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April 17, 2015
Shortly we will be back in the fields and another growing season will begin. As we approach planting the questions that persist are: what will the planted acreage of corn and soybeans be and what will the summer weather bring? Currently the market indicates that planting is expected to progress as normal and that yields will meet trendline. The futures market is forward looking. Currently the attitude of traders does not indicate concerns about supply as we approach the upcoming growing season. This outlook is demonstrated by falling market prices. Grain prices are again weak and approaching the recent lows recorded last month. It is well reported and understood that old crop supplies of grains and soys are sufficient until we reach harvest. These large stocks have given managed money funds confidence to aggressively short (sell) the grain markets as they expect prices to deteriorate further. In the near term planting progress will confirm or reject the funds current position. If the crop gets planted in a timely fashion the market will try to press lower to challenge the harvest lows established last year. Conversely if planting is delayed or prevented the funds who have been selling the market will begin buying in their position and the market will reject the idea of testing previous lows. So as we look at the market today we wait to see what will occur with planting weather. Personally I wonder how much more the market will fall before the crop is even in the ground. Lets get the crop planted before being too confident about challenging the old lows.
On March 31st the USDA Prospective Plantings and Grain Stocks report was released. Old crop corn stocks indicate that producers still own large inventories and they will sell more corn. Ending stocks are estimated to be 1.827 billion bushels which is a very comfortable old crop carryout. Again these large ending stocks have provided managed money funds assurance that the market should be weaker and they sell. This recent selling has removed risk premium from the corn market. The prospective plantings report indicated that the US producer intends to plant 89.2 million acres this year, down 1.4 million acres from last season. With this acreage expectation and crop development similar to last years exceptionally high US yields the US ending stocks would grow to over 2 billion bushels. This production would be very negative to corn prices heading into 2016. But is such yield expectations realistic? For the past 5 years US corn yields have averaged 150.4 bushels per acre. Using this yield estimate we would find US corn inventories to fall to just under 400 million bushels producing the lowest ending stocks/usage ratio on record of 2.9%. Should the corn market have the weather risk premium removed so soon? Most likely not.
In Ontario basis levels are falling as end users continue to buy sufficient corn for their needs through the spring. Producer sales have been enough to satisfy and even slightly surpass market needs. Couple this to a stronger Canadian dollar and basis levels have softened. Although coverage is adequate in the short term it appears that Ontario basis levels will remain around import levels throughout the summer and therefore expect basis to remain steady to attract sufficient volume through the summer months.
Fundamentally it is difficult to find a reason for soybeans to see sustained strength. Supply is large with a 370 million bushel carryout in the US. The US producer is expected to plant 84.635 million acres of soys this season, up 935 thousand acres. If US yields equal last years then US ending stocks would swell to over 620 million bushels. This would be record high inventories and prices would work to prevent further soybean over production. This season soybean production is estimated to be around 45 bu/acre at present. At this level ending stocks would still grow to over 400 million bushels. Therefore there would have to be a noteworthy production issue develop to push the soybean market significantly higher. Could this happen? Sure, it can’t be ruled out especially since the crop isn’t even planted. Interestingly the managed money short position in soybeans is currently 55,000 contracts which represent 275 million bushels of soys. This short position is close to if not the largest short position ever held by these funds. What happened to the market in 2006 the last time the fund was record short? The market rallied $1.00 per bushel as the funds exited their positions. Should we expect this to happen again? I don’t believe so looking at the market today but then again, the crop isn’t even planted and we have a lot of summer to go.
The structure of the wheat market is very similar to that of soybeans, in that the managed money funds have been aggressively selling wheat and are approaching record short positions as well. There continues to be lots of wheat for sale in the world marketplace and US futures continue to fall to keep market share. Recently there has been concern that much of the US hard wheat crop was vulnerable to drought damage. Since then rains have developed and much of the drought concerns have subsided. Also like with soys, wheat has opportunity for a sharp rally if the funds become concerned about their extremely short position.