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Market Commentary

By Scott Krakar

May 20, 2015

This year’s crops have started with great potential.  Generally dry conditions have allowed early planting and excellent crop establishment.  This is not only true locally but also through much of the major grain growing areas in the US as well.  Early planting, coupled with the expectation of good summer weather, allows market participants to expect crops to perform well and produce large yields this fall.  With this assumption traders have been aggressively selling grain futures.  Will this be the situation for the balance of the year?  Currently weather forecasters are becoming confident in an El Nino pattern developing.  El Nino years are known to be beneficial to US crop development.  As we progress through the year expect the markets to remain depressed if we continue to see forecasts supportive of crop development.  Today’s market prices demonstrate that the majority of traders are expecting crops to develop favourably, however as all grain growers know, nothing changes like the weather.  The large crop is only an expectation until it’s in the bin.


Recently the USDA listed corn plantings as 85% complete.  This is contrasted with the 5 year average of 75%.  Clearly the corn growing season is off to an early start and this should be positive for final corn yields.  Early planting not only provides opportunity to capture much of the growing season but it also allows corn to pollinate before the typically hot and dry summer weather which limits pollination some years.  Much of the US corn crop should pollinate before the hottest weeks of the summer, consequently with its early start, we may see corn yields increase from prior estimates of 166.8 bushels per acre.  With great yield opportunity the market finds willing sellers.  Likewise the corn market finds sellers because of large South American crops, Chinese demand weakening, and US and Canadian bird flu concerns cutting into demand.  Bird flu alone has caused the death of 33 million birds in the US.  Similar to the US, the Ontario corn crop has been planted in a timely fashion.  Many trade estimates have Ontario corn planting essentially completed.  A lot of acres were planted in the first week of May when the weather warmed and fields were ready.  While there have been a few cool days we have generally seen much corn heat unit accumulation and corn has emerged rapidly.  This rapid start to the growing season should allow new crop to mature earlier in the fall than last years late planted crop.  Growers holding old crop inventory with hopes of a late summer rally should be mindful that their expectation of a late season premium may become a new crop discount if harvest begins early. 


Soybean planting progress is also ahead of average.  US planting is estimated at 45% complete verses the 5 year average of 36%.  Locally we expect 50% or more of the soys are in the ground with some fields already emerged.  The soybean market has seen a drastic price drop recently and unfortunately it is likely that this price slide will continue.  The May 12th USDA report estimated that the US carryout for the 2015/2016 season is likely to be 500 million bushels.  In the event that yields were to equal last years production per acre of 47.8 bushels per acre then ending stocks could grow to greater than 650 million bushels.  The world situation is not much different than that of the US, in that world ending stocks for 2015/2016  are too anticipated to be record high.  This is a very different supply picture than we have seen in the past few years.  This outlook shows world ending stocks growing over 70% in the last 4 years alone.  Given these fundamentals, it would not be unexpected to see the large commodity funds shorting (selling) the soy market further.  In the past these funds have been short in excess of 86,000 contracts in Chicago.  Currently they are at approximately 1/3 of this position.  What prevents them from selling into this market now that the crop is being planted rapidly and the yield prospects are good?  It seems the path of least resistance for soybean prices is lower. 


Wheat has seen some great volatility lately.  Large funds entered a record short position recently and the market fell accordingly.  It is remarkable to regard the size of their wheat short in the Chicago marketplace.  The funds sold a position in excess of 500 million bushels of wheat when the entire size of the US Soft Red Winter wheat crop is approx 400 million bushels this season.  This extraordinarily large position causes extreme volatility at times as those traders buy back their positions, as we witnessed in early May.   Fundamentally wheat supplies are large and growing in the world marketplace.  Recently Russia eliminated the export tax that they put in place early in the year.  This action demonstrates that Russia is not currently concerned about their wheat crop outlook and will likely exhibit again that they are content to be the world’s low cost provider of wheat.  Locally our wheat crop development is mixed.  Early planted wheat is doing well while late planted wheat in many spots is miserable.   The old adage is that you can only kill wheat with a blow torch.  Those who still subscribe to that belief have not yet met the 2015 Ontario wheat crop.