Yields, trade tensions complicate grain markets— this week in the grain markets

Grain markets took another hit this past week as elevated trade tensions on Friday topped some of the more bullish ProFarmer crop tour results. On Friday, China announced that they would institute another US$75 billion in import tariffs on U.S. goods, including another five per cent tariff on soybeans to take the total tariff to 30 per cent. They also instituted a 10 per cent import tariff on American pork. Almost immediately, President Trump tweeted out that “American companies are hereby ordered to immediately start looking for an alternative to China.” Aside from soybean prices falling as much as 1.3 per cent alone on Friday, broader equity and bond markets also saw large losses on the heightened trade tensions.

This comes on top of the head-scratching that the White House is currently dealing with as it tries to alleviate American farmer angst towards the one-two punch they’ve been dealt by the Trump administration: this U.S.-China trade war as well as the recent increase in ethanol waivers. For the latter, it allows oil refiners who received the waiver to not have to blend the biofuel into gasoline. For perspective, President Obama’s administration approved eight ethanol waivers in 2013, 2014 and seven in 2015; in 2017, the President Trump White House / EPA approved 35 waivers and for 2018, it was 31. The larger ethanol waiver program puts negative pressure on corn prices as ethanol demand is intuitively weaker with fewer refineries having to blend the biofuel in.

The only real bullish data this week came from the ProFarmer crop tour which showed poor yield potential in the eastern Corn Belt, but better potential results in the western states. That said (and as the tables below show), soybean yields might have some upside yet as the crop is quite immature but has room to improve. Conversely, U.S. corn yields might have peaked. On that note, the USDA’s crop progress report from this past Monday suggest that indeed, crops continue to be behind in their development and are not improving.

From a qualitative perspective in my read-through of #PFTour19 social media posts, there are two main takeaways that I saw. First, in many places, plant populations are down from last year as farmers scrambled to get the crop planted. Second, since many of these crops were planted late, their development is quite behind that of years past, which makes them very prone to quality AND quantity issues should there be close-to-average frost dates. Thus, analysts are saying a long, frost-free fall will be needed to help get the crop get through maturity.

The good news is that there is a little bit more rain on the horizon for the Corn Belt, albeit there is also some drier conditions expected for Great Lakes area. Looking more long-term, the NOAA has been calling for average to possibly early frost dates, thanks to a low-pressure ridge coming down from Western Canada. However, DTN’s weather team says that this is a “weak feature” and that fall weather might actually be a bit more favourable for those late crops than once thought.

Heading north, frost showed up in parts of east-central Saskatchewan (including my hometown of Foam Lake, SK), were hit with a (disgusting) overnight frost last Saturday. Across the Prairie province, record low temperatures were seen in many places. Notably, quite a lot of oats are produced in eastern Saskatchewan and until recently, oats prices have been mainly watching and waiting for harvest to start up.

In their August estimate of supply and demand estimates for Canadian crops, AAFC is estimating that a little over 1 MMT of Canadian oats are headed for the feed column, but after this frost, their number might be a little low. Combined with some rumours of stronger oats exports into the U.S. this summer, Canadian oats endings stocks might be tighter than the 600,000 MT currently being forecasted by AAFC. Accordingly, oats prices might find some strength this fall.

In the same monthly report, AAFC revised the potential for this year’s production slightly higher, namely for the wheat harvest. A lot of analysts’ eyes were on canola production but AAFC only increased 2018/19 exports by 200,000 MT. This translated to 2018/19 canola ending stocks to drop by the same amount to have a 3.7 MMT carryout. With no changes to supply and demand table, 2019/20 canola ending stocks were lowered by the same amount to now sit at 3.775 MMT.

The Canadian durum wheat harvest was raised by 100,000 MT by the AAFC, and with no demand changes, carryout was raised by the same amount to 1.2 MMT. While this is still a 25 per cent / 400,000 MT reduction year-over-year, average 2019/20 durum prices are forecasted to be 10 per cent below the five-year average at $250 CAD/MT (or $5.10 USD and $6.80 CAD per bushel when converting metric tonnes to bushels). The Canadian non-durum wheat harvest was raised by AAFC to 27.4 MMT, up 400,000 MT from last month’s estimate, mainly thanks to expanded acres planted outlined by StatsCan back in June. Demand was raised a little, but Canada’s non-durum wheat ending stocks were pegged at 4.3 MMT, up nearly 20 per cent from 2018/19’s carryout.

Overall, it feels like there is a lot of bearish headwinds in the air but we have to remind ourselves that this is the time of year that markets tend to find their bottoms as crop potential is relatively known and harvest supplies start hitting the market. While you might be thinking of a few “F” words after reading this weekly grain markets recap, the one that the market is watching right now is “frost”. Any colder temperatures could quickly turn the tide of markets to the upside. The one market there might be an exception for though is feed as, with quality downgrades, more supply would become available.

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