Dec. 20 – Ethanol Rules Overshadow Completed Trade Deals

Grain markets are mostly in the green as disappointment in ethanol rules are offsetting the trade war deal with China and the UMSCA passing.                            

“Nations, like plants and human beings, grow. And if the development is thwarted they are dwarfed and overshadowed.” – Claude McKay (Jamaican poet)

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Ethanol Rules Overshadow Completed Trade Deals

Grain markets are mostly in the green as disappointment in ethanol rules are offsetting the trade war deal with China and the UMSCA passing.

USMCA, China Trade Deals in Santa’s Bag

Yesterday, amidst all the impeachment hoopla, the U.S. House of Representatives passed the new UMSCA trade deal, replacing the NAFTA framework for trade between the United States, Canada, and Mexico. [1] Unsurprisingly, President Trump and House Speaker Nancy Pelosi are arguing over credit of the deal getting passed! [2] Despite the UMSCA and Chinese trade deals in his pocket, U.S. trade chief Robert Lighthizer says there’s still work to be done, notably new trade deals with Europe. [3]

As discussed on Monday, with the China-U.S. trade war deal in place, China seems to be hitting the ground running on buying more U.S. agricultural goods, namely being the top customer of American soybean exports. [4] China bought nearly 700,000 MT of U.S. soybean exports last week, the biggest purchase in three weeks by the People’s Republic. Looking more macro, China has now bought 13.88 MMT of American soybean exports, officially surpassing the 13.3 MMT of American soybeans bought by China in all of the 2018/19 crop year. Aggregately, across all destinations, U.S. soybean exports are sitting at 18.84 MMT, up 22% year-over-year (through week 15).

U.S. soybean exports are tracking 22% higher YoY through Week 15 of the 2019/20 crop year

Looking outside the U.S., a recently-published study by a Brazilian business school suggests that Brazil could lose $10 Billion in farm exports to China annually if the trade war deal between China and the U.S. actually gets implemented. [5] Also, Canadian Prime Minister Justin Trudeau, in his mandate letter to his Minister of Agriculture, Marie-Claude Bibeau, that Canadian farmers impacted by international protectionist policies should be supported faster. [6] Despite issues in pork, beef, and canola exports, Canadian dairy is the only sector to have received compensation ($1.75 billion over the next 8 years as a result of the USMCA deal) that doesn’t have to be repaid. [7]

Ethanol Rules Staying Put Says White House                           

While the trade deals getting done before Christmas is generally viewed as a positive, the White House recently announced that their sticking with their plan for 2020 biofuel blending requirements. [8] Despite a proposal of using a three-year average of EPA waivers, the White House is saying that they’ll instead use a three-year average of energy department estimates of potential waivers. [9] The bottom line is that this is a win for Big Oil. While refiners are required to blend 15 billion gallons of corn-based ethanol, the amount waivers for “small” refiners will likely continue to be quite high. [10]

Comparably, there’s been some headlines out there that Chinese state-buying grain agency COFCO is going to invest more into the Brazilian ethanol industry. [11] While it’s unclear if COFCO will be focusing on corn-based or sugar-based ethanol, we know that Brazil currently has 349 ethanol plants that use sugarcane. Comparably, Brazil has 8 ethanol plants converting grain into biofuels and another six ethanol plants under construction. Further, there’s at least seven more ethanol plants in design phase.

Canadian Canola vs Black Sea Rapeseed

Some FarmLead Breakfast Brief readers have been pressing me as to why canola prices haven’t rallied more, despite the 1-2 million acres that still haven’t been harvested in Western Canada. Worth noting though is that canola prices have actually had more positive daily gains in trading, over daily losses. Regardless, one of the main reasons for the weaker activity in canola prices is the carryover from last year. Also, as mentioned a few weeks ago, demand for Canadian canola is diverging, with robust domestic needs versus the aforementioned weakness in exports.

While we know China has certainly backed away, Canadian canola exports are tracking 7% behind this time a year ago with 3.43 MMT shipped out through Week 19. That said, through the previous week, visible canola stocks were sitting at three-year highs, despite crush running nearly one-third higher than a year ago! [12] That said, I’m expecting to see Agriculture Canada lower its ending stocks estimate to below 4 MMT in their next monthly update (likely to come out later today).

Canadian canola exports are tracking 7% lower YoY through Week 19 of the 2019/20 crop year

From a competitive standpoint, I continue to keep my eye on Eastern Europe as we’ve seen more rapeseed production coming out of the Black Sea. A growing rapeseed market in Ukraine, Kazakhstan, and even Romania is mostly a function of stronger demand from EU rapeseed importers, but what about Russia? While the country only planted 4.45M acres of rapeseed in 2019, the head of oilseeds for the German Seed Alliance, Sergey Tuchin, thinks that Russian rapeseed acres might top 12M acres before 2024. [13]

With rapeseed production in Russia literally 10 times bigger than the 200,000 MT produced a decade ago, there’s clearly more farmers looking to diversify both crop rotations and market access. The obvious notable is China, which is now connected to Russia by a bridge that is nearly competition and open for traffic by the spring of 2020. [14] All this in mind, Russian rapeseed production still has some headwinds: yields remain low (averaging about 27 bushels per acre), as many producers save seed for many years.

Conversely though, there’s an estimated 100M acres of fertile farmland in a area the size of the Canadian Prairies sitting in Siberia that hasn’t been touched for decades! While that might sound scary in theory, the reality is that it’ll take many years for this land to be developed/worked on to make as productive as what we have here in North America!

On that note, the FarmLead Breakfast Brief will take a hiatus over the next 2 weeks as I spend the Christmas and New Year holidays with family and friends. Look for my outlook on 2020 grain markets though in about 10 days!

Merry Christmas and Happy Holidays!

To growth,

Brennan Turner
TF: 1-855-332-7653
@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 = $1.3149 CAD, $1 CAD = $0.7543 USD)

Mar Corn: +0.8¢ (+0.2%) to $3.873 USD or $5.097 CAD
Mar Soybeans: +0.5¢ (+0.05%) to $9.368 USD or $12.329 CAD
Mar Soybean Meal (per short ton): unchanged at $302.70 USD or $398.39 CAD
Mar Soybean Oil (cents per lbs): +0.08¢ (+0.25%) to 34.15¢ USD or 44.95¢ CAD  
Mar Oats: +0.5¢ (+0.15%) to $2.978 USD or $3.919 CAD
Mar Wheat (Chicago): +2.8¢ (+0.5%) to $5.48 USD or $7.212 CAD
Mar Wheat (Kansas City): +3.3¢ (+0.7%) at $4.638 USD or $6.104 CAD 
Mar Wheat (Minneapolis): -0.3¢ (-0.05%) to $5.41 USD or $7.12 CAD
Mar Canola: -0.2¢ (-0.02%) to $10.818/bu / $477/MT CAD or $8.22/bu / $362.43/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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