Grain markets are mostly red to start the last week of October, which has seen corn, wheat, and canola prices all rally significantly.
“You never want to plateau out. Getting better every day is my expectation.” – Jeff Lurie (American businessman & owner of NFL’s Philadelphia Eagles)
Canola Prices Plateauing as China Leads Food Security Concerns
Grain markets are mostly red to start the last week of October, which has seen corn, wheat, and canola prices all rally significantly. Strong demand for U.S. corn and soybeans continues to support their current values, and for the latter, canola prices have tagged right along. With the January, March, and May 2021 futures contracts all sitting around $550 CAD/MT, canola prices haven’t touched these levels in over 3 years since Plant 2017. For the month so far though, canola prices have rallied about 6%, whereas corn is up about 11% and Chicago SRW wheat has gained nearly 10%.
The U.S. Southern Plains is set to receive some snow this week, which is great for the two-thirds of the recently-planted winter wheat crop there that’s emerged, but probably not so great for the other third not yet emerged or even planted.  As I mentioned in my weekend column for RealAgriculture.com, I think that Chicago SRW wheat prices actually have more upside than corn right now.  A lot of this is attributed to La Nina production concerns, and while Argentina & U.S. dryness are on the bulls’ agenda for 2021 wheat prices, Ukraine is one country at the heart of the current bullishness.
On Friday last week, the USDA attaché in Ukraine released their updated estimates for the 2020/21 wheat harvest there, suggesting that production was just 24.9 MMT (blamed on this year’s dry conditions), and, as a result, Ukraine wheat exports this year will total just 15.4 MMT.  Compare that to the USDA’s official estimates from the October WASDE of a harvest of 27 MMT and exports of 18 MMT. Better yet, compare the USDA’s Kiev-based attaché export numbers to the current, unofficial government export quota of 17.5 MMT.
China Leading Global Grain-Sourcing Scramble
Late on Friday last week, the U.S. Trade Representative office pushed out a report claiming that China has bought about $23 Billion worth of U.S. agricultural goods so far.  With about 11 weeks left to go in 2020, this dollar amount would represent about 71% of the $36.5 Billion target agreed to in Phase One of their trade deal. Included in the text of the report from the USTR was this gem: “It is worth noting that the Phase One Agreement did not go into effect until February 14, 2020,and March is the first full month of its effect. That means that we have seen (only) seven months of agreement sales.”
As most know, China has purchased a record amount of U.S. corn so far this year and soybean export sales for this time of year to the People’s Republic are the strongest they’ve ever been. Also, pork exports to China are at record levels while sorghum, beef, & wheat exports are also much higher compared to years past. While no one will disagree that these sales volumes are all positive, many in the industry think that, based on China’s track record of cancellations and postponing shipments, Beijing won’t actually meet the full $36.5 Billion.  Case in point, China’s soybean imports from Brazil in September were 7.25 MMT (+51% year-over-year) whereas inbound shipments of U.S. soybeans was just 1.17 MMT (-32% YoY).  Worth noting, however, total U.S. soybean exports are
Nonetheless, there are plenty of other buyers out there and the data continues to show countries are over-buying on COVID-19-related supply chain fears.  Countries from the Middle East to Asia are shoring up their reserves of staple foodstuffs like wheat and sugar as precautions against future supply disruptions. Poor harvest in some places like Morocco and Turkey mean these countries have relaxed their import tariffs and are now buying more than they normally would.  To help finance the accelerated buying, countries like Morocco are raising their export tariffs on the likes of fertilizer, which could mean more expensive farmgate prices. 
However, ADM’s CFO, Ray Young, probably said it best in a conference last month, “Countries around the world, in terms of food supplies, have moved from effectively a just-in time philosophy of buying food to a just-in-case philosophy.”  This is why, if you’ve been reading the FarmLead Breakfast Brief, you’ll know this sort of buying activity is been reflected by the likes of record Canadian oats exports as well as the significant rally in pea prices.
In that vein, Goldman Sachs thinks that the broader commodities complex will see a bull market in 2021, thanks to the weak U.S. Dollar, government stimulus, and inflation risks.  However, to be the Debbie Downer, it’s worth noting that the Goldman Sachs call pertains largely to precious metals like gold, which are used as hedges against rising inflation. Specifically, for foodstuffs, Goldman believes that the aforementioned demand from China as well as weather issues like La Nina will be the largest drivers going forward (tell us something we don’t know Wall Street!).
