Grain markets this morning are mixed with corn, canola, and soybean prices all higher but cereals in the red.
“There are a terrible lot of lies going about the world, and the worst of it is that half of them are true.” – Winston Churchill (former British Prime Minister)
Canola, Soybean Prices: Best & Worst COVID-19 Scenarios
Grain markets this morning are mixed with corn, canola, and soybean prices all higher but cereals in the red. Yesterday, grain markets ended the day mostly in the green, supported by WTI oil prices and broader equity markets, which both had solid daily gains. That said, volatility in the grain markets remains, not just because of COVID-19-related demand uncertainty but also the combination of additional investor dollars (which fled equities back in March) and weather.
More specifically, there are some freezing temperatures forecasted this weekend for everywhere from North Dakota down to northeastern Missouri and back up to Michigan and Ohio.  Early planted soybeans are the most at risk but because cooler temperatures have kept emergence in check, the total percentage of the crop that’s at risk is much lower than what’s actually been planted.
On that note, the USDA said in Monday’s crop progress report that 23% of the U.S. soybean crop has been planted.  This is above pre-report expectations, and way ahead of the 5% planted by this week a year ago, as well as the five-year average of 11%. Also, 51% of the U.S. corn crop has been planted, which is a one-week 24-point jump and, like soybeans, also ahead of average pre-report guesstimates from grain markets participants. It’s also well-above the five-year average of 39% and the 21% seen planted through this week a year ago. Conversely, 29% of the American HRS wheat crop has been planted, slightly below the 30% expected, but also behind the 43% average for this week.
Last night, Shaun Haney of Real Agriculture and I did a live, 30-min Facebook/Youtube/Twitter/LinkedIn Skype-based video interview, and we covered everything from pulses to cereals to oilseeds to why I’m more tanned than Shaun.  We also discussed why I’m still quite bearish on corn prices, something that I walked extensively through in Monday’s Breakfast Brief. That said, I also commented on how I think there is more downside risk for soybean and canola prices, but I’m way less bearish than I am on corn prices.
Canola & Soybean Prices: Worst COVID-19 Scenario
That said, before we peer too far into the crystal ball for canola and soybean prices, it’s important to understand its close relationship with oil prices. Since canola and soybeans get processed into canola oil and soybean oil (which can then be processed into biodiesel), oil prices and prices for oilseeds are highly correlated. Thus, as oil prices go, so do canola and soybean prices.
However, in this new COVID-19 world where oil demand has tanked, a new energy market may start to emerge. Harvard Kennedy School’s professor of international affairs, Meghan O’Sullivan, nailed in a recent Bloomberg op-ed, saying, “As history has shown, a big change in energy markets often precipitates a big change in geopolitics.”  You obviously have your OPEC players, but then there’s the U.S., Brazil, Russia, and the list goes on.
On that note, Brazil’s state-owned oil company, Petrobras hit a record level of crude oil exports in April, with over 1M barrels per day sailed.  Worth noting though, is that China accounted for about 60% of these imports. Conversely, Rystad Energy is estimating, specifically in the U.S., that the oil and gas industry could see dozens of bankruptcies in the near term, with potentially hundreds if the demand function continues to remain depressed through to 2021.  However, they also noted that as production cuts start to show up, this could help bring oil prices back up.
But therein lies the dilemma: How much biodiesel demand will there be in the long-term if oil demand remains depressed? However, now that we’re in the month of May, production cuts from OPEC and Russia have started. Further, we have to look at now only the major biodiesel customers (i.e. China), but also those that have a lot of demand for feedstuff byproducts, like soymeal and canola (again, looking at China here). That said, Brazil’s soybean exports in April set a new record of 16.3 MMT.  This is a 40% jump over March 2020’s 11.64 MMT of Brazilian soybean exports, and a significant improvement over the previous record of 12.35 MMT, set nearly 2 years ago in May 2018. Further, there are expectations that soybean exports from Brazil in May will be another strong showing, especially considering that soybean prices there are sitting at record levels, thanks to Brazilian Real being devalued so much against the U.S. Dollar. 
Thus, there are two subsequent factors that I’m thinking about. First, how many more soybeans does China need, considering that they could be dealing with African Swine Fever and a reduced hog herd for up to 2 more years!  Second, how many more soybeans can Brazilian farmers grow and export. Conversely, despite their economy shutting down for nearly 2 months, China is still expected to made good on the commitments of purchasing agricultural commodities from the U.S., as per the trade deal signed in January. 
Since it’s an election year, we would all be naïve to think that politics aren’t involved here, and that’s why there continues to be buzz about President Trump pushing to upend global tradeflows away from China a bit.  Nonetheless, through last week’s soybean exports report from the USDA, American soybean exports to China are tracking 120% higher (read: more than double) from a year ago with 12.36 MMT sailed (or 454.1M bushels if converting metric tonnes to bushels). Big picture though? It’s not hard to see that U.S. soybean exports have started to tail off but, as I suggested 2 weeks ago, China meeting trade deal targets for buying American soybean exports would be positive for soybean prices.
