Tuesday, April 24, 2012

Big Crops Weigh in on Wheat Market Mentality


It’s getting hard to escape the constant bearish new crop production and acreage forecast, with Canada coming out this week with wheat area +13% from last year. However sustained demand (as futures flirt with strong buying support levels) is helping prices from stumbling lower, but for how much longer? Whilst talk of improving crop conditions in both US and Europe continues to shift lower in futures. While the continuing downgraded soybean crop in Sth American, with output still not stabilising helped fuel soybean rally  to 3 ½ year high.

No significant rain over much of US wheat growing regions over the last week, but some is forecast this week. Temperatures are tipped to warm up, which will be a welcome break after this week’s cold weather. With a bearish weather outlook for winter wheat crop in the US and a strong start to the spring wheat crop, the market remains under strong selling pressure. Winter wheat crop continues to be in great shape and maturing vigorously. 63% of the crop is rated good – excellent, with only 10% rated very poor – poor. This compares to last year when only 35% was rated good to excellent. 57% of spring wheat has been planted, well ahead of the five-year average of 19%.

Despite concerns regarding tight old corn crop stocks futures have succumbed to heavy fund selling across the week. Total US planted corn acreage continues to surge ahead at 28% (+11%). Key state of Illinois is at 59%, well ahead of the average of 15% for this time of year. Private analysts, Informa, estimated that nearly 25.5mmt of US corn could be potentially harvested prior to Sept, due to early planting. This would be almost double from last year. This helps alleviate tightening old crop stocks before the marketing year closes, with stocks to use ratio at record low of 6.3%.
Soybeans continue to be darling of agricultural commodities, with prices surging  on Chinese demand rumors, and concerns that corn will still attract too much land away from beans. Argentinean crop prospects keep shrinking (on a daily basis now!), with new estimates now around the 40mmt mark. This compares to the USDA forecast earlier this month of 45mmt! Usually customers flock to Sth America for the cheapest beans this time of year, but with Argi crop shrinking and shipping stem full in Brazil, customers have only once place to go, the US.

Beans are at a record overbought position, because of these underlying bullish fundamentals. The trade remains nervous over the possibility of a long liquidation correction led by bearish economic news and weakness in the other grains. However there hasn’t been a weather scare in the US yet, and you can usually count on a couple per year! If any production hiccups occur in the US, hang onto your hat as this has the ability to explode the oilseed market.

Bullish export demand and a return of speculative buying interest continues to help gains in Winnipeg canola. Planting intentions were pegged at 20.4ma, and although this is a record acreage and +8% from last year, it was smaller then some had anticipated (which was up to 23ma). In Saskatchewan, the top state for canola and wheat, only a handful of farmers in the south have sown crops. However unseasonably warm temps may spur more planting, but snow/rain is forecast later on this week.

Further good rainfall is expected over much of Western Europe, with the wet bias expected to last for the next couple of weeks. Generous rainfall in April has eased previous dry conditions that were experienced in Feb/March and stabilised wheat and rapeseed conditions, although crop damage may not be totally irreversible. Good example of the extent of the European spring frosts a couple of months ago, with 29% of Poland's winter crop dead according to the local government. That land will be resown mostly with spring barley and corn.

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