Grain markets are closing out the month of January with not a lot of love as weather stabilizes in South American and President Donald Trump following through on a lot of campaign promises (first politician to ever do so?), which is creating more doubts about international demand and/or markets for U.S. agricultural products.

From a performance perspective, everything was lower compared to last week with oats dropping the most (-3.6%) followed by corn and wheat, down 1.85% and 1.8% compared to last Friday’s close. Soybeans weren’t that much further behind, dropping 1.7% while canola was able to weather the storm, dropping only 0.35% for the week.

The “America First” platform new U.S. President Donald Trump is pushing out is leaving an ugly cloud hanging over global commodity trade, and subsequently creating more risk in the markets. Moreover, there are many unanswered questions on biofuels policy in Washington, D.C. right now as small-town manufacturing workers are likely to gain the most under the new administration, not the American farmer. First, Trump officially pulled out of the Trans-Pacific Partnership, the Pacific Rim deal that would allow more open trade between countries representing 40% of the world’s GDP, including Canada, Australia, and Japan. Second, he has started to the process to renegotiate NAFTA (in which, the market didn’t really react to it) and it’s been made clear that the new U.S. government is more interested in the Mexican side of the deal.

Further, Trump is totally going to try and build a wall on the Mexican-U.S. border and to pay for it, it’s been rumoured that a 20% tariff would be put on any good coming across that border from Mexico (there are reports that a 16% tax is placed on all US goods going into Mexico, but that’s in correct because ALL goods are taxed w/ a 16% VAT, even those produced in Mexico). Mexico is massive buyer of American meat, meaning the demand of feed grains for those animals could fall.

Heading north, while the government is acutely aware that Mexico is in the gunsights of the Trump administration, the 49th Parallel between the U.S. and Canada is one of the most active borders in the world when it comes to trade. Supporting the Canadian-U.S. partnership is the announcement that the Keystone XL and Dakota Access oil pipelines are back on the table to get digging on. This is a positive for the Canadian Loonie, which gained 1.2% for the week, as it is largely dependent on the price of oil and ability to export its natural resources.

With Trump trumpeting “America first”, the fact remains that the American agricultural industry needs needs international markets to survive, considering 10% of beef, 15% of chicken, 21% of pork, 15% of corn, 48% of soybeans, and 42% of wheat is exported to customers outside of the states. From an agricultural standpoint though, farm groups are seemingly having a tough time navigating the waters but it continues to be clear that there is a significant difference between what Donald Trump is doing for the rural vote (i.e. infrastructure and manufacturing investment), but not for the farm vote.

Apart from the trade policy action with the new U.S. government, the market’s focus continues to be on South America where better weather in Argentina and new forecasts in Brazil continue to suggest a record soybean and corn crop for the total continent. With Brazil at the point where only harvest rains could negatively affect numbers, the early January rains across the country were welcomed by the additional acres planted this year (as per CONAB, soybeans +2% YoY to 83.8 million acres while corn area is up 7% from last year to 39.8 million acres; wheat is unchanged at 5.2 million acres).

As per AgRural, Brazilian farmers have sold 37% of their 2016/17 soybeans, compared to 48% at this time a year ago and an average of 44% over the past 4 years). Next door in Argentina, the drier weather of late has relaxed bullish tensions in the market but it’s estimated that 4.9 millioin acres of soybeans (or about 10% of total area) still needs to be planted, and these acreage would equal nearly 4 million tonnes of production.

Argentinian producers are likely to get some more showers in the next 2 weeks, but depending on the forecasting model, the volume of precipitation widely varies. Nonetheless, the Buenos Aires Grains Exchange dropped by their estimate of the 2016/17 Argentinian soybean crop to 53.5 million tonnes, more in line with a lot of other private estimates compared to the U.S.D.A.’s 57 million-tonne forecast). The Exchange estimates that nearly  million acres have been lost to flooding with almost another million still at risk, so combining that with the couple million still yet to be planted, the market is pricing in that lack of production today.

Speaking of acres, Informa Economics pulled back its estimate of 2017 American soybean area by about 150,000 to 88.65 million acres. Considering where soybean prices are at today (still above $10/bushel in Chicago!), these are profitable levels for most producers, but we are still cognizant of the 2016/17 record production carryout, estimated 2017/18 production, and the aforementioned fact that South American farmers are behind in their sales, meaning as those sales ramp up, pressure will get put on the market. On the flipside, there’s a case that if the corn market can get closer to $4/bushel by another quarter or so, the likelihood of 2017 U.S. corn acreage staying similar to that of 2016 would increase (we’ll still see above 90 million no matter what).

Switching gears, Chinese New Year is this weekend and with it enters the Year of the Rooster. The week-long celebration kicks off fresh optimism for vegetable oil demand in the People’s Republic as, in 2016, their palm oil imports dropped 24% from 2015 to 4.5 million tonnes (the lowest since 2005) as prices jumped 25% thanks to the drop in production from El Nino effects. Add in that Beijing government was consistently holding auctions of state rapeseed/canola oil reserves, the price-sensitive vegetable industry pulled back on its palm oil demand.

However, it’s expected that palm oil production will start climbing in the second half of 2017, with analysts expecting double-digit production growth each month (yes, that means palm output is being forecasted to grow by 10% or more EACH month). With more supply available, prices intuitively will pull back, likely making China (and others like India) buyers again, opting in for Southeast Asian supplies of palm oil instead other veggie oils like rapeseed or soy oil.

Thinking about some Canadian acreage, we still know there’s a lot of canola likely going into the ground despite some of the bearish factors. Our friend Chuck Penner of Left Field Commodity Research believes that peas acreage could expand again to another new record to roughly 4.4 million acres while lentils will likely pull back from its monster area last year to something closer to 5 million acres (still about one million acres above the 2015/16 crop from two years ago). Right now, market prices are supporting all the aforementioned acreage, and accordingly, managing some of the price risk exposure of that area / production and locking up profitable levels is hard to ignore. While politics are clearly playing a factor in the grain markets today, weather, international demand, and crop rotation concerns will still outweigh the voices and faces you’re seeing on CBC and CNN.

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