On the flipside, Canadian canola exports continue to inch up and that should be consider a positive.  That said, I do have some reservations that we’ll meet Agriculture Canada’s forecast of 9.1 MMT. That said, I think the strong pace of domestic demand (read: canola crush) is going to help things, even with another 1 MMT coming off recently-thawed Canadian Prairie fields. Viterra is the ultra-bear on canola prices, continuing to say that Canadian canola ending stocks for 2019/20 could come in above 7 MMT.  I disagree, thinking that Canadian canola supplies by the end of this crop year will end up closer to 3.5 MMT.
Soybean & Canola Prices: Best COVID-19 Scenario
Todd Hultman from DTN continues his consistent streak of healthy analysis to take in, noting earlier this week and soybean prices still have not tested their one-year lows (despite losing $1.20 since the beginning of the 2020 calendar year!).  Despite the negative message construed, this is actually a positive! Part of the rationale here is also based on the strong pace of soybean crush, something I covered 3 weeks ago. It’s the same thing for canola crush in Canada, which is expected to hit a new record in 2019/20. Conversely, Argentina’s soybean crush sector continues to battle against government export taxes, supply constraints thanks to logistical and COVID-19 related issues, and smaller demand for soymeal. 
Probably the most bullish factor for soybean and canola prices though is the declining production of palm oil. Oil World editor, Thomas Miekle, thinks that, because of COVID-19-related labour shortages and aging trees, palm oil production in 2019/20 should drop by 2 MMT, year-over-year.  That’s significant considering that in the last 3 years, palm oil production has increased by an average of 6 MMT annually!
Further, Gro Intelligence points out that, despite being the vegetable oil with the highest oil content, palm oil prices are still trading at a steep premium to gas oil prices, meaning biofuel blending will be limited.  As proof of this, China, has greatly reduced its palm oil imports from Indonesia and Malaysia (although, I’ll admit, this might just be related to COVID-19 slowing the Chinese economy down). That said, Indonesia is struggling to figure out how to keep its robust biodiesel program despite oil prices being in the tank (pun intended). 
The other bullish factor here is the ongoing deficit that Europe has for its biodiesel program, namely the need to buy more Canadian canola exports and rapeseed from Black Sea.  Strategie Grains pegged the 2020/21 EU rapeseed harvest (including the UK) at 17 MMT, a 600,000 MT decline from a month ago. While this would be about a 1% bump from the 2019/20 crop, that was a 13-year low. This weaker production is a direct function though of increased government regulations on rapeseed production, and since profitability to grow the crop has fallen, so have acres, and thus production.
On the feedstuffs side of things, this is the one unknown is hard to account for, given all the uncertainty related to meat processing capacity and consumer meat demand in general. That said, there could certainly be more canola meal available as some poor quality comes off as Harvest 2019 finally finishes in Western Canada. Accordingly, if you have adequate cashflow and don’t need to sell right away, then hold onto said spring-harvested canola and get it tested first by an independent lab. I’m specifically talking about understanding your canola’s quality factors like oil content and any damage, dockage, foreign material, etc. As a reminder, “time of year” is not an official grading standard. 
Once you know your quality, if it’s not already contracted, I encourage you to shop it on our 100% free Combyne marketplace. We have dozens of credit-verified buyers looking for spring-harvested crops and on your new Listing, you can be transparent, indicating that it was spring-thrashed. However, I also encourage you to be transparent about the other quality factors to show that just because it was spring-combined does not mean the quality is bad!
Finally, the one big factor here that could be bullish for soybean and canola prices is how many acres get planted. Given all the demand certainty, is there a case to be made that the number of fields planted with these oilseeds could be less than what we’re currently expecting. Put another way, when you’ve got strong competition from pea or lentil prices, might we see a few fields get switched out at the last second. Further, because canola and soybeans are generally regarded as high risk, high reward crops, with the demand uncertainty, some farmers not be willing to make as big as bets as they normally would (especially if their a mixed operation with cattle, hogs, or poultry also on the balance sheet). That said, last week, average canola prices in Western Canada for spot movement just pushed ahead of 2018/19 canola prices for the first time all crop year. This isn’t explicitly a sell-signal, but it is a positive trend to consider.
Overall, I still feel that canola prices and soybean prices have some bearish demand concerns, but they’re not as bearish as corn. Further, the current weaker prices could push acres down in both Canada and the United States. Another bullish factor that I didn’t really dig into for canola prices is weakness in the Canadian Loonie. Frankly, I’m a bit surprised that it’s held up above 70 cents like it has, but I think that there will much deeper long-term consequences for the lavish stimulus pending by the Canadian government. And thus, while just pennies of the stimulus are going to the agriculture industry, a weaker Canadian Loonie could actually help increase commodity exports, thus mitigating some of the bearishness of demand unknowns.
Due to some technical challenges, no grain markets future data is included in today’s Breakfast Brief, but you can review them here at your convenience.
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