Above or Below The Line? — This Week in the Grain Market

Grain markets saw a correction this week as more supply and demand numbers out of South American became known, with less focus on the weather on the southern half of the equator. Everything ended the week in the red, with soybean oil being the biggest loser, down 4.85% while soybeans and canola lost 2.2% and 2.05% respectively on burgeoning supplies and substitution challenges. Corn lost 1.55% while wheat was down 1.15% on the Chicago Board of Trade, with oats being the best loser, only losing 0.4% for the week. At the end of this week, with tops of trading ranges hit and pulled back from, have we hit the high-water mark for the rest of the calendar quarter when it comes to grain prices?

This week we got a NOPA soybean crush number of 160.6 million bushels, topping analysts’ pre-report expectations of 159.1 million, which supported prices on Wednesday, but other outside factors reined in markets towards the end of the week. The Malaysian palm oil stocks report last Friday showed inventories dropping by 7.6% from December to January to a 5-month low of 1.54 million tonnes, but that’s less than what investors were expecting, which pushed prices lower. The consistent musings around traders are that production will start to pick back up across Southeast Asia in the coming months and that to capture more business from India or China, prices must fall anyways. Palm oil prices have since pulled back to a 3-month low as plantation owner Sipef revealed is has forward-sold almost double what they had a year ago as they anticipate much lower prices with increased production in a few months’ time.

Staying in Asia, in an update of their baseline estimates, the USDA reiterated its call for increasing Chinese livestock feed demand over the next decade. More of the market was focused on their expectations for 2017/18’s American acreage, which they pegged at 49.5 million of wheat (down 1.7 million from 2016/17), 89.5 million acres of corn (a 4.5 million-acre drop year-over-year), and 85.2 million acres of soybeans (up 1.8 million acres over last year). While I and many others don’t think the corn number will drop below 90 million acres, 85 million acres of soybeans likely justifies the USDA’s forecasts of high $9 USD / bushel price targets that are out there right now. However, the real acreage numbers the market wants to see is from the USDA’s Ag Forum next week on Feb 23-24 and you can bet that the soybeans number will the one most closely watched.

In North America, warm temperatures are being welcomed by the public and those with crops still left to take off / are working in the yard but wheat traders are watching how impactful the warmer weather will be in the Southern Plains and the Midwest which could cause fall-seeded crops to come out of dormancy a bit earlier than usual and create a little bit of unwanted harm on the crop. There are supposedly 26 ships waiting in the Port of Vancouver to be loaded with grain but grain has been moving fairly well from the country and freight rate remains cheap, so there’s no massive reason for inland prices to rise today.

It’s a different situation though in Russia as since November the ruble has appreciated by 12% and is up 6% from the beginning of 2017, suggesting that those sourcing wheat from Russia may look at cheaper alternatives if this trend persists (a similar storyline is being played out in the U.K. where wheat exports are down significantly thanks to cheaper options elsewhere). While the surge has left Russian farmers less interesting in selling their crops, it’s likely to impact spring seeding decisions as spring wheat could fall out of favour with Russian producers at these domestic prices.

Where there seems to be more wheat available is in Australia as ABARES increased its 2016/17 production number to 35.1 million tonnes (USDA is at 33 million tonnes), mainly due to Western Australia’s output getting raised to 11.4 million tonnes. This is significant for the Canadian producer as Aussie wheat is finding its way in into Southeast Asian markets were their premium white and hard wheat varieties are useable for noodle production. The Aussie barley crop also got a big upgrade by 2.77 million tonnes for a massive (and record) 13.4 million-tonne crop while canola production bumped up to 4.14 million tonnes, the 2nd-largest on record, and again, mainly influenced by much bigger-than-expected production out of Western states.

AgResource says that Brazil’s February soybeans exports could come in at nearly 6.9 million tonnes, a new record and more than triple the business that was done last February. The main reason for the massive influx is demand is none other than China, who after their New Year’s celebrations put purchasing on hold, are aggressively back in the market. It’s suggested by AgResource that China has covered 85% of is March demand from Brazil and is looking at cheaper Argentine offers from April onward.

However, with prices on the Chicago futures board remaining above $10 USD / bushel, everyone’s asking “when are we going to see Chinese demand start switching to South American from the U.S.?” It already has. China owned 2 million tonnes-worth of soybeans that were loaded in Brazil in the first half of February and are likely to top 5 million tonnes for the full month as more deliveries are made to ports and ship-loading accelerates. As such, while soybeans currently flirt above $10 USD / bushel on the Chicago Board of Trade, I can’t find legitimate, non-speculative reasons that things should go higher (neither could the Ontario producer who admitted this yet still was hoping for $15 CAD / bushel while at the same time acknowledging $13 is a great price in today’s environment).

This in mind, the Brazilian crop seems to get bigger by the day, with yields in Central and Northern regions coming in at record levels. As such, there’s been talk of 107 -109 million-tonnes from local analysts (USDA at 104 million tonnes) and with the crop coming off bigger than expected, the Brazilian producer may start to realize that the futures board in Chicago isn’t sustaining any rallies, meaning they could start getting a bit more aggressive on sales. With some helpful rains in areas that needed it, South American production estimates have gotten bigger this week, not smaller.

Analysts in Brazil are also increasing their corn production forecasts to 90 million tonnes (30 million from the first crop, 90 million from the 2nd crop). Further, those who dropped their Argentinian soybean production estimates are possibly adding some tonnes back on the balance sheet as decent weather is bringing the crop back as just this week the Rosario Grains Exchange says that 77% of the Argentina crop is actually in good-to-excellent shape! However, congestion on riverways are limiting the efficiencies of Argentinian agricultural products getting to market. That being said, If Argentina wants to start supplying Mexico with corn like it thinks it can though, it’ll need to solve its logistics issues first.

While the U.S. Grains Council says that talk is cheap and that Mexico is unlikely to change sourcing origins, Mexico did buy 13.3 million tonnes of U.S. corn in 2015/16, or 28% of total U.S. corn exports (for the record, it’s mostly white corn though).

Overall, it seems like Mexico, and not Canada, is at the heart of NAFTA trade issue after this week’s meeting between President Trump and Prime Minister “Joe” Trudeau. However, if U.S. corn demand were to slip, given the expected 2.3 billion bushel carryout in the U.S. for the 2016/17, any addition to that number does not help anyone’s cash price, including those in Canada. More simply put, agriculture continues to be viewed as the industry that’s likely to hurt the most from any NAFTA renegotiations, regardless if you if you live below, in, or above America.

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