MarketInsight June 29, 2015

Marlene BoerschMarket Insight

Major grains & oilseeds markets –

Last week the markets rallied strongly as they recognized that some crops were in trouble and the weather outlook is unfavorable. Wheat has led the rally during the past two weeks as traders recognize that USDA’s production estimates are overstated. The USDA WASDE report due on the July 10 should have some adjustments similar to the IGC report, which downgraded wheat production last week.

Speculators and funds were short-covering last week at a time when producers were in no mood to sell. European traders were buying back their short hedges in Chicago wheat, which were put on against EU long grain positions; this pushed the Chicago market up and narrowed the spread between Chicago wheat and Kansas futures.

While press reports were centered on crop problems in the US, there were several reports of reduced crops in the EU and further problems due to weather. If the weather outlook continues dry, we can expect additional strength in futures this coming week. Weather in Western Canada is not positive.

Soybeans – Soybeans followed the other grains during the week, but lost ground on the corn/soybean ratio. In our view, if the 5-myn acres of soybeans get planted then the new crop ratio is about right. Considering the weather and/or further seeding delays, then we should be at 2.70. If no further problems occur and the acres are planted, the ratio should be at 2.50. Any setback in wheat or corn, and we would expect soybeans to fall harder.

Canola – Canola is now overpriced on a product basis to soybeans so there is no commercial interest for export. Crushers are still paying up against a nearby short position, as they are very concerned about current weather conditions and eventual crop size; it is a good time to sell canola in our view.

Flaxseed – Flaxseed production is expected to increase in Canada, the U.S., Kazakhstan, and Russia, thus increasing total world production. The EU will likely drawing supplies from Kazakhstan and Russia, which is negative for Canadian flax exports to the EU. ‘If’ U.S. production does increase, this could also lower imports from Canada due to higher domestic production. Canadian exports of flaxseed to China are still expected to increase.

Wheat – The forward picture is dependent upon the weather. It appears as if El Nino is confirmed, and if it continues to develop, prices need to move higher and USDA needs to revise its production forecasts, which as we have been saying are very wrong.

Durum – In global durum news, Algerian output is estimated at 3.4 myn mt versus roughly 4.9 myn on average. Tunisian soft output could be just 1.4 myn my, 40% below last year. Their harvests are looking poor which should add underlying support to both durum demand and price. In the EU, MARS pegged their 15/16 durum yield estimate at 3.22 mt/ha, 3.6% below last year (3.34 mt/ha yield in 2014) and is 1.1% below the long-term average of 3.26 mt/ha. – Global 15/16 durum carry-in is modest and stocks should remain fairly tight when viewed historically.

Barley – There are reports that China has already purchased 10 myn tonnes of barley for import in 2015/16. If this is correct and El Niño continues this is very bullish on barley.

Oats – For the upcoming StatsCan seeded area report on June 30, per the Reuters survey, the average analyst estimate for oat area is 3.4 myn ac (range of estimates 3.0/3.7 myn) versus StatsCan last at 3.645 myn on Apr 23 and versus 2.798 myn last year.

Peas Old crop pea prices are stable with the occasional good premium showing up to finish shipping needs. There simply is very little volume left to be done, so the market is practically idling. However, we did expect to see more pressure on new crop prices as the weather deteriorated. While production in Canada is threatened by drought and heat, there is little point for producers to sell more for now.

Lentils – Basically the same factors apply as for peas. Old crop is near done and new crop yields are being watched for now; there are very few new crop offers in the market. Lentil prices have increased relatively more than yellow pea prices and already reflect the tight conditions. However, if yields are affected further as we move into the hot months, then prices will move to levels that will effectively restrict demand.   Overall, we expect firm pulse markets and excellent shipping opportunities upon harvest.