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Market Commentary

By Scott Krakar

July 15, 2015

 

Until recently the outlook for grain prices was very negative.  World inventories that were deficient only a few years ago, swelled to comfortable levels.  The US harvested a large 2014 crop and was expected to repeat this performance again with the 2015 crop.  This season started well and planting progress was made at a rapid pace.  Because the crop began with great promise yield expectations grew.  The market became concerned over potentially burdensome stocks, in fact larger stocks than the world had ever seen.  Therefore many grain markets fell to contract lows and the forward price outlook was bleak.  In the matter of only a few weeks this has changed.  Throughout much of the corn belt rain accumulation has exceeded records dating back over a century, meanwhile growers in the west are facing an incredible and devastating drought.  The weather events witnessed in June that have brought such regional extremes demonstrates the difficultly in accurately predicting grain prices.   The futures market anticipates supply and demand given specific assumptions.  When the assumptions change so does the market. 

Corn:

In its latest report July 10th, the USDA estimated corn acreage at 88.9 million acres and yield of 166.8 bushels per acre.  Most analyst expect these numbers to be adjusted lower on the next USDA production report Aug 12th.  These expectations are driven by the excessively wet weather experienced in much of the eastern corn belt.  In some area’s, especially parts of Indiana and western Ohio the corn crop will be nothing short of a disaster.  In contrast the western corn belt is reported to be thriving and will have excellent yield potential.  Weather forecasts will be followed closely with hopes that the water logged areas will see improving conditions that are warmer and dryer.  Will changing conditions improve the yield potential of the severely impacted corn?  Not hardly.  As most of the readers that read this column have seen over the years, young growing plants cannot abide severely water logged conditions for extended periods of time.  The affected corn plants that are short, stunted, yellow and thin will never yield satisfactorily or perhaps anything at all.  So the question that remains is how much of the yield loss from the poor areas will be made up by the areas with perfect weather.  It will be some time before we know with more certainty.  Nevertheless we do know with certainty that the US cannot afford to lose much production before we see supply shrink to uncomfortable levels.  Suppose that the USDA drops planted acreage by 500,000 acres to 88.4 million acres and also lowers yields to 162 bushels per acre.  These numbers are not unrealistic considering the difficulties that have been experienced over a wide acreage.  With these previously mentioned estimates corn’s stocks to use ratio would drop to 8.2%.  In the past 55 years there have only been 3 years that have seen stocks this tight.  What does a market do that faces a potential shortage?  It adds a risk premium. 

Soybeans: 

Beans find themselves in the same situation as corn.  Some beans are wiped out, some are thriving.  Overall, in the July 10th report the USDA estimated planted acreage of 85.1 million acres and yield of 46 bushels per acre.  As with corn these estimates are likely to be lowered due to prevented planting and yield loss due to excessive rain.  Beans are remarkable producers at times and can manage good yields often if August brings supportive weather.   Have too many beans suffered irreversible damage to do well in the balance of the summer?  If they don’t perform the US soybean balance sheet will be tight.  If the USDA lowers planted acreage by 1.5 million acres to 83.6 million and drops yield to 44 bushels, the stocks to use ratio will be 5.0%.  In the past 4 decades there have only been 5 years with a lower ratio %.  There are estimates that planted acreage may fall by 3 million acres.  If this even lower acreage estimate was shown to be true and final yields were lowered to even 43 bushels per acre, the US could face the tightest soy carryout in recent history. 

Wheat:

US wheat is priced amongst the highest in the world.  The US soft winter crop has seen devastating quality deterioration, again due to the heavy rains.  The quality of this crop is affected by many factors:  high vomitoxin, sprouts (which destroy the baking characteristics of wheat) and low test weight.  Supplies of milling grade soft wheat are dwindling and much of the crop remains in the field.  This is not only true through much of the US but also into Ontario.  The market is keenly awaiting harvest in Michigan and Ontario as these regions have seen little harvest.  It is only reasonable to assume that Ontario will have some downgraded wheat, the question is how much.  If our local wheat ends up meeting milling grade specifications then Ontario will enjoy some exceptional demand, not only from local millers but also from millers in the US that have seen horrible local quality.  Conversely, if Ontario’s crop is poor we will be faced with very poor demand and steep discounts as there is much poor wheat in the US to compete with.