Major grains & oilseeds markets –
The financial markets tumbled at the end of the week as investors headed for the exits; more were concerned that Chinese economics were not good and indications were that a recession was imminent.
This sentiment rolled over into commodities, including grain, and our markets closed at the low-end of the range for the week. We had some positive news for grains, suggestions of lower US yields and smaller global production forecasts, but the bearish sentiment in the financial markets outweighed any positives and markets weakened.
Speculative funds were particularly active, disposing of their entire long and sold in excess of 10-myn tonnes on the week. Index funds were also sellers.
Soybeans – Oilseeds are seen most vulnerable to an economic downturn in China. In the short term the futures markets will be led by events in China. China is the world’s largest importer of soybeans, purchasing between 6/7 myn tonnes monthly, so any economic data which can be interpreted as fewer soybean imports is seen as bearish. Ratios collapsed on China concerns. In our view, whatever problems exist in China, the last thing the government will permit is a shortage of food supplies, so imports will stay unchanged. In the meantime, until this is clear, the futures market is vulnerable to some setbacks.
Canola – After Friday’s collapse in soybeans, canola is overpriced and we have reduced our import numbers based upon current market prices. Importers will pay a premium for canola during a shortage, but not 10 percent. We think canola needs to drop about 5 percent against soybeans. However, it is not clear whether futures need to drop or a weaker “Loonie” will accomplish the job.
Flaxseed – StatsCan’s forecast of flaxseed production came in at 884,000 mt, just 4% above last years’ production in spite of an increase in seeded acres of almost 9%. Yield was pegged at 20.9 bu/acres. Still, while AAFC projected exports at 825k mt for the 2015/’16 crop year, after reviewing potential destinations, we do not expect to export more than about 745k mt. Given these export numbers, ending stocks could increase to around 250k mt.
Wheat – The wheat markets were lower on the week on sufficient global supply and due poor export demand for US wheat; US export sales came in below the previous week and total sales are running 15% below the pace of last year on this date. There was chatter about Russian export delays (SovEcon pegged new crop sales 50% below 14/15) but this may in-part be due reporting delays. There was serious flooding in eastern Argentina with reports of wheat crop losses of 6%. The lone reasons we can uncover for a forward rally would be if corn were to rally on the tightening EU corn picture, or is there was surprise political unrest at a major exporter.
Durum – We expect 15/16 global output will come in modestly above 14/15 as the EU crop escaped harvest intact. Global 15/16 carry-in is modest and stocks should remain fairly tight when viewed historically; Canadian carry is on pace to decline as well.
Barley – Persistent dryness in Ab and in parts of Sk. has impacted quality in Canada, though the final results are not yet in. Malt imports are a risk in Canada this season. Though area was higher this season in Canada, and despite that the crop is not yet made, we expect the 15/16 malt situation will be tight and that carry can decline.
Oats – Oat futures prices suffered sharp losses on the week when viewed on a percentage basis. The cash and futures charts remain bearish. StatsCan put Canadian output 13.9% above last season, and this may prove conservative. However, we view oats as a very cheap feed input, and the StatsCan numbers likely do not account for the amount of crop that was cut early for greenfeed; with lower yield, and fewer available stocks than StatsCan accounts (due feeding), the balance sheet is tighter than it appears. Expect cash prices (or at least basis) can eventually improve.
Peas – Recent yield assessments put pea production below 3 million mt and this is lower than our previous estimate by another 273k mt; partly StatsCan has a higher acreage abandonment number than Mercantile. In essence it means that eventually, exports will have to be curtailed to 2.3 million mt (almost 25% from last crop year, when we shipped more than 3 million mt). This makes current pea bids too cheap in our mind, especially when taking into account the very significant deterioration of the Canadian dollar since last summer.
Lentils – The StatsCan production report pegged lentil production at 2.08 million mt, up only marginally from last years’ 2 million mt in spite of a 17% increase in seeded acres. This is within 36k mt of Mercantile’s earlier estimate. Note we expect exports to fall from the record 2.1 million mt last crop year to around 1.85 million mt (still the 2nd highest export number ever), leaving a more traditional carryout of 250-280k mt, or a stock-use-ratio of 11-13%. Meanwhile due to quality concerns, prices for decent quality large greens and for #2 reds have taken another step up to $40/cwt and $37/cwt, respectively, as buyers are trying to restock empty shelves as quickly as possible. This is creating excellent nearby demand, especially since harvest is not coming in as quickly as expected.
Canaryseed – The StatsCan production forecast for this year is at 133,800 mt, slightly above last years’ thanks to a 20% increase in acres. Yields are forecast to be poor (no surprise here) at only 922 lbs/acre. Note that the SAF take on yields is even worse at only 768 lbs/ acre! The big unknown over the past several years has been the level of carryin stocks. These should slowly have been drawn down.
[If you are interested in our new crop supply & demand numbers, pls contact Mercantile]