, perhaps even record high.  Currently, estimates place Argentina at just over 50% harvested, therefore there remains much unknown about their final production number which is estimated to be about 56 million tonnes. 

How important is Argentina in the world soybean product marketplace?  Argentina exports typically account for just under half of all the world’s soymeal and soyoil exports.  The big buyer is China.  China is the largest single user of soymeal which feeds approximately 30% of the world’s production.  This consumption is more than double that of the US. 

Overall current estimates place world soybean ending stocks for the 2015/2016 season at 74.25 million tonnes, down from 79 million in the prior estimate.  Therefore the focus of the market going forward will be US production.  Surely US planted acreage will rise from current estimates as profitability favours soybeans over corn this growing season, however, even if planted acreage does increase it doesn’t necessarily mean that weather won’t be closely followed.   With poor weather 2016/17 US ending stocks will shrink below current estimates of 305 million bushels.  If estimates were for ending stocks to drop further we would definitely see the market continue to add further risk premium to soybean prices.  While this is possible, it is important to remember that it is also possible that US ending stocks could grow. With suitable weather it is not out of the range of expectation to see US ending stocks approach 428 million bushels.  In the past 25 years US ending stocks have only been over 400 million bushels three times.  Managed money funds are reported to be long over 200,000 contracts of soybeans.  For comparison the largest position they have held is 254,000 contracts.  When the managed money funds held these record positions US ending stocks were 92 million bushels. 

 The world supplies of both corn and wheat are not as worrisome as that of soybeans.  This is especially true with wheat.  World wheat ending stocks continue to grow, with stocks increasing 81 million tonnes in only 4 years to 257 million tonnes.  The US stocks to use ratio is expected to be about 49.5% or in other words the US will carryover about half of next year’s usage from this growing season.  Most noteworthy is the US production of Hard Red Winter wheat.  Overall estimates are for record or near record yields due to the timely rains that fell across the US Plains.  These burdensome wheat stocks are likely to replace corn in some feed rations, especially if corn experiences a weather production shock this summer.  In its last estimate, the USDA forecasted corn ending stocks to be about 1.8 billion bushels.  This is a comfortable carryout and stocks are projected to grow to 2.15 billion bushels into 2016/2017.  Will summer weather change this market anticipation?  Most likely it will.  If a poor growing season develops and Brazilian corn production estimates continue to be lowered due to drought then one would expect corn futures to rally with the risk of lower supplies.  This rally would not only be welcomed by producers currently planting corn but it would also be welcomed by the burdensome wheat carryout.