Gains amidst uncertainty — This week in the grain markets


Grain markets this week were mainly trading relative to the headlines, taking cues from the U.S. dollar, free trade agreements, and dryness in both South and North America.

The U.S. dollar dropped to its lowest level in three years this week after the U.S. Treasury Secretary said he didn’t care which direction it went. The next day, the President said he wanted a stronger dollar, and the greenback rebounded.

A weaker U.S. dollar increases the exportability of America’s agricultural products, including wheat. Obviously, this allows the Canadian dollar to appreciate. But, the loonie is sticking a bit above 81 cents USD, which will hopefully minimize the impact on basis levels in Canada (and Canadian grain prices).

It was announced yesterday that Canada and ten other Pacific Rim countries have resurrected and finalized a free-trade deal that many thought was dead. With the U.S. definitively out, it’s not the Trans-Pacific Partnership anymore. It’s being called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (or CPTPP for short). Everyone has their perspective, but the general view is that it’s good.

For Canada, it might be interesting how this could affect current ongoing North American Free Trade Agreement (NAFTA) renegotiations (the sixth round of talks is happening as we speak, in Montreal). CPTPP will likely take about a decade for everything to be implemented, but the first step is the signing ceremony, which is expected to take place in Chile on March 8th of this year. The biggest impact for Canadian grain and oilseed producers is likely a renewed level of optimism for trade with Japan, the world’s third-largest economy.

With all these trade and currency headlines swirling, wheat prices seemed to take advantage. Specifically, SRW wheat prices on the Chicago Board of Trade were up 4.6% for the week. Kansas City-traded HRW wheat prices climbed 3.6% since last Friday’s close. And in Minneapolis, HRS wheat prices were up 1%.

Oats had a solid week, up 3% for the week, though, on Thursday it did give up some of its gains earlier in the week. Soybean meal ended 1.2%, while corn and soybeans were up 1.05% and 0.9% for the week. Canola was the only futures-traded crop to end lower, dropping 0.45% for the week. This is mainly due to the fact that the Canadian dollar gained 1.2% for the week to close at 81.25 cents USD.

Allendale Brokers came out with some bullish calls on grain prices this week. They think that corn prices will rally up to $4.25 USD/bushel on the Chicago Board of Trade, while soft red winter wheat prices on the futures board could climb to $5 by March/April. For purposes of tempering expectations and not taking these forecasts as gospel, I would say that there is roughly a 30-35% chance we get to $4.25 for corn prices, or $5 for winter wheat prices. Keep in mind that these are for front month contract prices.

For perspective, December corn prices are trading at nearly $3.90 at the Chicago Board of Trade Friday morning, while December Chicago-traded winter wheat prices are at $4.95.  The one main rallying cry for higher grain prices continues to the dryness concerns across North and South America.

South American farmers have slowed their grain sales down. Argentina continues to be dry and the idea of selling too much unharvested grain spooks farmers. Michael Cordonnier, president of Soybean and Corn Advisor recently dropped his estimates for Argentina’s corn and soybean crops by 1 million tonnes each. His forecast for the 2017/18 crop there now sits at 40 million tonnes of corn and 52 million tonnes of soybeans.

AgResource lowered its Argentine corn output estimate to 36.5 million tonnes and their soybean production forecast to 52 million tonnes. For perspective, the USDA dropped their estimate of the Argentine soybean crop to 56 million tonnes in the January WASDE report, down 1 million from the previous month. The USDA’s corn production forecast for Argentina remains at 42 million tonnes.

In Brazil, corn is now being used for ethanol which will likely help corn prices there and draw down the leftover inventory from 2016/17’s record crop. Moving to soybeans, it’s getting to be harvest time for the first crop but there’s some wet weather over the next few days and weeks that is going to slow down field activity. More specifically, over the next two weeks or so, up to 12 inches of rain is in the forecast for Mato Grosso and Goais states. While it will also put a halt of harvest in a few areas, it will also make the transportation of soybeans problematic.

Keep in mind that we see this issue every year in Brazil and it will stay that way until they get the remainder of the BR-163 highway paved. Or until they finally build the “grain train” that’s supposed to go the 1,000 km from Mato Grosso to northern ports. This is why the cost of freight for Brazilian grain is estimated to be three times as high compared to its American brethren.

Despite this, Brazil’s soybeans are gaining more influence in China. This has intuitively slowed down America’s soybean exports, with Brazil responsible for 53.3% of China’s soybean purchases in the 2017 calendar year. This is the equivalent of nearly 51 million tonnes! With the trade-off between Brazilian or US soybeans aside, China imported over 95.5 million tonnes of soybeans in the 2017 calendar year (key words here being ‘calendar year’). The notable trend in all Chinese grain import data is more feedstuffs and vegetable oils.

Overall, it feels good to see grain prices head higher. However, with all the currency issues, it lays the foundation for the reason why grain companies are resetting their basis to new “updated” levels. Take it how you want but there are some new winds of trade and geopolitical risk brewing. As such, grain markets were more volatile this week, and for the better.

Categories: Grain Markets / Markets

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