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April 21 2016
Throughout the winter, grain and oilseed futures had a bias to trade sideways to lower. In this regard, the grain markets were not alone, as most major commodity prices traded to low levels. This general commodity weakness was driven by not only growing inventories of goods, but also a strong US dollar. The US economy appeared to be on track for recovery and the speculation was that the US Federal Reserve would raise interest rates throughout the year. Because these anticipated rate hikes did not occur the US dollar began to slide. Due to the weakness of the US dollar commodity prices began to rise. The currencies of resource economies that were severely downtrodden began to recover. As of this writing, the Brazilian stock market index has risen 40% and the Argentinean stock market is up about 50%. Their currencies, similarly with the Canadian dollar are also higher.
Throughout the winter, with low grain prices, futures markets showed very little volatility. It is not unusual to see volatility increase into the planting season. During this time the market closely observes planting progress and weather forecasts. If weather is threatening to timely planting or crop establishment, the market rallies as it builds a risk premium. To date, planting progress has gone very well in much of the US. With world grain inventories record large and the US ending stocks projected to increase, one would expect the market to continue its drift lower. It has done the opposite. Recently the market has moved quickly and abruptly to the upside. Many market participants have watched the recent market strength and questioned why it has occurred so hastily. Sure there are some weather challenges in South America with Brazil being dry and Argentina being wet but unless these conditions continue to worsen there shouldn’t be any material damage to world inventories. Therefore the consensus among many analysts is that the market is currently being influenced by large fund flows. Speculators that have been aggressive sellers have become buyers. In light of the large world inventories of grain, this rally appears to be an opportunity to price grain at levels that are not only profitable but also unexpected. I grew up in a family with four boys and learned from a young age that when the plate of cookies was passed around it was best not to delay in grabbing one.
In its March 31st prospective plantings report the USDA estimated US corn planted acreage to be 93.6 million acres up 5.6 million acres from last year. If this planted acreage is realized it would be the 3rd largest US planted acreage in history. If we assume yields similar to last year the US ending stocks could swell to 2.63 billion bushels or the highest stocks to usage ratio since 2004. Of course it is possible that the USDA planted acreage estimate is high. Suppose instead we see 90 million acres with a 168 yield as was indicated previously at the USDA Outlook conference. Under this scenario we see ending stocks still increasing to a burdensome 1.978 billion bushels. The weather for planting has been good for US corn and therefore final planted acreage could come in at the high estimate. If this were to be the case it would take considerable adverse weather to prevent ending stocks from growing into next year.
As mentioned earlier, Brazil has been seeing adverse conditions in their Safrinha corn crop as conditions have turned hot and dry during its pollination phase. There have been estimates that even perhaps 15% or 9 Million tonnes may be lost from previous estimates due to weather. While this is substantial, to put it into context it represents only 1% of global production.
The USDA estimated soybean plantings to be 82.24 million acres this growing season. While this is higher than last years plantings it was lower than the average trade estimate. Prior to the March 31st report, soybeans had rallied to a 7 month high. Since the report soys have rallied even more aggressively. On March 1 speculative funds had a net short position of 135,000 contracts, they are now long the market. There has been a spectacular build in open interest in soybeans. Recently soybean open interest has increased to a record 896,845 contracts. The previous record was in 2012 when 796,100 contracts were open and soybean prices were just shy of $18. With open interest so high where do you find more participants to buy the market?
With the strong price action currently it is very possible that the March 31st planting estimate will be too low. If we assume 1.5 million acres are added to the March estimate and yields are similar to last year, US ending stocks could increase to record high levels surpassing levels not seen since 2006. The concern today, however, is not in the US production, but rather that of Argentina. There have even been estimates that Argentina could lose up to 15% of its remaining beans yet to be harvested. This would represent 7.5 million tonnes or 2.3% of world production. Surely if these losses mount then US demand would increase. US prices have responded and therefore expect US farmers to plant acreage sufficient to meet the prospective demand.