New contract lows being hit
Seasonally, late August is a typical low in the wheat complex. The only problem is how low can they take these contracts? The previous contract low for December Chicago was $4.53, which sank another 15 cents to the $4.38 mark. September to December Chicago has a 26.75 cent carry, clearly signaling that the market doesn't want winter wheat now and instead would prefer it later. The danger in a full carry market is that when September goes off the board — currently $4.14 — December could sag to that level when it becomes the front month. Kansas City is in a similar boat.
I wrote about my negativity on Aug. 4 regarding the government being on the hook for substantial crop insurance indemnities on spring wheat regarding the western Dakotas and Montana. In six trading sessions from the Aug. 4 close to the Aug.15 close, we have dropped the spring wheat fall price election 11 cents to $7.06. Eleven cents may not sound like much, but when it comes to settling claims, every penny makes a difference.
The spring price election for spring wheat was $5.65. The Aug.15 mid-point average is $7.06. A grower who was zeroed out on one acre of wheat with a 50 bushel actual production history is looking at $353 per acre x 70 percent or $247.10. On Aug. 4 that number was $250.95.
So 11 cents of downside is $3.85 per acre in coverage. If we lost a million acres to abandonment, the feds just saved nearly 4 million in those seven trading days. The number is much higher if you include shallow losses which can't be quantified at this time. I'm addressing abandoned acres here, but you get the drift. Another 11 cents on Aug. 31 is substantial. Don't look for much upside until then.
The big news affecting the market this week was the lack of U.S. offers for Egyptian grain purchase. This is sending a negative tone across the wheat complex. Drier forecasts for the Dakotas are also favoring a wrap up of spring wheat harvest. Yields so far have exceeded expectations, and the market knows it. Processors know it's there, and they don't have to bid it up. The U.S. dollar had some upside movement this week, which was also negative news for the grains.
Corn contracts drifted lower for the week on follow through liquidation from the bearish Aug.10 report. The December contract traded to its lowest level since Sept. 1, 2016. The reaction to the U.S. Department of Agriculture's report has been met with much skepticism given the dry stress conditions encountered on the crop during July pollination.
The U.S. Drought Monitor for Aug. 15 shows 10 percent of corn acres in Iowa are in D2 severe drought to D3 extreme drought conditions with another 30 percent in D1 moderate drought. For the U.S., roughly 5 percent of corn acres are in severe to extreme drought and another 10 percent in moderate drought. With key corn growing regions of Iowa and South Dakota experiencing drought, it is tough to argue with folks who think corn futures should be going higher. However, we typically put in a low in the grain markets in the late August timeframe when deferred payment contracts are no longer allowed to be rolled into new crop.
The real problem remains a burdensome 16.3 percent U.S. stocks-to-use ratio, the highest since 1986-87. If you are in the camp that USDA is optimistic at a 169.5 bushel yield estimate, or if you are in the camp that the yield should be in the 165.5 bushel range, at the end of the day it would only change ending stocks around 320 to 340 million bushels. So the ending stocks number comes in at 1.93 billion bushels on the low end and 2.27 billion bushels on the high end. This is the primary reason there has been a lack of fund buying. The real question is, do the funds build a large short position from here until harvest?
Despite all the negative news, I'm not totally bearish the regional cash market in the coming year. The western Dakotas experienced drought, and ethanol plants in those areas will be forced to improve basis to get corn. If Iowa gets 10 to 15 percent below-average yields in an area, that consumes all the corn it grows between livestock and ethanol, and they will also be forced to improve basis to get corn. Not to mention Illinois planted late, so the top-end yield potential likely isn't there. This situation, if realized, would greatly improve the basis through spring to harvest of 2018. So for new crop, at least in the Northern Plains, the cash market could do the heavy lifting by improved basis even if futures stay locked in a narrow trading range as they did last winter. There is some hope for the cash market in the next 12 months unless the Dakotas and Iowa come up with surprisingly good yields in October.
Soybeans continued their sell off early in the week after a surprise yield increase in USDA yield estimates. Soybeans are getting closer to flirting with the 2017 lows, as August weather has been favorable for soybean production. August has been a mild month and has been favorable weather for filling pods. It may be a while until people are in agreement with what kind of crop is out there, especially knowing how spotty rains have been and how cool the spring was. For the week ending Aug. 17, September soybeans were down .25 cents and November 2017 soybeans were down 4 cents.
The markets sold off recently, as rain did fall in much of the Midwest, bringing along cooler weather with it. Areas that really needed it only got enough to act as a Band-Aid for now though. Iowa and northern Missouri got smaller than expected rains and are still short in many areas. Recent rains in the Dakotas and Minnesota have improved prospects there
The trade was expecting crop conditions to improve 1 to 2 percent on the Aug. 14 report, but were thrown a curveball with a 1 percent decrease in ratings. Soybeans were rated at 59 percent good to excellent versus 60 percent good to excellent last week and 72 percent last year. The market still did not act positively to this number, and it only put more doubt in people's minds of the near 50 bushel soybean crop the USDA is estimating. The Pro Ag yield model was slightly lower this week after three weeks of yield improvements. It is 2-plus bushels per acre less than USDA's 49.4 bushels per acre estimate.
November 2017 support is the $9.15 and then the recent lows of $9.07 we saw on June 23. We haven't seen prices this low in this new crop contract month since the $9.03 we saw the beginning of August 2016. $9.55 is new resistance and then $9.88 November futures is chart resistance after that.
For the week ending Aug. 17, November canola futures in Winnipeg were down $6.90 Canadian at $500 Canadian per metric ton. The Canadian dollar traded to .7907. This brings the U.S. price to $17.94 per hundredweight.
• Velva, N.D., $17.38 per hundredweight, new crop $17.02
• Enderlin, N.D., $17.92 per hundredweight, new crop $17.81
• Hallock, Minn., $17.41 per hundredweight, new crop $17.23
• Fargo, N.D., $17.95 per hundredweight, new crop $17.55
Uncertainty about the current size of the canola crop is giving this market underlying support. The average estimates for this year's Canadian crop is 18.1 million metric tons versus 18.4 last year. Guesses range from 17.5 to 19.5 million metric tons. Large supplies of global oilseeds are weighing on canola values though.
Cash feed barley bids in Minneapolis were at $2.10, while malting barley received no quote. Berthold, N.D., bid is $2, and CHS Southwest New Salem, N.D., bids were at $2.50.
Cash bids for milling quality durum are $7.25 in Berthold and at $7.75 in Dickinson.
Cash sunflower bids in Fargo were at $17.60. Oct.-Nov. $16.60. For the week ending Aug. 17, soybean oil was down 35 cents at $33.17 on the August contract.