More yield, production downgrades coming?

Grain markets all rebounded in the last full week of trading for August, as yield potential concerns remain elevated with updated crop ratings, harvest weather challenges, and yield monitors guiding the market. This past week, Agriculture Canada provided a major downgrade to the country’s crop potential, which is certainly helping the bullish case for even higher prices this fall. Combined with strong, continued demand for almost all crop types, any further reduction to Harvest 2021’s output is eventually going to create some level of demand rationing. However, before we see any slowdown in demand, prices – both at the farm gate and in the grocery store – are likely to move higher. Therein, it’s likely that we’ll see more buyers move to just-in-time purchasing, which means there’ll be more specials, end-of-week, and/or end-of-month buying to meet their demand needs at the last second.

While corn and soybean futures are paying the most attention to crop potential in the U.S., Brazil, and Argentina, ongoing strong demand from China and other net-importing countries is helping keep prices elevated. In the wheat complex, poor weather in Europe continues to negatively affect harvest efforts, and the heavy summer rains are producing lower test weights in wheat crops in France and Germany (the bloc’s 2 largest wheat producers), but protein is still little changed year-over-year.

The biggest news for wheat this week though, came from Agriculture Canada, who dramatically lowered their average yield estimates for every crop produced in Canada, compared to their previous month’s forecast. Frankly, this shouldn’t be surprising as even a month ago, I made some fairly bullish estimates in this column of where I felt the Canadian durum and wheat crop would end up in AAFC’s August publication. In reality, the August heat that Western Canada faced was even more detrimental than many of us could’ve expected and as a result, the Canadian wheat balance sheet, as well as that of many other crops, especially canola, has tightened up considerably in just one month (cue the “I told so”s on Coffee Row!).

Leaning into durum, in just one month, AAFC dropped average yields by nearly 13 bushels an acre to 26.7 bu/ac, which would be down 37% year-over-year and the lowest average yield since 2003/04’s 26.2 bu/ac. This adds up to a production number of just 3.83 MMT, a drop of more than 2 MMT from AAFC’s July estimate, and almost 2.75 MMT, or 42%, below Harvest 2020’s 6.6 MMT output. Combined with old crop exports being raised by 300,000 MT to another new record of 6.1 MMT, the durum balance sheet remains incredibly tight as we start the 2021/22 new crop year.

Thus, with much smaller production, Canadian 2021/22 durum exports must be rationed and AAFC pegged it at 3.1 MMT, slightly below my estimate from a month ago of 3.3 MMT and 52%, or 3 MMT, lower year-over-year. With questionable quality coming off, I think more than just Ag Canada’s forecast of 400,000 MT of this year’s durum crop will go into the feed column, which should then result in ending stocks dipping below 600,000 MT, as I suggested a month ago. Included in the chart below is a look at where 2007/08 stocks and average durum prices ended, but keep in mind that AAFC didn’t come to these numbers right at harvest time (which we’re currently in), but only once the crop year was done. The takeaway for me here is that the $20 CAD and higher durum prices for top quality being seen today could be around for a few more months until more of this year’s harvest – both in terms of quantity and quality – is known.

For non-durum wheat, the headlines are just as bullish as, compared to Agriculture Canada’s estimate last month, yields were dropped by more than 17 bu/ac to 36.4 (also -34% YoY), production was slashed by 9.2 MMT to 16.4 MMT (now -38% YoY), and 2021/22 exports were felled by 8.9 MMT to sit at 11 MMT (-48% YoY). Given production shortfalls in the U.S. and Russia, it’s certainly possible that Canadian non-durum wheat exports climb above AAFC’s current export estimate, which could suggest 2021/22 ending stocks drop below 2 MMT.

While I again reference the 2007/08 crop year in the non-durum wheat charts above and below, we need to be mindful of Australia’s bigger wheat harvests, both last year’s record and this year’s near-record, which will continue to heavily compete with U.S. and Canadian wheat high protein exports in 2021/22. The other bearish factor to consider is that in 2007/08, all major crops saw reduced harvests, which exacerbated things and pushed prices even higher. Compared to today, global corn and soybean crops look okay, albeit not huge, and while that will certainly pressure the supply and demand balance sheets, global supplies are better than 2007/08. On the flip side, the bullish argument for this year is that demand – especially in the feed market – is much higher than that of the crop year 14 years ago.

Thus, I’m at a point now in my grain marketing plan where filling contracts (that I haven’t gotten out of) is a focus, but I am considering binning anything else and likely waiting until October before signing up new contracts. This doesn’t mean I’m going to stop talking to my grain buyers, but I should be tracking how their prices are changing from the beginning of the week or month to that near week’s or month’s end.