February 2018 will go down in history as the month that Argentina’s soybean crop hit a new crisis level. Ongoing drought across the region coupled with delays in Brazil’s harvest has unleashed speculations across the soybean complex.
For the month, the May contract in Chicago closed at 5.5%, continuing the frantic surge caused by short-term supply concerns. The uptick has continued, despite broader trade concerns between the United States and China. The Trump Administration is considering tariffs on steel and aluminum imports, news that would put a dent into Chinese shipments of both products to the United States, in addition to imports from a dozen other nations.
The decision looms as China considers its own restrictions on U.S. soybeans. China was considering the plan, but needs to conduct an assessment of the impact of restrictions on its own soy crushing and livestock industry. Though the simple answer is that it will drive up the cost for local farmers, the bigger story is a looming trade war.
Canola — like soybeans — had a pretty good February. The combination of some soybean production risk in Argentina and the Canadian Loonie dropping a bit catalyzed canola price improvement. May canola prices pushed back to levels not seen since early December as the market followed global soybean prices higher. Specifically, the May 2018 futures contract listed on the Winnipeg ICE exchanged opened February at $502.80 CAD per metric tonne, closing the month at $524 (a gain of 4.2%).
Canola prices on the futures board for the November 2018 went from $503.80 CAD per metric tonne to $515.30 CAD per metric tonne — a gain of 2.2%. Canola prices on the July 2018 contract actually performed the best as it went from $507 to $529, a positive 4.3% improvement in the month of February.
The February WASDE report didn’t provide any surprises, but the ongoing impact of the drought in Argentina and the southern regions of the United States has pushed corn May prices above $3.80 per bushel. The contract is at its highest point since September 2017, but still a far cry from the $4.30 level that we saw last July. The May contract added 3.52% in February.
The markets know that the world is awash in corn. They know that the U.S. production number will be large and that yields will come in at record highs. And they knew that future demand factors like Chinese and Brazilian ethanol production is still several years from importance. But Argentina’s ongoing drought crisis has pushed production expectations down in the region and fuelled speculators to consider the impact of the ongoing U.S. drought on the upcoming crop. Last week, management money shifted from bearish to bullish in the corn sector.
Durum wheat prices couldn’t replicate the success of winter wheat across North America. But a number of different stories are having a significant impact on prices. First of all, there’s wide speculation that there will be more durum acres planted in both Canada and the U.S. this year, namely because of the Indian import taxes on peas and lentils. Second, Italy continues to be a dud when it comes to buying Canadian durum, which is keeping prices generally below $7.50 CAD / bushel.
For both durum and spring wheat prices, growers continue to be cognizant of the 2018/19 production potential given the drier conditions. Also, the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership will likely help more spring wheat get exported into Pacific Rim markets, especially Japan. For February though, spring wheat prices on the Minneapolis futures board did next to nothing, ending the month 0.2% below where it started.
While a lot of readers may not be winter wheat growers, they should be mindful of what the prices are doing. It was a long-deserved month for winter wheat farmers, who have been looking for prices to tick higher. Russia’s surging production and exports have weighed on global wheat prices for months. But a combination of bullish factors has pushed Chicago and Kansas City red winter wheat prices higher. U.S. acreage is sitting at lows not seen in more than 100 years.
Kansas City May HRW wheat prices closed the month up 8.7%. Chicago SRW wheat prices for May 2018 topped $5.00 for the first time since August 2017 and gained 7.2% for the month. CPS wheat (which closely associates with winter wheat because of comparable protein quality) gained nearly 8% on the cash market in February.
The higher prices for lower protein wheat were influenced by a few factors. In Western Canada, feed grain prices certainly improved over the month of February, namely because feed barley is dealing with some strong domestic AND international demand. However, beyond that, quality concerns are moving to the top of the list as markets eye the ongoing drought across the United States. Good-to-excellent ratings for the U.S. winter wheat crop sit at 4% in both Oklahoma and Kansas, two of the largest winter wheat-producing states.
Thus for low-protein product, there’s still a lot of it in the market. However, low protein prices have rallied while high protein (i.e. 13.5% hard red spring wheat product) has stayed relatively mute. Specifically, the spread between the two on the futures board has narrowed from the $2 USD / bushel a few months ago to less than a dollar today. Overall, there’s a lot of bullishness going into March, but we remain cognizant of the amount of wheat in the world and managed the downside risk accordingly.