Asking Premium Questions — This Week in the Grain Markets

Grain markets this week were fairly volatile as the market swayed on harvest pressures, fresh policy announcements, and wet weather slowing down Harvest 2016 and/or affecting its quality. Soyoil was the leader for the week, up 4.25% on palm oil touching two-year highs in Asian markets. This intuitively supported canola, which was up almost 2.5% for the week on the Winnipeg ICE futures market, but soybeans were pressured by a large U.S. crop, and were down 1.3% for the week. Corn wasn’t as bad, just down 0.5% on the same big crop while wheat was mostly rangebound but finished slightly higher as “what’s your quality” becomes the most consistent question buyers are asking farmers.

This was question was being forced down most international wheat suppliers throats the past couple weeks by the Egyptian government as they tried to stick to their guns over a zero ergot tolerance import policy. However, after putting out multiple tenders and literally no one offer them wheat, they realized that maybe they had overstepped their boundaries. With about 4-5 months worth of wheat in their coffers, playing chicken with the international wheat trade would not have been a smart move, as it would’ve seen domestic prices increase significantly, meaning more expensive bread. For a country where 2/3s of their population rely on bread subsidies, that could’ve gotten ugly quick.

That being said, Egypt changed its policy back to 0.05% (the world standard) and was able to grab 4 cargoes of Russian wheat. However, at $187 USD / MT delivered, this was $12 / MT more than couple of weeks ago, and for wheat that’s of a little worse quality (12% protein vs 12.5% protein). Why the higher price? 2 reasons: First, Egypt needed to get some supply security and second, the market wasn’t going to lock up any contracts without some sort of risk premium to protect themselves.

Speaking of policy reversals, the canola market got some positive news this week as Chinese and Canadian negotiators were able to come to an agreement on the canola dispute, extending the 2.5% dockage tolerance on Chinese imports until 2020! While Canadian Prime Minister Trudeau called the deal “science-based”, 4 separate business deals worth a couple billion dollars were approved, including nuclear, oil and gas, and the sale finalization of the Canadian weight loss/nutrition company behind Hydroxycut (so yes, some politics were played).

Also supportive of canola prices in general was palm oil prices jumping higher this week, mainly because a typhoon hammered one of China’s top producing regions and crushers had to cut output. While palm oil can be substituted with other options, of note here is that the Chinese oilseed crush capacity has expanded in recent years (up to 40 million tonnes a year!). That being said, crush margins in China are fairly positive with processors filling there October & November needs with U.S. soybeans. Additional support for the elevated domestic prices is that the market isn’t expecting Beijing to start auction reserves until June of next year (although China has been known to change its mind on policy very quickly…).

On that note, Statistics Canada came out this week with a new production estimate based off of satellite imagery and things are looking mostly bigger than what their report a month ago on August 23 was saying. For example, StatsCan’s estimates jumped from a 17 million-tonne canola crop to 18.3 million tonnes (closer to what the trade is expecting). The durum wheat crop was raised from an already large 6.7 million tonnes to a massive 7.3 million tonnes (although a record crop, again, quality is the main question being asked right now).

2016-09-23-statscan-farmlead-chartConversely, lentils oats, mustard, and barley production estimates were all lower than their August numbers. Regardless of which why the numbers swayed, people are still very skeptical of the new process, as last year with the “eye in the sky”, StatsCan estimated the canola crop at 14 million tonnes versus the 18 million tonnes it got settled at (not exactly accurate is it).

For the past month, we’ve been strongly recommending off-the-combine sales of most specialty crops including lentils, peas, and mustard for the past month as bids have fallen a bit on some harvest pressures but mostly because of limited demand compared to the size of the crop. Adding to the bearish pressure is fresh analysis from StatPub who thinks that India could almost be self-sufficient this year when it comes to pulses. They’re estimating a 22 million-tonne crop in 2016/17 of all pulses, more or less equaling annual demand. While the kharif crop has been strong (harvest on it starting up), the rabi crop still has to get planted and we won’t know how many acres go to pulses until the end of November.

StatPub estimates the global pulses crop to come in around 53.7 million tonnes (7% higher than the 5-year average), including 6.4 million tonnes of lentils (+36% vs 5-year average) and 13.2 million tonnes of peas (+21% vs 5-year average). While quality is a question mark for lentil crops in Canada, we know it’ll be very hard to get back to the prices available just a month ago, let alone in the spring and winter.

Recent rains in Australia have some thinking that the Aussie chickpeas crop this year could be smaller than the record 1.23 million tonnes currently forecasted by A.B.A.R.E.S.. We’ve seen record prices recently as the global market has been short but even if the at least 1 million tonnes come off in the Land Down Undaa, add in favourable weather conditions in India, and Canadian production back over 100,000 MT (albeit some bad quality), at this point I’m about managing risk. Could we see higher prices? Yes there’s a chance, but I also know that I can protect profit and lock it in today on some of my production

Wrapping things up, with the wet weather and big yields, our call remains that feed grain prices will remain depressed. Thus, moving lower quality grains now is likely easier to do and better for your balance sheet, than trying capture carry that isn’t there today by storing it in your bins or selling the higher grade quality stuff. Conversely, we think that there continues to be better prices in store for the higher quality cereals, especially durum. While I’m doubtful that we’ll get up to the levels seen in 2014, there’ll still be some good levels available.

That being said, don’t expect a 10% jump for other markets in the next week off just this week of wet weather because the market tends to slowly price any bullish weather risk. One factor adding favour to the bulls’ camp is some U.S. Dollar weakness, as things are getting a little more volatile ahead of the November 8th Presidential election (P.S. first debate is on Monday, September 26th).

Finally, a wet week in the Midwest was grabbing a lot of attention this week in the headlines, with the Western Cornbelt likely staying wetter than the Eastern half for the next 3 – 4 weeks. Rains across the Canadian Prairies this weekend won’t allow combines to get rolling again until early next week but I think we can all agree that the crop isn’t going to get any better at this point. This will probably support prices a bit as quality concerns will start to pick up and premiums get built in.

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