Weather premiums show its face
Grain markets saw the volatility dial turned up last week as it was green across the screen, thanks to ongoing weather and supply concerns to offset some anticipated changes in demand. HRW wheat and corn took the lead last week, jumping more than 10% in their front-month contracts, thanks to ongoing less-than-ideal weather for Europe, North America, and South America.
For the latter, the size of Brazil’s secondcrop safrhina crop is under question due to dryness there. Despite the weather though, the average guesstimate for Brazil’s total corn crop for the full year is 107.3 MMT, a new record and therein suggests we’re in clearly overbought territory.
Elsewhere in South America, rains are delaying the soybean harvest in Argentina but are helping replenish soil moisture levels for the upcoming wheat planting campaign. The Buenos Aires Grains Exchange (BAGE) expects that 16M acres of wheat will be planted this year, which is unchanged year-over-year but significantly smaller than the 17.3M estimated by the Argentine Ministry of Agriculture just two weeks ago.
More broadly for wheat, the complex got a boost last week thanks to some fresh official guidelines from the Chinese government that its livestock producers should use less corn and soymeal, and more wheat and edible oil alternatives like sunflowers. Accordingly, it’s expected that China will use 40 MMT of wheat in their feedstuffs in 2020/21, a new record and, based on these new guidelines from Beijing, could continue to support even higher numbers in the 2021/22 crop year. However, the speculation of adverse weather and corresponding lower-than-expected production continues to drive bullish investor momentum as last week, hedge funds flip back to a net-long position in Chicago wheat while increasing their net-long position in soybeans to the largest since September 2020.
Also last week, Agriculture Canada updated its supply and demand tables for Canadian crops, but it comes a week before Statistics Canada shares its newest forecasts of seeded acres on Tuesday, April 27th. Therein, while we need to take the current ending stocks forecasts with a grain of salt, AAFC did downgrade them from last month for both old and new crop durum and old crop wheat (non-durum). The largest contributing factor to the carryout decline was exports being increased. This included another 200,000 MT for 2021/22 durum exports to now sit at 5 MMT, which aligns with the theme from the IGC that globally inventories heading into 2021/22 are historically tight.
For non-durum wheat, Canadian exports in 2021/22 were raised by 100,000 MT to now sit at 19.2 MMT, and while that’s not matching the 2020/21 record of more than 21 MMT, if realized, it would be the 3rd-largest export campaign in the last 4 years. AAFC made special mention of China’s ongoing increased demand for wheat as the large driver of higher exports. As a
heads up, once we get this week’s seeding intentions report from Statistics Canada, I’ll update AAFC’s tables and share the corresponding charts in next week’s column.
Overall though, it feels like we’re smackdab in the middle of a weather market, but compared to years past, it’s showing up a little earlier than usual. Therein, I expect the volatility to continue and, although you’ll be busy in the field, I’d suggest considering the use of some target pricing tools – including the multi-buyer Target Offers functionality on Combyne – to ensure that you’re able to capture any highs before the weather premiums dissipate. To be clear, it is likely that these new crop price levels on the futures board will be here until said weather concerns are alleviated in the next 3 – 5 weeks. Thus, the demandled rally that we’ve seen over the past 6 months will take a backseat as guarantees of new crop supplies are realized over the coming weeks.