Lessons from history — This week in the grain markets

Grain markets started the month of December in the green, supported by the turning of calendars and a lower U.S. dollar.

The decline of the U.S. Greenback was mainly related to a heavy geopolitical risk news day that pressured equity markets. This news included a North Korean missile launch, a new tax bill in the U.S., and fresh fodder against U.S. President Donald Trump.

In the FarmLead Breakfast Brief on Tuesday, I noted how the stock market continued to find new highs, begging the question when “when will this bubble pop?” I said that if the stock market were to crash, two possible scenarios could play out:

  1. Investors could pull their money out of every asset class they’re long in. This would suggest a potential sell-off in the futures markets for grains and/or a build-up of even more short positions.
  2. Those investors leaving the stock market could put their money in commodities. We saw a similar transfer of wealth from equities into the commodity sector in 2008 and 2009 — that was the start of a bull run for most commodities. While other factors were supporting the move (i.e., US ethanol mandate), history is worth noting.

November wasn’t really a month for the grain markets history books. Oats were the worst performer in November, losing 3.15%, with the majority of that loss occurring in the latter half of the month (including this past week, where they lost 1.4%). Chicago soft red winter wheat prices were up 0.9% this week, basically offsetting the 0.8% loss in November. Kansas City hard red winter wheat futures markets gained 1.3% this last week but lost 0.5% for the month of November.

Minneapolis hard red spring wheat prices lost 1% this past week, but it could’ve been worse if not for a 10 cent positive move on Friday. Same thing for the month of November: spring wheat prices lost about 1%.  Corn prices ended the week up 1.15%, but did lose 1% in November. Put another way, from where it started to where it finished, March corn futures only moved about a nickel.

January canola saw a decent trading range in November, but ended it 1.6% lower that where it started. For the past week, canola prices dropped nearly 1%. January soybeans traded sideways this week, and the month — it literally opened November at $9.848 USD / bushel and closed at $9.858.

This week, the USDA announced that they think U.S. soybean area will indeed increase again in 2018, to a new record of 91 million acres. They also project corn acreage at 91 million acres. Increases year-over-year are also expected in rice, sorghum, barley, and oats, whereas cotton and wheat will see less American soil. At 45 million acres of wheat, this could be the lowest acreage planted since 1919.

From a production standpoint, the USDA believes U.S. corn yields could average 173.5 bushels per acre in 2018 (current estimate for the 2017 crop is 175.4). This would imply a production mark of 14.5 billion bushels (current 2017 estimate is 14.58 billion). Accordingly, ending stocks by the close of the 2018/19 marketing year would climb to 2.61 Billion bushels, up from 2017/18’s carryout of 2.49 Billion bushels.

For soybeans, the USDA is expecting yields to average 48.4 bushels per acre in 2018 (they were around 49.5 in 2017). This means production should hit 4.36 billion bushels (versus 4.43 billion in 2017), but carry out would tighten to 376 million bushels (the current 2017/18 carryout estimate is for 425 million bushels). From a demand perspective, there are some who think that the ethanol number may be too low for corn. But they think that the USDA’s expectations for soybean demand are right on the money.

Finally, the USDA estimated an average 2018/19 marketing year price for USD 3.30 per bushel for corn, $9.40 for soybeans, and $4.60 for winter wheat.

While a better-than-expected crop was taken off in Western Canada, there’s been another surprising factor: demand. Canola crush and exports are running roughly in line, if not a bit above last year’s record pace. We do tend to see some softening for canola prices through Christmas, with support on the Winnipeg ICE futures board being seen at CAD 500 per metric tonne, and resistance closer to $520. In the next eight weeks, these will dictate any bullish moves, including:

  • Stronger exports or crush numbers;
  • A weaker Canadian Loonie; or,
  • Issues with the South American soybean crop.

On Dec 6, StatsCan will release its next production report. Average pre-report estimates for canola were pegged at 20.2 million tonnes, compared to StatsCan’s September estimate of 19.7 million and last year’s canola crop of 19.6 million tonnes. The market is expecting production to stay flat or increase for pretty much all crops in Canada from the September forecast. Only corn and soybean production numbers are expected to come down a bit.

In South America, people are considering what La Nina could do there. While drier conditions are supposed to be seen in Argentina and southern Brazil, the former is getting some rain this week. Whether or not that continues through December is another question, as therein lies some of the potential for weather premium.

Using this year’s North American growing season as an example, poking the bullish fire about it being too dry can end up being a bit overblown. However, we will welcome the premium if volatility picks up as we can target some better prices.

History tells us that when it comes to volatility, the market can move to extreme positions. As such, the target should be to “sell the rumor and profit on the fact.”

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