MarketInsight May 20, 2015

Marlene BoerschMarket Insight

Major grains & oilseeds markets –

Last week was a very interesting week: We had the release of the WASDE report (which contained bearish wheat numbers), Russia removed its wheat export tax, and an El Nino event was confirmed, which all combined for a volatile week. The corn and soybean estimates were in line with expectations. We do note that the high yields USDA used for corn and soybeans do not leave room for a weather event. The WASDE wheat numbers were a surprise to the market. Their estimate came in far-above Mercantile’s early bird estimate and was 19 myn tonnes larger than IGC. We consider WASDE number to be overstated, as do many in the industry.

Soybeans – There was nothing in the WASDE report that was bullish on soybeans. Bird flu reports in the US and China are not supportive to soymeal demand.

Canola – We saw a drop in the open interest on the July month and an increase in selling of new crop November futures. Cash business remains slow, although we understand the Chinese are still looking for August/September shipment of either canola or Australian origin seed. We still see that the old crop seed supply is going to be very tight and are prepared to own a small July/January long.

Flaxseed – Canadian flaxseed exports have been increasing again over the past 3 years, but so is acreage and production. For example, given average yield, production could increase by about 200k mt, and exports are forecast to grow by roughly he same tonnage. If correct, this balance sheet will stay reasonably constructive.

Wheat – Friday’s removal of the Russian export tax will allow trade to return to normal, with plenty of old crop stocks still looking for homes. On new crop, the warning flags are the US (too wet), Australia (El Nino) and India (how big is the import demand?).

Durum – The AAFC weekly price summary dated May 8 put West Coast FOB for 13% protein #1 CWAD at $441.65 and at $398.55 for 12% pro. FOB prices declined per the preceding weekly view, but business has since been done and they could steady or move higher if demand resumes in a meaningful fashion. AAFC expects global 14/15 carryout increased by just 100k mt though; as such, global 15/16 carry-in is light and stocks should remain fairly tight when viewed historically.

Barley – The Alberta Crop Report put barley seeding progress at 42.5% complete versus 25.4% the previous week. The Lethbridge price pulled-back by $8.00 per mt on the week; Canadian barley still offers value to our domestic consumers in our view, but the lower $USD, sustained weakness in western cash corn price in the US, and available cheap backhaul freight might eventually result in some corn imports. Internationally, Nearby shorts in Russia were reported paying interior parities of $207 usfmt Fob (the Russian pace of barley exports remains high with another 425,000 tonnes was shipped in April), while Black Sea new crop was reported at $170-175. Argentine Fob was not offered old crop Aussie Fob remained at $242- 245, while China supported new crop with bids at $225 (level money with French C&F). We can assume malting barley to be worth at least $280 USF/mt FOB.

Oats – Cash prices for oats when denominated in Canadian dollar terms do make our oats attractive to US millers. Our balance sheet analysis suggests fairly tight 14/15 and 15/16 ending stocks for Canada. It does still seem possible to us that Canadian area will eventually be revised lower given the talk of producers switching oat area into other crops.

Peas We said recently that we thought it peculiar that the pea market was not reacting to problems in India in the same way as lentil and other pulse markets had, but the situation has caught up to peas now as well. In fact, India has shown active buying interest in the market again for both current crop and new crop peas. We believe that the heavy rains during harvest in India caused more damage than they originally acknowledged and may have spoiled some crops in storage as well, though we are still trying to confirm the latter.

Lentils – Lentils are basically in the same situation as described for peas. Demand has been above expectations due to shortfalls on the Indian Subcontinent and due to the loss of Syrian lentil production. Prices in Canada are outstanding as demand basically outstrips supply, and this has also spilled over into new crop values.

Last years’ Indian pulse harvest was reported at just under 20 million mt, and this years’ (2014/’15) crop has been lowered by the Indian Department of Agriculture to just 17.3 million mt. We think even this may be optimistic. ‘Normal export demand’ from India is around 3-3.5 million mt, but in exceptional years, this can rise to 4.0 to 4.7 million mt. We are sure that this year will be a high import year.

Transportation – Railroad performance continues to be below par and makes it unlikely the AAFC export estimates will be achieved.