Grain Sell-Off Sets up Volatile Report Week
Grain markets saw another week of heavy selling, the second straight week of such activity for the complex, with new crop wheat futures down between $1.35 USD/bushel for Minneapolis HRS and $1.70 for Kansas City HRW wheat over the last ten trading sessions. Wheat values were pressured specifically by the ongoing winter wheat harvest, with Chicago front-month contracts touching their lowest level since March 1, 2022, while oilseeds were challenged by reports that China’s soymeal inventories have tripled in the last three months.
More generally, many market participants blamed a variety of four factors this past week: higher production forecasts from the International Grains Council, an updated long-range forecast that includes cooler temperatures for the Corn Belt, the likelihood of recession, and ongoing negotiations for Ukrainian grain to make it to market from Russian-controlled ports. Nonetheless, supply continues to be relatively tight in many crops, a variable for which we’ll get an update this week with the USDA’s Stocks and Acreage reports on Thursday, June 30, 2022.
When a fast sell-off like this happens – i.e. canola futures losing $200 CAD/MT in two weeks! – commercial buyers try to take advantage and buy up as much as they can at the lower levels. With stronger demand support, as prices rise, short positions usually start to get covered, which would also help elevate futures values. The good news for those looking for these higher prices is that the crop is still a few months from being in the bin, and this sort of intense pullback is much better happening in June than it is in September. Why? If it was the latter, prices wouldn’t likely rebound for a few more months as seasonality takes over with lots of new supply coming to market. Conversely, it’s the end of June and with a lot of likely acreage changes expected in this week’s USDA report because of the wet weather in the Northern Plains, and the complex going into oversold territory, especially in wheat, the potential for a bullish surprise is certainly on the table this week.
On that note, Agriculture Canada updated its supply and demand tables last week, and as it pertains to wheat, there were a few changes. In durum, the AAFC didn’t do much except increase the average crop year price forecast by more than 16% month-over-month to an average of $500 CAD/MT or $13.60 CAD/bushel. My model still suggests a lower average yield than the 34.2 bu/ac Agriculture Canada is forecasting, and accordingly, my price estimate from last month still stands (as shown in the chart below). Of course, there have been some good rains falling in durum-producing areas but I’m also cognizant of the damage that some storms have inflicted namely hail. Does the crop have time to rebound? Certainly, but with the IGC dropping their estimate of world durum stocks for 2022/23 to 6.3 MMT, we continue to be in a tight inventory situation and market prices throughout the calendar should reflect that.
For non-durum wheat, yield uncertainty remains thanks to the wet vs dry conditions that are the eastern and western Canadian Prairies, respectively. The multi-week delay to get the spring wheat crop even seeded in Manitoba and eastern Saskatchewan is leading to a need for some much warmer weather than what has been forecasted for the next week. In the western Prairies, healthy rains have certainly been helpful, but more moisture will be needed throughout the growing season to help the crop “achieve normal yields”, said Agriculture Canada last week. Therein, it is a possibility that any losses in the eastern Prairies could be offset by better conditions in the western half of the region. Perhaps that’s why then, AAFC increased its estimate of average non-durum wheat yields by 3 bushels per acre to 54 bu/ac, which adds another 1.5 MMT to the production column.
I should also mention that some rains could help eastern Canada’s crops as well, but they are looking pretty promising as it, with just a few weeks to go before getting combined. On the demand side, AAFC also raised 2022/23 exports by 300,000 MT (as shown in the chart above), as well as domestic use by nearly 1.2 MMT, which completely offsets the higher output number, thereby keeping ending stocks at 4 MMT. That extra demand seemed to justify an increase in Agriculture Canada’s price forecast by $40 CAD/MT (or $1.10 CAD/bushel) to a season average of $450/MT and $12.25/bu. My estimate continues to include a lower yield, but my average price forecast is actually now below that of the government’s.
Ultimately, this is an incredibly volatile time of the year, with the market turning in a moment, but then flipping again with a change in the weather forecast. The potential for drought remains as the high-pressure ridge that I mentioned in last week’s column, is still hovering over parts of North America. It is bringing rain to the Canadian Prairies (again, appreciated by some but not by all!) but if hot and dry conditions return in mid-July to mid-August, it would likely impact corn yields, given it would happen during pollination, a key crop development stage. That said, watching your fields or the markets every hour of every day is not healthy so make sure to take a break for the sake of not just your body and mind, but that of your family or teammates around the farm too! You cannot control Mother Nature or the markets, especially at this time of year, so consider getting out to the lake, going for a round of golf, or visiting some relatives and friends you haven’t been able to see these last two years!
Founder | Combyne Ag