After just a one-week break, grain markets were again plagued by geopolitical risk with the phrase “trade war” hitting the headlines everywhere.
Pressuring Canadian grain prices was the Canadian Dollar hitting a two-month low, closing below US$0.77. But the majority of both the grain and broader markets impacts was, once again, U.S. President Donald Trump deciding to start the week by slapping 25% tariffs on roughly $50 billion in Chinese products. Then, the administration slapped tariffs on steel and aluminum imports from Canada, Mexico, and the European Union.
On the Canadian front, the weaker loonie and uncertainty around NAFTA has weighed on the market. Ongoing trade negotiations have been stuck around the automotive sector, which prompted pre-emptive strikes this week by the Trump administration on U.S. trade partners.
President Trump says that the other two NAFTA trading partners, especially Canada, have been very difficult to deal with during these negotiations. But we have to take that comment with a grain of salt.
We see that NAFTA changes will be beneficial to all three parties. The U.S. remains Canada’s largest trading partner, and the former will need the latter in the future since pulling out of the Trans-Pacific Partnership.
The Canadian government assessed all possible scenarios this week after the steel and aluminium tariffs feel. The general sense is that they have nothing to lose by retaliating. However, it’s worth noting that the Canadian federal government took these actions with reluctance.
The one thing that people don’t think about when it comes to tariffs is the cost of doing business outside of just paying the levy. This will require more paper work for Canadian goods to make it to the U.S. or waiting times at the border, assuming that those goods will be still competitive to make it into the U.S. after the higher import taxes are applied (or for sure there will be lost market opportunities in the U.S.).
Also grabbing some attention in the grain markets was the Tuesday-night-strike of 3,000 engineers and conductors employed by Canadian Pacific. However, the strike was short-lived, as, within 24 hours, a new deal was in place and the threat of slower grain movement was alleviated.
Corn prices lost about 15 cents this week, or nearly 15 cents, thanks to the solid start to the growing season. Thanks to the U.S. Memorial Day long weekend, the USDA’s crop progress report was released a day late on Tuesday (instead of the usual Monday update). What it did show that the crop is enjoying a pretty good start to the growing season. By no means is the crop made (despite some sarcastic comments on Twitter and the ag forums!)
Here’s a breakdown of some major data points of U.S. crop progress report:
- Winter wheat crop ratings: 38% good-to-excellent (G/E); last week it was 36% and 5-year average is 44%
- Spring wheat planting: 91% complete; 95% last year; 89% 5-year average
- Soybeans planting: 77% complete; 65% last year; 62% 5-year average
- Corn crop ratings: 79% G/E; 65% a year ago; 70% 3-year average
What a difference a month makes. April was the second-coldest month on record for the state of Illinois, the second-largest corn state in the country. But well-timed rains and hotter temperatures have all but evaporated many fears created by early planting delays. Reports of two-foot-tall corn are already spinning across the Midwest.
Given that farmers planted fewer acres this year, we’re looking for a strong crop and a strong price. Corn rated G/E in Illinois hit 83% this week, and there’s good reason that this figure could climb even higher in the weeks ahead.
With that in mind, moisture deficits still exist in pockets of Minnesota and the Dakotas. That was evident this week where drought conditions increased slightly in the Northern Plains.
Concerns over much of Western Canada might’ve been alleviated this week (and through the weekend as the region got some much-needed rains. This comes just as the crop across the Canadian Prairies is about 90% planted, which means a nice drink for seeds that just were recently sown! In the East, 90% of Ontario corn and about 70% of soybeans have now been seeded.
In Brazil, the real continues to trend lower against the U.S. dollar, thanks to the truck driver strike down there. With the strike ongoing, Brazilian cash grain sales basically stalled; after all, with no trucks to move grain, why sell? The strike has now stopped though with a deal being signed, but even so, farmers in Brazil are waiting for better premiums to increase their sales of soybeans that they just harvested a few months ago. They might not have to wait as the idea that China might not buy a lot of U.S. soybeans is back on the table.
In canola, prices ended the week generally mixed as the focus was less so on the supply and demand structure, but more so currency and trade risk.
It was not the same dynamic in wheat markets thanks to a selloff in the sector and broader concerns about grain prices in the wake of recent trade tensions in the White House. Specific to durum, it was the Canadian government suggesting that they’re going on the offensive, as they’re looking at taking Italy to the WTO on their country-of-origin labelling law. Since October 2017, Canadian durum exports to Italy have been non-existent so, while the trade would welcome the action, let’s remember that actual change may not be implemented right away.
After all, it could the Canadian government seven years before it won the COOL argument against the U.S. on beef.
In the meantime, trade war is the new favourite word at the White House and your local coffee shop.