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June 17, 2015
Within Ontario, crop development has a wide range of variability already this crop season. Most areas were generally dry in the early spring and planting progressed rapidly in May. At that time many were concerned about the possibility of a drought, with the expectation that the early season dryness would continue throughout the balance of June and beyond. Nevertheless the drought talk abated as the rains came in good earnest. At first the rain was considered a good thing, however as the rain continues is it too much of a good thing?
Currently corn futures are indicating that the market consensus is not concerned about this year’s US corn production prospects. Corn futures have fallen to new lows and essentially all weather risk premium has been removed from the market. The USDA, in their most recent crop production report released June 10th, maintained yield expectations to be 166.8 bu/acre. If this yield expectation is accurate the US will still maintain adequate stocks through 2016. The US crop is not unlike the Ontario crop, in that there is much variability in plant development due to excessive rain fall in some areas. Will this variability lower yield expectations into the future? There is no doubt some areas will be negatively affected however much of the US corn crop will pollinate with adequate moisture. When the entire crop is assessed it is important to account for the negatively affected areas in context and not give the poorest areas an overweighting impact. The corn market is currently rated 73% good to excellent and 5% poor to very poor. Excellent corn ratings greatly exceed very poor ratings currently and therefore the market continues to show weakness.
Recently China has been attempting to auction state owned reserve corn stocks into their marketplace. These auctions are reported to have had little success as the reserve auction price is higher than values which can be purchased in the world marketplace. There are two anticipated consequences of this poor auction sale: First, there is an expectation that the government will reduce auction prices, thus lowering their sale price of corn (however it will still be higher than world prices). Secondly, it is possible that the government takes steps to limit feed grain imports. The largest feedstuff ingredients Chinese buyers have been purchasing are barley, sorghum and dried distillers grains (DDGS). If these products are limited into China to prevent their corn prices from falling, then needless to say they will have a negative price impact on US corn prices. The pricing impact of this, if it were to occur, should not be underestimated. In April 2015 China imported 602,000 metric tonnes of US DDGS. This is 20,000 metric tonnes of imports each day.
In some US States excessive moisture has caused delays in soybean planting. Most notably are the delays in Kansas and Missouri. Although these two states are not among the largest soy producing states their acreage is still meaningful when estimating US ending stocks. These states acreage is not insignificant as their combined soy acreage estimate this season was approximately 9.5 million acres. On Monday 4.91 million acres were not planted and the weather forecasts continue to be for additional rainfall. The consequences of this are obvious: If this soy planting is prevented there will be a meaningful reduction in overall US production of soy. To me, it is difficult to accept that this acreage will not be planted. It is only reasonable to expect that when conditions improve producers will plant when possible, even into early July. If this late planting occurs yields will be negatively impacted, but with supportive summer weather these beans could still perform reasonably. Where then will the prices go over the short term? It is all up to the weather. However bullish expectations must be cautioned by the massive production of soy worldwide.
The rains that have been significant across the US have caused delays in the southern US hard red winter wheat harvest. Questions persist about the quality of this wheat after these rains, as heavy rain on mature wheat often lowers test weight. Similarly the soft red winter wheat harvest has also started in the far south. So far the soft red wheat quality has been of good quality with limited test weight and vomitoxin issues. There are a lot of “what ifs” in the wheat market. Will wet weather deteriorate the wheat crop further? Will the dryness in Western Canada and Australia continue and limit yields? Will Russian wheat production be lowered because of dryness as well? The answers to these questions are only speculation at this point. What is known today with certainty is that US wheat prices are not competitive into world markets.
Many participants in the Ontario wheat industry are questioning the potential of this year’s wheat. Not only is there concern of poor yields but there is also concern over quality. Wet/humid weather at flowering time exposes the wheat to fusarium infection which leads to high vomitoxin wheat. Many producers are diligent in spraying fungicide to prevent infection however this is no guarantee of success. So likewise to the entire wheat complex, Ontario wheat also faces a lot of “what ifs”.