By: Craig Turner, Senior Risk Management Consultant
The Stats Canada grain and oilseed production report was viewed as bullish compared to expectation. Deep cuts were forecasted in their report in August, and they cut production again in canola (rapeseed) and spring wheat. The old saying is "small crops get smaller" so the trade will be thinking production comes down a little bit more by the end of the year.
Canola production is 34% lower than last year. Canada may lose 7 million mt of canola which represents about 65% of their exports. Spring wheat is down 41% year over year. Barely is down 34%. Oats are down 44%. Canada will most likely have to import more feed from the US, and that is not on the USDA balance sheet yet. I think you have to add at least 100 million bushels to US exports for increased demand from Canada. Some will argue 200mm. That takes new crop ending stocks to 1.3 to 1.2 billion. If true then $5 is too low for spot corn prices.
It is early but we are hearing worse than expected corn yields in IL by 5 to 10%. A field in IL that was expecting 270 bpa is getting closer to the 240/250 area. I'm also hearing about weak stalks and lower than expected moisture levels. Farmers who usually slowly ramp up harvest in early September and now trying to get as much done as possible for fear that the corn may not stay up if they wait to October. It is early but I've had enough conversations about this over the past three days to know it needs to be monitored closely.
I have not heard enough about soybeans either way to have much of an opinion on harvest. There are issues out in the western corn belt, MN, and the Dakotas, but we also hear a lot of good early stories from the ECB. We'll know a lot more about soybean yields in the next week or two.
With Stats Canada reducing production and the disappointing early yield reports, the bulls have the edge right now. The situation in the Gulf is still the dominating factor in the US export market and it is slow to come back. We did hear a major Cargill operation came back online today but at limited capacity. If export capabilities were fully operational I think corn would be 20 or 30 cents higher right now. This could be the seasonal bottom farmers have been waiting for. Now is not the time to make cash sales but it is the time for end users to extend coverage for 2021-2022 needs.
Corn Courage Calls - I like buying courage calls for future new crop sales. The March 2022 $6 calls are about 10 cents. If we do get the big rally you can sell cash grain during a S. American weather market. It is not a bad idea for end users also who want to cap their input costs at $6 just incase this market really takes off
Corn Re-ownership - If you want to re-own I like buying March futures, buying the $5 put, and selling the $6 calls. March futures are around $5.30, the put is 18 cents and the call is 10. You pay 8 cents for the option position, you have march futures and 70 cents of upside, and your risk is capped below $5.00. If the market really rallies we can always roll the $6 call higher.
Soybean Courage Calls - March 2022 Soybean $14.00 calls are 30 cents. You have been now and Feb 18, 2022 to make sales on soybeans. It is also a good play for end users to cap their input costs between now and February.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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