July 29 – Durum Prices, a Weak U.S. Dollar, & that Dam China

Grain markets this morning are mixed as wheat & durum prices rebound from yesterday’s selling but traders are also watching weather, currency, and China’s dam problems.

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Durum Prices, a Weak U.S. Dollar, & that Dam China

Grain markets this morning are mixed as wheat & durum prices rebound from yesterday’s selling but traders are also watching weather, currency, and China’s dam problems. Strategie Grains lowered their estimate of EU soft wheat production yet again to now sit at 130 MMT (well below last year’s 147 MMT harvest), while moisture concerns are being talked about again from Australia to North Dakota, albeit it’s more talk than anything at this point.

Monday’s crop progress report from the USDA continues to tip its hat to the bears as corn and soybean good-to-excellent (G/E) ratings jumped by 3 points to 72% each! [1] With the current temperatures, and adequate soil moisture in most growing regions, Progressive Ag Marketing’s yield forecast was raised to 180.7 bu/ac for corn and 50.5 bu/ac for soybeans, both a healthy clip above the official USDA estimates. [2] With crops mostly ahead of normal crop development, and the calendar turning over to August this weekend, I’m expecting to see rangebound-trading to the downside over the next month (unless demand from China starts showing up more regularly, that is).

On a small, separate note, Montreal port workers started a 4-day strike on Monday, refusing to provide any mooring services, except for grain vessels and supply ships head to/from Newfoundland and Labrador. [3] This might be the only time ever in the history of human civilization that there’s been a port worker strike and grain trade has not been interrupted!

China’s Dam Problems

Chinese corn prices on the futures board in Dalian hit their highest level in nearly 5 years on fears of a supply shortage as flooding continues in the south central part of the country. More specifically though, the Yangtze River is flooding and the intensity of the water flow has damaged the structure of the massive Three Gorges Dam, and there’s concerns that the dam could fail. [4] Downstream, the Yangtze river basin accounts for nearly half – read: almost 50%! – of China’s annual agricultural output. It could also have a major impact on China’s manufacturing and inland shipping along the river, which is important given that it provides easy water access to get goods from in their “heartland manufacturing” region to other parts of the country.

While this Chinese dam failing could be a big blow to economic activity in the region, it might be enough to create some unrest amongst the population and challenge the Chinese Communist Party’s reign. More succinctly, political analysts are comparing the possibility of the Three Gorges Dam failing and the CCP’s fallout to that of Chernobyl, and how it put a nail in the coffin of the Soviet Union’s reign. With more rain in the forecast, for the region, it could put even more pressure on the Dam and the 40M people who have already been displaced by the flooding happening today, could grow to 100s of millions of people. [5]

Frankly, if the dam fails, there’s a lot of economic and political implications, but as it relates to grain markets, we would likely see a healthy pop. More specifically, given the importance of the region to China’s food security, if the Three Gorges Dam were to fail, China would have to import a lot more than it currently is, and not just corn or soybeans or wheat, but fruits, vegetables, meat, etc. Bottom line: this is like a fire burning right next to a stockpile of gunpowder and the only thing that’s staving off disaster is a few engineers and some concrete.

King U.S. Dollar Losing Its Crown?

We’ll get the download from the U.S. Federal Reserve in terms of how they’re thinking of the market with their regular publication of their meeting minutes and Chairman Jerome Powell’s forward guidance later today. While the U.S. Federal Reserve is not expected to lower interest rates into negative territory, the market is expecting them to hear that the Fed will do what it can, while asking on the U.S. government to provide more fiscal stimulus. [6]

That said, with the U.S. Federal Reserve printing money and buying assets in the stock market directly, the risk to the downside is creeping up. However, many investors are saying “don’t fight the Fed”, meaning don’t bet against them and the stock market. [7] The problem with sort of expansionary monetary policy and unprecedented direct involvement in trading markets is that it weakens the U.S. Dollar. Add in the global markets concern over how the U.S. is trying to beat COVID-19, it’s put the Eurodollar at 2-year highs against the U.S. Dollar! [8]

In fact, the U.S. Dollar has now fallen more than 10% since March, and with all the abrupt changes to policy-making (thanks to COVID-19), Goldman Sachs came out yesterday with a note that warned about the growing decline of the U.S. Dollar as the go-to global currency. [9] More notably, as shown by Reuters below, a decline in the U.S. Dollar has helped support various other asset classes, but it’s also made it cheaper for those development countries to pay off U.S. Dollar-denominated debt.

