Is the Summer sell-off of Grain Markets Nearing an end?
Grain markets continued their summer sell-off with wheat futures closing off the week significantly lower in response to news that Russia has agreed to let idled Ukrainian grain start shipping, six months after the war began. While the market believes it will take, at the very earliest, six months for Ukrainian grain export volumes to hit pre-war levels of 5 MMT a month, it is interpreting last week’s news as obviously very bearish. Other variables moving grain markets are hot temperatures in the Midwest – the top 18 corn-growing states all facing moisture deficits – and broader sell-off in commodity markets amidst recessionary concerns. Nevertheless, as we move into the last week of the 2021/22 crop year (the new season for most Canadian crops starts on August 1st), bearish sentiment might begin to level out.
Some of this bearishness is in the corn market as, despite the moisture concerns in U.S growing regions, Iowa and Illinois are actually looking pretty good. Therefore, the #1 and #2 corn-producing states could make up for any yield losses in other areas, which would mostly be attributed to late-planted corn trying to pollinate in this recent heat. The market isn’t very worried about the U.S. corn crop, especially considering the talk of record acreage getting planted in South America for the 2022/23 season. That said, the U.S. soybean crop will still need some moisture to help fill pods in August.
Speaking of crop conditions, this past week’s heat and humidity have helped move along late-planted crops in Manitoba and eastern Saskatchewan, but the warmth might’ve been too much for crops already well on their way. With this in mind, Manitoba producers are talking about yields that could actually come in reasonably close to average. While Saskatchewan’s fields are looking pretty good too, nearly 1/3 of the province’s oilseeds and spring cereals are still behind in their regular crop development schedule. Generally, the best crops (and, perhaps, the best weather) so far continue to be acknowledged in Alberta, albeit southern areas and western Saskatchewan remain in need of moisture.
This week, by sharing fresh supply and demand tables that include updated figures for planted acres, Agriculture Canada admitted as much for the western Prairies, noting that “the precipitation will be needed to help crop development.” For durum, AAFC increased old crop exports by 100,000 MT to 2.4 MMT, which meant 2021/22 carryout was lowered by the same amount back to their forecast held back in April of just 450,000 MT. This is a new record low for Canadian durum-ending stocks.
The lower planted durum acres print suggested by StatsCan a few weeks ago, took 200,000 MT of Harvest 2022 production off the board, which combined, with the tighter old crop carryout, means AAFC’s estimate of 2022/23 durum ending stocks fell by 300,000 MT to 700,000 MT. Conversely, I’ve increased my average durum yield estimate from May by 3 bushels to 31.5 bu/ac, compared to AAFC’s 34.2 bu/ac forecast, which hasn’t changed since first published back in January. Thereby, my production and ending stocks forecast for Canadian durum wheat in 2022/23 is still below AAFC’s, but not by as much as it once was. Due to limited global supplies, I still expect Canadian durum prices to remain elevated, but they will likely remain depressed until early winter.
Meanwhile, I also increased my forecast for average non-durum wheat yields from May by 3.5 bushels per acre to 52.3 bu/ac. Again, this is still below Agriculture Canada’s 54.1 bu/ac figure, meaning my production number is still about 1 MMT below their target of 28.2 MMT. However, if AAFC’s harvest output is realized, it would make it the 3rd-largest crop on record. I agree that, despite falling prices, demand is expected to remain relatively strong and so I’ve updated my export target substantially to match AAFC’s at 18 MMT, thanks to this bigger harvest potential.
Ultimately, the old growing season adage has held true: grain prices fall as production forecasts rise. Where grain prices go will be a function of ongoing yield speculation and what actually happens to Ukraine’s grain. In a sick twist, one day after the “Grain Corridor” agreement was signed, Russia fired missiles on Odessa’s port area and damaged some infrastructure, including a warehouse used for loading grain. This attack technically breaks the conditions of the deal. However, Ukrainian officials say they are still planning to ship out their halted grain, which is estimated at $10B in value (albeit, maybe less now, after the last couple of weeks of selling!).
Ultimately, it’s a net positive for the world but the downside is that basically, two harvests will be available in the same export campaign. We’ll look more closely at Ukraine’s future impact on “normal” grain markets in the coming weeks and how wheat prices are performing from a year-by-year relative standpoint. In the meantime, happy new crop year!
Founder | Combyne Ag