Sept 28 – AAFC Gets Bearish on Canola, Bullish Durum

Grain markets this morning are mixed, but seem to be leveling out, as we look into AAFC updated supply & demand tables, as well as vegetable oil fundamentals.

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AAFC Gets Bearish on Canola, Bullish Durum

Grain markets this morning are mixed, but seem to be leveling out, as we look into AAFC updated supply & demand tables, as well as vegetable oil fundamentals.

Harvest pressure is starting to make its way into corn and soybean prices, as the weather forecast is formidable in many areas to go hard this week (in addition to this past weekend in the Midwest).  For wheat, grain markets are looking at Ukraine and Argentina, where persistent drought is weighing on the production potential. It was estimated this past week by the Ukrainian government that only 10% – 15% of Ukraine’s fields had enough soil moisture to be planted! That said, some rains are in the forecast for the next few days, which should get more farmers into the field to plant their winter wheat, but without it, Ukraine could be in for a second straight year of smaller wheat production.

From a headline standpoint, corn’s weekly losses were their largest since April and soybeans haven’t fallen this much in one week since March! Conversely, the U.S. Dollar earned its best one-week gain since April, which put further pressure on the complex as U.S. grain becomes less for international buyers, relative to other options.

Grain markets pushed lower as speculators leave & famers sell their harvests

That said, grain markets are starting to consider the impact to ethanol demand, should a second wave of COVID-19 rage across the world this fall/winter. [1] In the meantime, lobbyists continue to call on the White House and President Trump to provide further assurances for the ethanol market (and thus corn prices), and that the “EPA needs to follow the letter of the law on the RFS,” says Anne Steckel, of the National Farmers Union. [2]

The other demand buzz I continue think about is how much buying is being done now to prepare for said second wave; after all, we know that many companies in the food value chain are building up their “pandemic pallets” of goods to avoid shortages like we saw in March and April. [3] And in the UK, British grocers have already started limiting the purchasing, per family, of certain staple products, measures that we saw almost everywhere in the early months of the COVID-19 pandemic making it to the western world. [4]

Vegetable Oil Market Tightens Up (Sort of)

Arguably, international buyers of grain, oilseeds, & pulses are doing the same thing, sourcing more than they normally do for this time of year. Nonetheless, this continues to make the vegetable oils balance sheet look relatively tight, given the demand for edible oils and feedstocks. Therein, I, and many others continue to be bullish in the long-term (3-5 years) for soybean and canola prices. Right now, it seems to be mostly about the demand from China though, as soybean imports by the People’s Republic from January through August are now officially a record with nearly 65 MMT shipped in. [5]

However, South America will continue to be the asterisk here for the vegetable oils complex, creating competition for North American farmers and agribusinesses, not only their production capacity, but also their processing capacity. For example, soybean crush volumes in Argentina in 2020 are expected fall nearly 10% from last year to 38 MMT. [6] That said, Argentina is seeing yet another port workers strike, which will also put pressure on exportable supplies getting to market. [7] Meanwhile, despite a record 2019 harvest, Brazil is literally importing soybeans, with total estimates suggesting 850,000 MT, or the most since 2003. [8] In the meantime, cash soybean prices in Brazil continue to sit at or near record highs. [9]

For canola prices, the pull-back was clearly noticeable this week, and it surely stings for those who still have some green seeds in their swaths still (my family included!). Apart from some rain this past weekend in a few spots across the Canadian Prairies, it’s looking like the next few weeks could be dry (given the last few years though, I’m probably not the only one keeping my fingers crossed!).

What certainly won’t help the canola complex though is Agriculture Canada’s updated supply and demand tables that came out on Friday afternoon. In it, the government found an extra 830,000 MT from Harvest 2019, and increased their Harvest 2020 number by 400,000 MT to match Statistics Canada’s estimate from a few weeks ago. While demand was also upgraded a bit, the bigger crop from 2019 means more supply gets carried into the 2020/21 new crop year, and thus ending stocks head higher.

Canola prices are likely to be pressured by bigger ending stocks

Needless to say, the $11.50 – $12/bushel cash canola we saw trade a lot this past week on the Combyne platform, is likely gone for awhile, unless the speculative buying helps re-start this recent rally. However, going into this reversion of canola prices, Canadian farmers have been heavy sellers, not just of canola, but almost all crops. [10] In fact, the volumes being delivered on this month – averaging 1.4 MMT per week – would be impressive for any time of year, let alone harvest. Of course, with Canadian oil-by-rail shipments falling to an 8-year low recently, there’s lots of open room to move grain, oilseeds, & pulses right now! [11]

Other AAFC Insights for Grain Markets

While I’ll talk a little about pulses in this Wednesday’s Breakfast Brief, in the cereals category, the updated tables from the AAFC showed stronger demand for oats and barley, both domestically and abroad. As a result, ending stocks for the two cereals with both lowered materially by AAFC for 2020/21 to now sit at 700,000 MT for oats and 1.1 MMT for barley. Last week in the FarmLead Breakfast Brief, I estimated that oats stocks for 2020/21 could come down 100,000 – 200,000 MT, so I was pleasantly surprised when the AAFC dropped it by 300,000 MT. In this light, it re-confirms my comments from earlier in the week that oats prices could perform better than barley this year.

Looking into the wheat complex, strong demand here at home AND abroad continues to support durum prices at the current levels. With the slight downgrade to the size of the crop in StatsCan’s second production estimate, durum ending stocks were lowered by AAFC by 500,000 MT to now sit at 700,000 MT. That’s obviously positive for durum prices, as we continue to see high $7s in most places and even some low $8 CAD/bushel durum prices consistently trade on Combyne for immediate movement .

Durum prices are likely to go higher because of record exports & thus, tighter stocks

For perspective, the last time we saw a carryout this tight was technically 2019/20 (thanks to AAFC lowering 2019/20 stocks to 660,000 MT), but other than that, never. Put simply, thanks to the record durum exports seen in 2019/20 and expected to continue in 2020/21, durum stocks are a long ways from the nearly 2 MMT we saw just a few years ago. For non-durum wheat, Canadian exports continue to perform well, tracking 130% better year-over-year with 2.84 MMT sailed through Week 7.

Canadian weekly non-durum wheat exports through Week 7

Overall, the unabated movement of grain continues to be positive for grain markets. I continue to asterisk the current activity though as all this early buying is likely to weigh on values down the road. This could be either because of 1) there is a second wave of COVID-19 and supply chains start to tighten up again and/or 2), a second wave of COVID-19 doesn’t show up and food companies are holding a lot of extra supply that they maybe don’t need.

To growth,

Brennan Turner
CEO | FarmLead
TF: 1-855-332-7653

Due to some early morning meetings, futures grain markets prices are not available in today’s Breakfast Brief but you can review them here at your convenience.

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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