U.S. Dollar decline against the Federal Reserve expanding its activities

As it relates to grain markets, a weaker U.S. Dollar makes it cheaper for international buyers to purchase U.S. goods. For example, if an international buyer (i.e. China) bought 1 MMT of U.S. corn back in January, it would’ve cost them about $170M USD out of the Gulf of Mexico. However, since the U.S. Dollar has fallen quite a bit, that same 1 MMT now only costs about $150M USD. Thus, you can buy the same amount of grain for about $20M less than what you would’ve paid just a few months ago. This is a clear reminder that when a currency moves like this to the downside, it increase the purchasing power of other countries.

Durum Prices Dip but Still Strong

This currency effect can play both ways though. With the U.S. Dollar weakening, it strengthens the currency of others, such as the Euro, as mentioned, and the Canadian Loonie, which is now sitting at its highest level since before all this COVID-19 crap began in early March. [10] Put another way, for those looking to buy from Europe or Canada, their costs have gone up over the last few months. There’s a rabbit hole I could go down here in explaining all the intricacies of currency effects, hedging, and other factors, but you and I both have the rest of our day to get to!

One of the best performances in grain markets this year has been durum prices, which are still tracking 15% better than they were at this time a year ago. While durum prices have dipped a bit, it’s hard to ignore the healthy uptick in demand during COVID-19, and that’s what’s keeping even new crop durum prices elevated as traders believe the demand could stick for awhile. For example, Nielsen reports that, in the 16 weeks preceding June 20th, pasta sales in the U.S. were up 54%. [11]

Also supporting durum prices has been the drier weather in Europe (part of the reason for Strategie Grain’s wheat harvest decline mentioned at the beginning of today’s post). More specifically, Italy is going to have to import more, but so are North African countries like Morocco and Algeria after hot weather severely cut yield prospects. The International Grains Council, in their July update, estimates that global durum production will total 24.2 MMT, 6% below the five-year average, and 2020/21 ending stocks will come in at 7.7 MMT, down about 10% year-over-year and historically tight. [12]

Going forward, while there’s still a few weeks left before the majority of durum fields start to get cut, current new crop prices are reflecting a decent-size crop in Canada, but a smaller one in the U.S. and elsewhere. Put another way, Canadian durum prices will be closely watched this year by traders around the world, given its importance to supply said world markets with a food staple that a lot more people want in these COVID-19 days. To be clear, I’m not saying that durum prices should explode to the upside here, but the usual seasonal strength that shows up in late October could come a bit earlier this year.

Average durum prices in Western Canada for spot movement through July 28, 2020

Separately, as mentioned in my weekly Wheat Market Insider column for the Alberta Wheat Commission, it’s very rare for us to end a wheat exports season stronger than what we started it! While there’s 2 weeks of wheat exports left to report in the 2019/20 crop year, it’s likely that Canadian wheat exports will top the 18.2 MMT forecast that Agriculture Canada raised just a few weeks ago. That said (and as mentioned in last Friday’s Breakfast Brief), there’s more downside risk (read: seasonality) for wheat prices as we get into August and more combines start to roll. This is also true for durum prices, albeit my gut says that we might be already there as the harvest is right around the corner.

To growth,

Brennan Turner
CEO
FarmLead
TF: 1-855-332-7653
help@combyne.ag
@Combyne or @FarmLead on Twitter

At 8:10 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3344 CAD, $1 CAD = $0.7494 USD)

Sept Corn: -0.8¢ (-0.25%) to $3.193 USD or $4.26 CAD
Sept Soybeans: -3¢ (-0.35%) to $8.848 USD or $11.806 CAD
Sept Soybean Meal (per short ton): -$1.60 (-0.55%) to $290.30 USD or $387.38 CAD
Sept Soybean Oil (cents per lbs): +0.20¢ (+0.7%) to 29.72¢ USD or 39.66¢ CAD
Sept Oats: -0.3¢ (-0.1%) to $2.858 USD or $3.813 CAD
Sept Wheat (Chicago): +5.8¢ (+1.1%) to $5.293 USD or $7.062 CAD
Sept Wheat (Kansas City): +4.8¢ (+1.1%) at $4.415 USD or $5.891 CAD
Sept Wheat (Minneapolis): +3.5¢ (+0.7%) to $5.098 USD or $6.802 CAD
Nov Canola: -1.1¢ (-0.1%) at $11.047/bu / $487.10/MT CAD or $8.279/bu / $365.03/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.

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