Canola Prices: Are We at The Top?
What we do know is that canola prices have performed unseasonably well over the past few months. Since we almost never get a harvest/early fall rally in canola prices, I’ve been hearing more of the “I pulled the trigger too early” narrative from many farmers on social media and even directly from our Combyne users I speak with. Here’s the reality though: No, you didn’t. These previous sales were based on the information that you had available to you, and the smart principle to sell at profitable levels! Just like a bad game or even period within the game, you must move on and understand the updated facts to better prepare you for the next sale. And if you’re wondering, that next sale should probably be sooner than later in my opinion. Here’s why.
First and foremost, Agriculture Canada updated their supply and demand tables last week, and yet again, they increased canola ending stocks!  This is largely because they have now found almost 1 MMT of extra production from the 2019/20 crop year that wasn’t known to the market just 2 months ago! Because of this and some other demand finagling, 2019/20 ending stocks now sit at 3.13 MMT, or 1.3 MMT higher from AAFC’s estimate 2 months in late August! If we carry this 1 MMT of extra supply and thus ending stocks to the current crop year, the change is pretty significant, as shown in the chart below.
That’s where canola exports come in (thank goodness for that!). All this extra supply has helped exportability and accordingly, in the last 2 months, Agriculture Canada has added an extra 700,000 MT of extra demand for canola exports in 2020/21. Currently, thanks to the small rapeseed crop in Europe and general aforementioned COVID-19-related over-buying, Canadian canola exports have totaled 2.53 MMT through Week 11, which is 46% higher year-over-year and a record start to the marketing season.
Let’s step back for a second though: If this current pace of canola exports were to continue, we’d end the 2020/21 crop year with something like 13 – 13.5 MMT sailed! This will not happen, and the reason is substitution effects. As Canadian canola prices rise, other vegetable oil crops (read: soy oil and palm oil) become more financially attractive and those crops get bought instead.
Ultimately, I think canola prices are in this weird world of trying to determine how much smaller this year’s crop actually is, while demand is clocking along at record levels. Add in some speculative buying, and you see the rally that we’ve had these last few weeks! While I don’t doubt that there is potential for even higher values in the coming weeks, it’s probably not going to be another $30 – $50 CAD/MT on the futures board! So, with canola prices sitting about $80/MT higher compared to a year ago, are you willing to hold out for another $5? #10? $15? If you’re not hedging and are only focused on cash sales, it’s worth also noting that basis levels have started to widen.
Put another way, the market is telling us that canola prices have satisfied current demand levels, including for the 2021 crop as November 2021 futures actually fell last week! Further, I’m more aware of the fact that 2020/21 ending stocks are likely to end somewhere around 1.8 – 2.1 MMT, which is a healthy amount (see 2015/16’s canola prices versus ending stocks in the chart above). Put bluntly, I think that we’re much closer to the top of this rally than coffee row is telling you and you should manage the downside risk potential accordingly.
At 7:55 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3175 CAD, $1 CAD = $0.759 USD)
Dec Corn: -3.3¢ (-0.8%) to $4.16 USD or $5.481 CAD
Jan Soybeans: -3.8¢ (-0.3%) to $10.778 USD or $14.20 CAD
Dec Soybean Meal (per short ton): -$4 (-1.05%) to $382.40 USD or $503.82 CAD
Dec Soybean Oil (cents per lbs): +0.54¢ (+1.6%) to 34.65¢ USD or 45.65¢ CAD
Dec Oats: -1¢ (-0.35%) to $3.025 USD or $3.986 CAD
Dec Wheat (Chicago): -10¢ (-1.6%) to $6.228 USD or $8.205 CAD
Dec Wheat (Kansas City): -14.5¢ (-2.55%) to $5.553 USD or $7.316 CAD
Dec Wheat (Minneapolis): -5.3¢ (-0.9%) to $5.723 USD or $7.54 CAD
Jan Canola: +3.4¢ (+0.25%) to $12.53/bu / $552.50/MT CAD or $9.511/bu / $419.35/MT USD
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.