StatsCan report can’t reverse bearish August — This week in the grain markets

Grain markets rallied on Friday to finish the last week of August mostly in the green but it wasn’t enough to make up for the sell-off that started mid-month. In terms of infleuncers, Statistics Canada provided its first in-depth forecast of the Canadian crop, but also that a new NAFTA agreement was nailed down in Washington.

At the beginning of the week, the U.S. and Mexico agreed to terms on a bilateral deal, and then invited Ottawa to the negotiating table. The only stipulation from U.S. President Trump was that Canada would need to align with the other two parties of the NAFTA deal by Friday — that didn’t happen.

Simply put, there are a lot of moving parts (and politics) at play here.

One could argue that President Trump doesn’t have a great rapport in Congress and that they won’t approve a trade deal in North America that does not include Canada. That being said, a bilateral deal with Mexico would need to be approved by Congress. Thus, the Canadian government has been stressing the importance of trade with senators and members of Congress from specific states who have a heavy trade relationship with Canada, there are a lot of politics at play.

Ultimately, the roadmap for a new NAFTA is very much up in the air now.

This week, we got some evidence that farmers are already heading in that direction. Farm Futures released its first acreage survey and we saw a noticeable decline in soybean planting intentions and uptick in other crops.

The survey said that farmers will trim about two million acres of soybeans — from 89.6 million to 87.5 million acres. That would be a 2.3% decline from last year. The shift favours corn acres and winter wheat acres. The survey projected an increase in U.S. corn acreage by 1.7 million acres to 90.8 million. That would be about a two per cent jump from this past spring’s planting.

Similarly, total U.S. winter wheat acres planted this fall were suggested to climb 2.6% year-over-year to 33.6 million. Meanwhile, U.S. durum and spring wheat acres were forecasted to fall by 2.5% each to 1.8 and 12.9 million acres respectively.

Looking at some of this past week’s price action, soybeans and canola were the only crops to not have a green week, with the November 2018 futures contracts for each ending 1.3 % and 0.5% lower, respectively. Down in Chicago, the November soybean contract remains below US$8.50 while canola prices are still below $500/MT.

Last week, the USDA announced Trump’s plan to subsidize crops (and farmers) affected by heavy tariffs. Each crop and livestock farmer can receive up to a maximum of $125,000 in compensation. These payments and limits are completely separate from existing government programs like PLC and ARC.

However, to be eligible, “applicants must have an ownership interest in the commodity, be
actively engaged in farming, and have an average adjusted gross income (AGI) for tax years
2014, 2015, and 2016 of less than $900,000.” Specific to soybeans, the USDA is offering a
subsidy of US$1.65 per bushel on 50%t of 2018 production.

The way the subsidies were calculated was based mainly around trade disruption. American
corn prices are the cheapest in the world, and so exports are cruising at a pretty good pace.
More specifically, we are now tracking 4.9 MMT behind the USDA’s updated forecast. Thus,
with two weeks left in the 2017/18 crop year, actual exports need to average 2.4 MMT each
week to reach the target.

Thus, for U.S. corn growers who are eligible, the compensation from the U.S. government is just US$.01 per bushel. And, for the week, December 2018 corn prices in Chicago gained all of 2 cents to close at $3.65. Comparably, it’s worth noting that the December 2019 contract (for next years’ crop), is sitting around $3.95, up 1% for the week.Wheat markets were able to rally a bit this week after selling off the last two weeks thanks to Russia and Canada.

In the Great White North, we saw a StatsCan production report come in below expectations. Very specifically, spring wheat production was estimated by Statistics Canada at 21.6 million  metric tonnes (MMT). Something to keep in mind is that StatsCan’s August report tends to underestimate the Canadian spring wheat crop by more than 12%, on average, over the past 5 years.

It’s hard to see that happening though this year, considering that Canadian spring wheat yields were projected at just 46.6 bushels per acre. That would be down 10% year-over-year and 5% below the 5-year average.

Regardless, StatsCan’s number was below expectations and thus the market saw some
impressive gains, up nearly 30 cents at one point on Friday.

Spring wheat price specifically ended the week up 1.4% for the December 2018 contract,closing just  below US$6/bushel. Worth also mentioning is the December 2019 contract (for the 2019/20 crop year) closing the week at $6.33, up nearly 2% from last Friday. That being said, spring wheat prices overall closed nearly 4% lower than where they started August.

In Russia, the National Association of Exporters of Agricultural Products said that, following a meeting with the nation’s agriculture ministry, it is exploring a cap on grain exports at 30 MMT.That would likely put a curb on wheat exports right around 25 MMT.

Cognizant of the current export pace, it’s likely Russia would hit said 25 MMT in wheat exports sometime in December. While purely speculative, it certainly got the attention of traders, and thus wheat prices. SRW wheat prices in Chicago for the December 2018 contract closed at $5.455 USD per bushel, up 1.7% or nearly a dime on the week. Comparably, December 2018 Kansas City HRW wheat prices gained 6 cents, or 1.2%, to finish the week at $5.533 USD per bushel.

Coming back to the StatsCan report, here’s a look at how StatsCan thinks how other major
crops in Canada are going to fare, as well as their usual revision by the December report.

Ultimately, this StatsCan report was certainly a bullish reprieve from some of the bearish-looking crops in the U.S., and the less-than-ideal news about global trade this week. As we head into September, the focus should be on getting the crop off safely and filling forward contracts made earlier in 2018. After all, it’s very rare to see grain prices in their top 5% at harvest time.

 

Brennan Turner

Brennan Turner is originally from Foam Lake, SK, where his family started farming the land in the 1920s. After completing his degree in economics from Yale University and then playing some pro hockey, he spent some time working in finance before starting FarmLead.com, a risk-free, transparent online and mobile grain marketplace (app available for iOS & Android). His weekly column is a summary of his free, daily market note, the FarmLead Breakfast Brief. He can be reached via email ([email protected]) or phone (1-855-332-7653). @FarmLead

Trending

Wheat prices jump into August — This week in the grain markets

This week, winter wheat prices touched a three-year high, but it didn’t last. Chicago SRW wheat prices for September 2018 gained 5 per cent or about 26 cents US/bushel to close at $5.56. While the December 2018 contract was up 5.4 percent — or nearly 30 cents — to finish a tad under $5.80. In…Read more »

Related

Leave a Reply

 

This site uses Akismet to reduce spam. Learn how your comment data is processed.