While grains ended the month of November with little fanfare, the first trading week of December proved to have some push to the upside despite a number of reports that didn’t really change any fundamentals. Soyoil led the complex with a 10.5% gain for the week, which helped support canola prices (+2.25% for the week) despite a bearish StatsCan report. Corn found some support in an updated Renewable Fuels Standard, with the E.P.A. raising the target for ethanol to 14.5 billion gallons for 2016 from 14 billion in 2015. However, this isn’t huge from a demand standpoint, so the corn market may need to wait for a weather market in spring 2016 to see any significant move higher. Some of the biggest factors affecting the trade though has been the swaying of currency markets, an ironic fact given that December usually tends to be one of the quieter trading months in markets.
From a currency perspective, the Canadian Loonie lost about 2% against the US Dollar in November and is down almost 13% year-to-date, while the US Greenback strengthened about 3.4%. The Eurodollar lost 4% in November against the U.S. dollar but did gain 2.6% this past week thanks to the European Central Banking decision to pull back a bit on its support of the region, which surprised the market a bit as they took the news as Europe improving. This accordingly pushed against the U.S. dollar, and combined with a U.S. jobs report that will likely push back a U.S. Federal Reserve move, the U.S. dollar lost 1.75% for the week (intuitively supporting commodity prices).
Why all this chatter about the FX market? Currency effects can sometimes be a bigger factor than the fundamental supply and demand tables! If the value of a country’s currency falls relative to the U.S. dollar, it becomes cheaper for international buyers with U.S. dollars to purchase the same amount of goods from that country. This increased demand will intuitively drive the domestic price for that good higher, but the cost of 1 unit of that good in US dollar terms will still be cheaper than what it was before the domestic currency’s depreciation.
Take, for example, the current export sales marketing-year-to-date of U.S. corn and soybeans. International purchases of U.S. corn is only 37% of U.S.D.A.’s whole-year expectation, 25% behind the pace from a year ago and well behind the average sales pace of 54%. Further, soybean export sales are 71% of U.S.D.A.’s forecast, 17% behind the pace from last year and slightly behind the average speed of 77% by the first week of November. Food for thought though: Chinese soybean imports are up 21% through the first 3 months of the marketing year versus the same period last year.
Why the discrepancies? While the value of corn priced in U.S. dollars has dropped 13% thus far in 2015, it’s gone up 42% in Brazilian Real terms and 154% when selling in Ukraine hryvnia! The more stark example may be in wheat though where it’s dropped almost 24% this year in U.S. terms, but the domestic price of wheat is up 55% in Russia & 123% in Ukraine! In the more globalized agricultural game that we’re in today, knowing your currencies could make or break you.
This is exactly why more analysts are suggesting that Canada could actually move into the #2 position when it comes to the world’s largest wheat exporters, surpassing the U.S. but still behind Russia. U.S. wheat exports are about 16% behind the pace needed to reach the 21.8 million tonnes the U.S.D.A. has forecasted, whereas Canada is likely to top the 20 million tonnes estimated (Russia’s wheat exports are pegged at 23.5 million tonnes). While Ukraine is forecasted to come in as the #6 wheat export this year, poor fall-seed crop conditions has UkrAgroConsult suggesting that the Black Sea nation might only take off 20 – 21 million tonnes in 2016. Compare that to the 27 million tonnes in 2015, this paints the picture for Ukraine to fall to the #8 exporter at less than 4 million tonnes vs the 15 milllion tonnes of wheat exports in 2015/16 (per the U.S.D.A.).
Staying in the international trade front, Asian corn buyers are holding off of their purchases right now in anticipation that prices will fall once President-elect Macri starts running Argentina on December 10th (next week!!!). As we’ve made mention of plenty of times in the past few weeks, cheap freight increases the competitiveness of Argentinian corn, especially since it’s going to be roughly 20% cheaper once Macri removes the export tax next week. Next door in Brazil, good rains continue to fall on freshly planted crops but it may be a touch too much for crops in southern regions as Asian rust is appearing more and and more on soybean crops and likely won’t slow down with more rain likely coming down the pipeline thanks to El Nino.
A.B.A.R.E.S., the Aussie version of the U.S.D.A., cut its wheat production estimate by 1.3 million tonnes to a touch under 24 million tonnes, citing below-average rains in many areas in September and early October while temperatures soared into the 30s (Celsius) in October. They’re expecting a 8.7 million-tonne crop out of its largest producing region in Western Australia, but that’s too high according to CBH (largest Australian grain handler) who is estimating a 7.5 million tonne wheat crop.
Aussie barley production will be bigger than last year at 8.2 million tonnes but, like wheat, the drier weather is leading to lower quality in terms of higher screenings but higher protein, meaning less of it will make malt grade. Australian canola production was pegged at just under 3 million tonnes, a drop of almost 14% year-over-year. In the pulse crops, the Aussie field peas output is being estimated lower year-over-year at 225,000 MT while the lentil crop is being estimated at 272,000 MT, a significant drop from the previous estimate of 321,000 but up from last year’s 242,000 MT. Finally, the Australian chickpea crop is one of the biggest at almost one million tonnes!
Finally, Statistics Canada came out on Friday, December 4th with another whopper of a report, blasting away market expectations by pegging this year’s Canadian canola crop at 17.2 million tonnes, an increase of almost 4% from last year and the 2nd largest on record after 2013’s monster. The market was expecting a number around 15.6 million tonnes, but with average yields in Western Canada climbing 9% year-over-year, the market shifted almost 25 cents/bushel lower after the report. It’s more than likely though that the private trade was expecting something with a 16-million tonne handle, so with a lower Canadian Loonie and higher soyoil prices, canola only ended 0.4% lower for the day.
Total wheat production was pegged at 27.6 million tonnes, again well above the 26.7 million guesstimated ahead of the report, but smaller than 2014’s 29.4 million tonne crop. This included almost 20 million tonnes of spring wheat and 5.4 million tonnes of durum, which is almost 15% higher than the 5-year average production number. The Canadian soybean crop was bigger for the 7th consecutive year at 6.2 million tonnes while corn production was up 18% year-over-year to 13.6 million tonnes, thanks to a record average yield of 170 bu/ac in Ontario.
Canadian barley production was also bigger at 8.2 million tonnes versus the 7.6 million expected and 7.1 million produced in 2014, but that’s generally in line with the 5-year average production number. As for the pulse & specialty crops, most results came in line with pre-report estimates with 942,000 MT of flax (+8% year-over-year, +62% from the 5-year average), 3.2 million tonnes of peas (-16% YoY & -4% from the 5-year), 2.4 million tonnes of lentils (+19.4% YoY and 26.7% from the 5-year and you can probably expect that number to climb in 2016). For the mustard crop, 123,000 MT was taken off (-37% YoY, -21.2% from the average), 84,000 MT of chickpeas were harvested (-32% YoY & -37.5% from the 5-year average but that’ll likely be made up by the aforementioned Aussie crop), and 149,000 MT of canaryseed (+19% YoY and +8% from the 5-year average).
Overall, the market continues to be in a net short position on the futures board (except for soyoil) so the fundamentals generally remain bearish in Chicago. However, with currency effects playing a significant role, demand of Canadian exports will likely be higher year-over-year, helped push out the bigger-than-expected crop that StatsCan says was produced in one of the weirdest growing season the country has ever seen. Thus, the sway in the market in the near term for cash prices will likely be moved not so much by supply/demand, but the competitiveness of the Canadian Loonie relative to other currencies.