Opinion

Grain markets got an American Thanksgiving boost as an unexpected update from the U.S. Environmental Protection Agency (EPA) surprised the oilseed complex, with soyoil leading, up 7.4% for the week. Soybeans weren’t far behind as they continue their run, up 5.1%, while canola held on a bit to climb 2.6%. Corn was supported by the EPA announcement, up 1.3% for the week, while wheat and oats pulled back from last week, down 1.6% and 9% respectively. Compared to a year ago, this week summed up the trend nicely in that oilseeds continue to improve a bit while cereals have languished.

On Wednesday, November 23, the EPA raised the American biofuel quota to 19.3 billion gallons, including 15 billion gallons of ethanol — both new records. The larger-than-expected numbers and the fact that it was released late in the day right before the U.S. Thanksgiving holiday caught the market completely off-guard. Unlike the USDA, the EPA doesn’t have a set-in-stone schedule of when they’ll report and all indications before this upgrade was that they would keep numbers similar to what they’ve been in the past. Net-net, this is a one-off, unexpected change in the market that moves the goal posts up a couple percentage points to the upside.

As such, soyoil went limit up and hit its highest level since July 2014 while palm oil in Malaysia touched a four-year high. With the thought that vegetable oil carryout could now be tighter, January canola briefly touched $530/MT, highs not seen since mid-June and, accordingly, we took advantage of continued opportunities to make more block sales now versus speculating even further on a weather premium. This in mind, the difference between cash and futures prices in the oilseeds market continues to be distinct and one has to wonder how long the speculators can try and front-run the physical game.

Staying in canola, thus far in the 2016/17 marketing year, 2.68 million tonnes of canola have been used by Canadian crushers, up 15% year-over-year, as capacity use is nearly reaching the limit! Across the border in the U.S., soybean crush numbers continue to surprise, but are still tracking only slightly ahead of the USDA’s full marketing-year estimate. Competing with domestic American soybean crush will be China as crush margins are the best they’ve been in two years and almost double year-over-year. This means that China will continue to be in the driver’s seat for soybean demand, but where it comes from – North or South America – is the bigger question.

Soybean planting in Brazil is pretty much complete, but there are some concerns over moisture (or lack thereof) now that the crop is in the ground. Conversely, in neighbouring Argentina, almost one-third of the soybean crop has been planted but total acres expected to get planted continues to get downgraded as heavy rains are hitting western province (causing flooding), while things are too dry to plant in the south. As the U.S. dollar has strengthened, South American currencies have weakened, creating stronger domestic prices for farmers to increase their sales positions as exporters are anticipating Chinese buyers to switch their purchasing options once the crop is more established.

Speaking of Asian switcheroos, the new currency limitations enacted by the Indian government will have on farmers there, and the planting of their rabi winter crop. While the kharif season produced a record amount of pulses (8.7 million tonnes, which was a 57% jump year-over-year), the rabi crop tends to account for about 60% of the entire Indian pulse crop production. While seeding is ahead of schedule and more acres are anticipated, the currency effect is slowly playing out.

More specifically, the abolishment of 500 and 1,000 rupee notes, or about 86% of the cash in circulation, is putting pressure on the country’s 260 million farmers (yes, more than 260 million people farm in India) to pay for the crop inputs required to help them plant over the next couple of weeks. As banks exchanging the notes aren’t commonplace in all rural areas and many don’t even have a bank account, Indians can only exchange up to 2,000 rupees into new money immediately, with the remainder of the notes having to be deposited into a bank (all 500 and 1,000 rupee notes won’t be accepted by banks after December 30th).

Switching gears, over in the Black Sea, we know that there are more winter cereals getting planted in Russia this fall (even after their record crop this past year) but next door in Ukraine, not as many acres are getting seeded. After a dry September, wet October, and now some colder weather, Ukraine winter wheat crops have slowly emerged and are a bit more susceptible to winterkill this year. To the west, more and more reports are coming out calling for similar wheat acres in 2017/18 across the European Union.

In the Land Down Unda, the International Grains Council is calling for a 28.3 million-tonne wheat crop, a five-year high. There have been some unfavourable conditions in the western half of the country whereas things have started to improve in the east. Net-net, the record crop that was once forecasted is no longer on the table, as neither is the ideal quality. It remains to seen if either Australian wheat or Argentinian wheat can make up for some lower quality in other parts of the world (i.e. Canada and the E.U.) but the spread between high and low quality wheat continues to widen. Overall, we believe there to be a little more upside of higher quality wheats but we have seen some strong opportunities to make sales.

Staying in wheat, the market continues to monitor drought situations in the U.S. Southern Plains, where there was less winter wheat planted than last year, but things are still a bit too dry in a few places. That being said, there’s still many piles of grain sitting around America from this crop year and we have to work through a bit more of those supplies before the 2017/18 crop concerns becoming a heavier variable. With this in mind, there is a bounty of grain available and hopefully, the railroads will keep busy, especially considering oil is expected to stick around the US$50/barrel level.

While on the topic of oil prices, many banks are forecasting the Canadian loonie to soften a bit in 2017, possibly down to 70 cents USD. This is due to oil prices potentially staying low (assuming O.P.E.C. actually ponies up a production cut), the U.S. economy and U.S. dollar remaining strong, and U.S. interest rates increasing, which is seemingly a lock. Overall, the recent rally has created some strong sale opportunities right now. Managing price risk proactively in this environment means looking at locking a block sale in today, versus languishing at lower levels if weather rumours and demand origination start to weaken.

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