Chasing Targets — This Week in the Markets

Opinion

Grains continue to trade a bit sideways to higher as buyers went out into the market to find some supply with “let’s bring some stuff in” attitude earlier in the week but things pulled back later on. The oilseed complex is being supported by solid US soybean sales and oil prices heading higher. With some firming basis across the border in the U.S., end-users may rather wait for supplies to come to them this winter, versus going out & chasing it.

The only real exciting attention being seen is in the pulse markets as laird (large green) lentils recently hit 50 cents/lbs, with small reds eclipsing the 44 cents/lbs mark. Is there more upside? I’m not against thinking there might be a 3-5% higher price in the next 6 months, but one should tread cautiously – breaking up your remaining inventory into its own separate blocks is a simple way to manage this price risk & scale sell into any strength.

Brennan Turner joined RealAg’s Kelvin Heppner to discuss what happened in the markets this week:

soybeans_closeup2

While we finished up harvest in North America, our fellow farmers on the other side of the equator are just getting going. Drier conditions have slowed seeding but because soybean prices are pretty solid right now thanks to a devalued Brazilian Real, over 80 million acres are forecasted to be planted, putting 2015/16 production over 100 million tonnes. From a trading standpoint, and as the USDA sees it, “stronger competition may lead to farm less dynamic demand” of U.S. supply.

Specifically, while soybean sales were very strong yesterday, the total marketing-year-to-date US export sales are 22% behind last year’s pace, whereas the USDA is expecting only a 9% drop in exports this year. Additionally, US corn export sales are 35% last year (USDA only calling for a 1% decline), while wheat sales are lagging 17% behind last year’s pace (USDA is forecasting a 0.5% slowing).

Related to corn, China is expected to drop its domestic corn purchasing as it tries to work through its massive stockpile. Last year, the Chinese government bought 83 million tonnes of Chinese corn, but this year, analysts are forecasting that number to be closer to 40 or 50 million. Nonetheless, even with purchases dropping about 50%, corn reserves in China will top 200 million this year. Of course, when you’re producing 228 million tonnes like China is this year (a record!) it puts pressure on prices, even those offered by the government.

On the soybean side of things, what do the slow U.S. export numbers mean for canola? Well, at the time of writing, canola is currently sitting at an 11% premium above soybean prices (or $~36.50 USD/MT or $48.0 CAD/MT). Canola and soybeans will continue to trek together and if you see soybeans move lower, canola, at least on the futures board, will likely do the same. Where you may see the biggest change though is on the basis side of things, and with basis on the south side of the 49th parallel firming, farmers are making sales keeping things hovering around $9/bushel on the Chicago board.

U.S. government weather forecasters are calling the beginning of El Nino effects on North American weather with the northern half expected to see drier/milder winter conditions, while the south is getting wet. The rains will be helpful for U.S. winter wheat areas, which continue to be dry, albeit not as bad as the past couple of years. Canada, (clearly part of that northern half of North America) is possibly going to see one of its warmest winters on record, according to AccuWeather. This could clearly be a concern for those areas looking to get a bit more snowcover this winter to help replenish soil moisture profiles that got depleted this growing season.

Comparably, in some parts of Russia, a lack of rain for many weeks is leading to ground so hard that it’s breaking farm equipment. With less winter wheat acres than originally planned going into the ground in both Ukraine & Russia, a mild winter and good spring rains will be needed to save the crop. That being said, one could look to a poor fall and a harsh winter in 2010 that pushed Russia’s wheat production down to just 41.5 million tonnes (they took off more than 60 million tonnes this year). Accordingly, wheat prices rallied in mid-late 2011 almost 50% but keep in mind, there is still a large global supply available, compared to a few years ago.

Prime Minister-designate Justin Trudeau (Justin Trudeau/flickr.com)
Prime Minister-designate Justin Trudeau (Justin Trudeau/flickr.com)

More obvious, the biggest news affecting Canadian growers recently was the Liberal party winning a majority government. While there doesn’t look like to be too many changes that affect the ag industry under another Trudeau government, there are some programs (i.e. Growing Forward 2) that are set to expire, but a big concern is where transportation standards & infrastructure are at and if the conversation will continue despite there not being any issues today.

Clearly it isn’t issue when western Canadian farmers delivered a record amount of grain in September 2015 with 5.88 million tonnes getting dumped, slightly above the previous record of 5.82 million set during the bumper harvest two years ago in September 2013. This included 2.384 million tonnes of canola, 22% higher than the previous all-time monthly best, also in September 2013. Across the board, deliveries have been above average thus far.

Coming back to government, while attention is necessary for the change to a Liberal majority, unnecessarily negative commentary would be unjust as they shouldn’t make the Canadian agriculture industry any worse or better off (relatively) than it is today. That being said, the Canadian Loonie has been historically depressed relative to the value of the U.S. Dollar under Liberal governments. Conversely, dating back to 1922, Bloomberg data suggests that stock returns on the Toronto Stock Exchange have been three times higher under Liberal Prime Ministers than Conservative ones. While there’s profits to be chased in the pulse markets the next few years, the Canadian equity market may provide some alternative options as well!

One thought on “Chasing Targets — This Week in the Markets

  1. Brennan

    It would be helpful to add your comments about Ontario and Quebec basis levels for corn. It doesn’t react solely to the Canadian dollar. It has a major impact on prices in the East.

Leave a Reply

 

This site uses Akismet to reduce spam. Learn how your comment data is processed.