Uncertainty until USDA report (Wheat/Corn#1)

(Cash price of corn)

Trader are currently facing a lot of uncertainty and pressure due to the next week report USDA which will give precise information about the choice of the farmer regarding the types of crops that they have chosen to plant. This will have a direct impact on the supply side at the global scale. Therefore huge variation of cash price have happened recently.

(Cash price for Wheat)

As you can see above, forwards curves for wheat and corn are quite special as they are always/often in contango.

This fact is due that it has to always cover the cost of carry to give the incentive to the farmer to keep growing this agricultural product. May to July are the only months when the contango becomes less steep for wheat.

This is due to the harvest period and the market is full of new crop. However for the corn, it is from July to September that the supply become huge and takes over the demand.

By logic, as the market is bearish it will reverse the forward curve for two/three months. Finally, when the market become more bullish as the demand is higher, the forward curve becomes again in contango. This feature is very typical for agricultural goods.

USDA Planting Intention

Each year, at the end of March, the US Department of Agriculture releases its Prospective Plantings report which is based on surveys and states what the farmers are intending to plant for the coming year. It is a powerful tool as it provides the market with an expectation of the size of each crop for the year.

Corn and Soybean seems to be a great dilemma right now.

According to Fram Future analysis based on weather forecast and estimations, corn should be more profitable than soybean but also riskier as processes are more complex.

A survey based on estimations of the plantation is going to be publish end of March by the USDA, showing accurate numbers about the acres used for corn.

As for now, the supply is still uncertain waiting for the numbers to come. If acres used for corn are less than 91.5 million and yield diminish slightly, stock in the US would reach a 5-year low rate stock/mass-needed (under 10%). If such hypothesis are confirm by the USDA plantation report, December futures price should increase as supply is weakening. In summary, the whole year is actually getting planed for the corn supply side in the US and solid assumptions about the market are going to be made next week based on that report and famers plantations.

Last month 2018/19 U.S. corn outlook is for lower corn use for ethanol, reduced exports, and larger stocks. The corn used to produce ethanol decreased by 5 times (from 25 to 5.5 billion. This conclude with a decrease on the season average corn price by 5 cents to get a price of $3.55 per bushel. Also, for the substitute of the corn which is the sorghum, there is a decrease in the export of 15 million bushels, to get a total amount of 85 million which is the lowest since 2012/2013. The production of corn is unchanged as the increase in yield forecasts is offset by a reduction in acreage. The corn production increased for India but reduced for South Africa. The major change in which we can focus in 2018/2019 is higher projected corn exports for Argentina and Ukraine and reduction for the United States. China’s corn feed and residual use is raised with lower sorghum and barley imports. Corn imports are raised for the EU and Canada. Foreign corn ending stocks for 2018/19 are lowered from last month, mostly reflecting reductions for China, Brazil, and Argentina.

Wheat:

Wheat production, exports and consumption:

Global wheat supplies are lower due to smaller crop forecasts in Iraq and Kazakhstan. However, Global trade is expected to stay unchanged as lower wheat production in certain countries is offset by a larger one in others. Exports are increasing from the EU and Brazil but lowering from the US and Mexico.

The EU is expected to increase its export to 23 million tons as it is experiencing an improved export competitiveness thanks to a price discount to Russian wheat, the improved competitiveness should continue for the rest of the trade year. The EU is now having a more prominent role in supplying African and Middle-Eastern countries. Egypt, the world’s biggest wheat importer recently shifted from buying Russian wheat to buying EU wheat, mainly from France and Romania.

The projected world consumption is reduced by 5.1 million tons to reach 742.1 million and India accounts for 3.0 million of the decrease. This reduction is based on an upward revision of the wheat stocks estimates for 2019. Global ending stocks are increased 3.0 million tons to reach 270.5 million tons, which is 3 percent less than last year’s record.

As a trader point of view, the recent change in supply of Egypt from Russia to Europe is an opportunity to save money on the shipment as france and romania are much closer in term of distance than Russia.

Historical seasonalities have shown that the price of wheat reach a peak during Jan-Feb-March. Therefore, when looking at the already existing average price for 2019, we assume that the cash price is going to fall even more during the year due to seasonality, probably closing the year lower than it started.