As we head into the last full week of the 2018 calendar year, grain markets held a bit of a weaker tone. This past week, no crops on the futures boards were able to make any positive gains despite some positive export activity being noted by the USDA, especially from China! Put another way, grain markets were wrapped pretty poorly by investors heading into the Christmas break (a week that tends to bring weaker trading volume).
The sell-off in grain prices accompanied the broader liquidation seen in the equity markets, with the S&P 500 seeing its worst performance in the month of December since the Great Depression in 1931! One of the other factors that is spooking investors has been U.S. President Trump threatening a government shutdown if he doesn’t get funding for his new wall on the U.S.-Mexican border.
On that note, you’ve heard me and everyone else talk about the trade war between China and the U.S. all year long. While that’s important, we also need to mindful of some of the other macroeconomic factors being overlooked in the current sea of geopolitical risk — namely monetary policy.
For the U.S., the Federal Reserve just raised interest rates for the fourth time in 2018, despite some signals that the American economy is softening. As such, the Fed indicated in their December minutes that a more “patient approach” to raising interest rates would be taken in 2019.
In Canada, further interest rate hikes are anticipated in 2019 after keeping things idle this month. The Bank of Canada has cited that the neutral range is between 2.50% to 3.50%, but we’re a bit skeptical of that being the case. With a higher interest rate, you tend to see that country’s currency strengthen at the same time.
However, a stronger Canadian Dollar would, in turn, negatively affect the attractiveness of Canadian grain exports. That being said, the Loonie lost more than 1.5% this past week to close below 74¢ USD for the first time in more than 12 months. In factor, through this past Friday, the Canadian Dollar has lost nearly 8% against the U.S. Greenback in 2018.
Another macroeconomic factor impacting broader markets has been oil prices. Bulls and bears have been jawing on their direction, but the bears are mostly winning. This week, WTI prices plummeted nearly 11% to close below $46 USD / barrel for the first time since December 2018 (see any correlation here with the Canadian Dollar?)
While the Saudi Oil Minister says that current oil prices are not linked to fundamentals, more analysts agree that global economic growth is slowing and that the current production cuts planned by OPEC won’t be enough and instead, supply will continue to saturate demand. Translation: oil prices could fall further.
Coming back to the grain markets, the USDA’s weekly export report showed export sales of just 313,580 MT of U.S. wheat, below the 500,000 MT – 700,000MT that the market was expecting. However, week 28 of the U.S. 2018/19 crop year saw a new crop-year weekly high of more than 655,000 MT of actual exports. Still though, total U.S. wheat shipments are tracking 9% behind last year with just 11.2 MMT shipped out.
This bearish sentiment help push wheat prices on the futures board with the March 2019 contract for Chicago SRW wheat closing at $5.135 USD / bushel (-3.1% for the week), for Kansas City HRW wheat finishing at $5.028 (-3%), and Minneapolis HRS wheat ending at $5.613 (-3.9).
Comparably, Canadian non-durum wheat exports through Week 20 of the 2018/19 crop year are sitting at 7.22 MMT, up nearly 17% year-over-year.
U.S. corn export sales though hit a new record for this past week of the crop year, with 2.517 million metric tonnes (MMT) sold! In terms of actual shipments, U.S. corn exports have totalled 16.7 MMT through week 15 of the 2018/19 crop year, up 76% year-over-year. For the week, March 2019 corn futures in Chicago lost 1.6% to finish at $3.785 USD / bushel. Is the market totally factoring in the strength of U.S. corn exports, or is it being diluted by something else?
The last two weeks, despite the trade war still firmly in place (albeit in a status of “truce”), we’ve seen Chinese buyers go after U.S. soybeans at a more regular pace. It’s been rumoured that China will continue buying soybeans over the holidays, with one source of Reuters suggesting another 2 MMT could be bought before Christmas Day. What’s also slightly positive for soybean prices are the rumours circulating that the Chinese government might suspend the 25% import tax for a handful of private crushers to make some one-off purchases.
However, soybean futures in Chicago lost 1.9% this week, with the January 2019 contract closing at $8.833USD / bushel. This, despite, soybean export sales for the week also hitting a new record of 2.963 MMT, topping the high end of the markets’ expectations.
In terms of actual U.S. soybean exports to China, just 341,000 MT (or 12.53 million bushels) have been shipped to the People’s Republic through week 15 of the 2018/19 crop year. Comparably, at the same time a year ago, nearly 18 MMT of U.S. soybeans had officially made their way to China by Week 15 (or 660.7 million bushels). The good news is that U.S. soybean export sales to China last week totalled 1.675 million metric tonnes (MMT), or 61.55 million bushels. Cumulatively, total U.S. soybean shipments to all destinations is sitting at 15.41 MMT, down 41% year-over-year.
Comparably, total Canadian canola exports through Week 20 of their 2018/19 crop year are sitting at 3.93 MMT, down 6.6% year-over-year. This weaker number is likely why we saw canola futures lose $3 CAD / MT on the January 2019 contract, to close at $474.80.
Some big news hitting the ag world this week was the sale of Cargill’s malt barley business to global malting business Boormalt. The company is a subsidiary of French co-operative Axereal and will be acquiring Cargill’s malt processing facilities on 4 continents, including locations in Biggar, Sask. and Wisconsin. As a reminder, Cargill closed down its other North American malt barley plant in Spiritwood, ND this past April. That decision was said to be due to reduced demand for six-row malt barley.
On that note, Canadian barley exports had a poor Week 20 of their 2018/19 crop year, but at 914,400 MT in cumulative crop year shipments, that’s still up 26% year-over-year!
Overall, geopolitical risk will continue to be the first drivers of grain markets as we turn to 2019, followed by fundamentals like export activity and 2019 acres. For the likes of corn, soybean, wheat, and canola, be cautious of hoping for prices to keep going higher and sell into those rallies; after all, there’s a healthy amount of supply for all of these crops still available at home and around the rest of the world.
Merry Christmas & Happy Holidays!