Commentary

July 12 2017

In their recent policy announcement the Bank of Canada governor spoke in a positive and confident tone about the Canadian economy.   He spoke of the economy being robust and stated that excessive slack capacity has been fully absorbed.  Expectations are for Canadian GDP to increase faster than previously estimated and inflation is growing, on target with the banks mandate. As a result, for the first time in 7 years the Bank of Canada raised interest rates.  Consequently on the day of the interest rate announcement the Canadian dollar rallied to a 13 month high. The US Federal Reserve has also indicated that it is their expectation to raise rates slowly and steadily over a multi year timeframe.  If inflation is realised both here and around the world, the expectation would be for commodity prices to strengthen. 

Early in the growing season it seemed like it was only our region that had weather difficulties.  Ontario fields were water logged and planting was slow, if not prevented altogether.   Unfortunately this situation has not changed and extremely heavy rains have been common, resulting in some substantial flooding, especially in areas that were heaviest hit with drought last year. What has changed however is as we entered the summer other geographies began to experience weather issues and crop stress.   As we have mentioned in prior months, the outlook for grain changes as fast as the weather.  Throughout many important regions the weather has changed and prices are responding.

Most notably weather issues have arisen in the US spring wheat growing area, predominately in North Dakota and South Dakota.  The severe drought has significantly impacted the production of US spring wheat, exactly at the time when high protein wheat is becoming harder to come by, due to back to back low protein US HRW harvests.  Because the US crop is in such jeopardy market watchers have turned their attention to Western Canada’s spring wheat production outlook.  Both Manitoba and Saskatchewan have received below average rainfall this season in key growing areas.  If this crop continues to deteriorate spring wheat supplies will become extremely tight and spring wheat prices will rally further over other wheat classes. 

While the extreme drought in the Dakota’s has caused analysts to focus on spring wheat it is also important to recognize the effect this drought is having on the corn and soy crop in the region.  The Dakota’s have substantial land area, growing about 10% of the US corn acreage and 14% of the US soy acreage.  US corn crop ratings are significantly poorer than this time last year in many areas.  When totaled the US has 74.3 million acres with worse crop ratings than the previous season, with only 9.35 million acres rated better than last year.  With current forecasts for extreme heat to remain throughout the Midwest, there is becoming more concern that US corn yields could fall below 160 bushel per acre average.  At this time US corn pollination is also behind the 5 year average pace, leaving the crop vulnerable to heat during flowering.   If yields fall 8% below trend line we would expect yields to average about 157 bushels per acre.   If this situation were to occur it is estimated that world ending stocks would drop about 50 million tonnes, the largest drop in stocks since 1988.  Currently the US is estimating the third highest yield in history.  With all of the conditions discussed above the expectation would be for this outlook to be overly optimistic. 

Soybeans ratings are also poor relative to last season.  In total 69.5 million acres of US soys are rated worse than last year, while only 15.9 million acres are rated better.  Among many market participants there is an increasing expectation that beans will likely yield below current USDA estimates.  If US beans yield 2 bushels per acre less than the current estimate of 48 bushels, then ending stocks will be reduced about 209 million bushels and the stocks to use ratio will be just below 7%.  While conditions are poor now and the outlook for bean production may be lower, it is necessary to recall that the bean crop is often said to be made in August.

As we head into wheat harvest locally, producers have been seeing a welcome harvest time rally.  Currently wheat futures are up about 22% since the beginning of the year.  Growers have been active sellers as the market rallied, not only for this crop year but more especially for the 2018 crop year as prices are good.  As of this writing there hasn’t been much wheat harvested and quality has been good with low vomitoxin.  As we enter wheat harvest the wet weather continues and there are more questions as to whether wheat quality will remain.  If conditions remain too wet for harvest we could experience sprouting and quality downgrades. 

In similar fashion to wheat, producers are selling some old crop corn and beans, however deferred sales into harvest into 2017 and 2018 are much more active.  Prices into the deferred time frames are currently profitable and it makes good business sense to lock in profitability while prices are attractive.