Due for a Santa Claus rally? — This week in the grain markets

Grain markets ended the first trading week of December mostly lower, though oilseeds found some gains on soybean exports and production headlines. We’re going to get the USDA’s December WASDE report Tuesday, but StatsCan and ABARES released updated production estimates for the Great White North and the Land Down Undaa, respectively.

Soybeans found some gains as they were deeply oversold, but fresh, optimistic headlines about the trade war helped the oilseed find some gains. More specific, China came out this week saying they’ll remove tariffs on some purchases of the oilseed, as well as some pork, in order to propel negotiations forward for a Phase One deal before the end of 2019.

In their December production estimate, ABARES (the Aussie USDA) said that below-average precipitation and above-average temperatures has significantly reduced harvest 2019 crop production potential in the Land Down Undaa.

The most pronounced decline is found in Western Australia, which is expected to see just 11.55 MMT of all types of grain come off for the 2019 harvest — a 35% drop year-over-year! Conversely, thanks to some timely rains in the southeastern state of Victoria, the harvest for all crops is expected to practically double from last year to nearly 7.2 MMT.

Digging into specific crops, the 2019 Aussie wheat harvest is expected to fall by 8% year-over-year to 15.85 MMT. This updated estimate falls in line with some of the forecasts from private entities but it is nearly 2.5 MMT below the 17.2 MMT that the USDA estimated in their November WASDE report. Further, this is a drop of 17% from ABARES’ December forecast and more than one-third below both the five- and ten-year averages!

Take a look at some of the other comparisons of Harvest 2019 crop production in Australia against this year’s previous estimates, last year, and the five-year average.

Very simply, the effects of three years of drought on the east coast, and the past year of dry conditions in Western Australia is impacting production. That said, it the globalized trade game: one country’s production issues are another’s gain. Case in point, while there is likely some higher protein available in Australia (due to drought conditions), they certainly won’t have the quantity to export a lot of it. This means that more of it will be used for domestic milling needs, leaving the door open for Canadian or American wheat exports.

One specific market is China, where they are changing the way they administer their wheat tariff rate quota. This should open up the wheat market in China a bit more for Canada and the U.S., but Canada has already seen some solid shipments, with 1.75 MMT sailed to the People’s Republic in the 2018 calendar year and 1.16 MMT in 2019 through the end of September.

That said, on Friday morning, Statistics Canada came out with their final estimate of harvest 2019 for the Great White North. StatsCan seemed to buck their historical trend of seeing Canadian crops get bigger from their summer estimates. At a high level, StatsCan did say that cereal crops were greater, but almost everything else saw production totals lowered, including canola, corn, flax, lentils, peas, and soybeans. Statistics Canada admitted that this harvest was an above-average challenge, given the above-average rainfall that both Eastern and Western Canada saw in the fall months.

Higher wheat yields in Saskatchewan and Alberta helped push total wheat production to just under 32.3 MMT, despite harvested acres dropping 2.3% year-over-year to 23.9M acres. Thanks to acres climbing 14% and yields up 9% from 2018 to an average of nearly 71 bushels per acre, the Canadian barley harvest this year was pegged at 10.4 MMT. This would be up 24% year-over-year, as well as nearly 750,000 MT more than the initial estimate form StatsCan back in August.

In my daily FarmLead Breakfast Brief commentary this week, I suggested that feed barley prices seemed like they were getting a bit top-heavy, and this new production number will likely confirm more sideways-to-slightly lower trading for the next little while. For oats, this harvest is said to bring 4.16 MMT to market, up 21% year-over-year (as well as about 200,000 MT more than the initial estimate in August).

We already knew soybean production in Canada was going to drop (mainly thanks to substantially lower acres in Manitoba, down 25% year-over-year) but the final haul is estimating at just over 6 MMT. The smaller pea and lentil harvest should continue to support the recent price trend that we’ve seen for pulses, albeit some better prices is mainly a demand function, as mentioned about 3 weeks ago.

On the bullish side of things, canola production is down 8% year-over-year to 18.65 MMT. This number is actually pretty close to what StatsCan said in August but also more than 700,000 MT below their satellite-based estimate in September. This will likely bring canola ending stocks down closer to 4 MMT, if not below it, versus the 4.7 MMT that AAFC is currently forecasting the 2019/20 crop year will end with.

If Canadian canola crush remains strong, then we might see 2019/20 carryout drop closer to 3.7 MMT, which should support better canola prices. That said, I’m not expecting canola prices to jump too significantly in one day, but rather they will likely see a slow climb of about $10 – $30 CAD / MT over the next 2 months (which would also coincide with some seasonality).

As we’ve flipped the calendar into December, the usual “Santa Claus rally” headlines start to appear. While this is a seasonal dynamic, I’m getting a bit less optimistic about what corn and soybeans will be able to do this month. First off, you’ve got a challenging geopolitical environment (as mentioned above) that is increasing the risk of further global economic downturn. Second, despite a slow start, Brazil’s soybean crop is looking relatively decent and corn production is expected to be a record. Third, there’s a lot of carry-over crop from 2018 that will compete for harvest 2019 sales.

Combined with what’s left out in the field, it doesn’t seem like major grain buyers are willing to blink on steadily increasing their bids. Unfortunately, it’s a poorly held secret that bills will need to be paid and in a game of chicken for grain markets, this is looking more and more like a buyer’s market for most crops.

This explicitly includes corn, soybeans, yellow peas, canola, and milling wheat, though the sketchiness around rejected falling numbers is another column on its own! Specific to beans and corn, I’ve started to see basis pull back in a few areas, as buyers are saying they cannot dry enough grain and aren’t as aggressive in buying for nearby movement. Conversely, we’re seeing some stronger international strength (and hence better prices) for green peas, lentils, oats, and flax.

Bottom line here is that we’re in a reminder phase that grain markets are cyclical. I might be biased, but my three rules to working through these cycles: (1) Know your cost of production; (2) Know you cashflow needs (and when!); and (3); know the quality of the grain that you have. These are data-driven principles that many would be well-served to think about as you reflect on this tough last year and start to prepare for 2020.

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