Dec 4 – Harvest 2019 And Other Ugly Realities Shining Through

Grain markets are mostly in the green today as fresh Harvest 2019 data from Australia was made available and increased trade risk adds to technical selling.

“Time will bring to light whatever is hidden; it will cover up and conceal what is now shining in splendor.” – Horace (Roman poet)

Harvest 2019 And Other Ugly Realities Shining Through

Grain markets are mostly in the green today as fresh Harvest 2019 data from Australia was made available and increased trade risk adds to technical selling.

U.S. President Donald Trump said yesterday that he might wait until after the 2020 Presidential election to try and close a trade agreement with China. [1] The negative implications for global trade were echoed in broader markets yesterday with major sell-offs in the Dow, S&P 500, and the TSX in Canada. [2] Complicating things are the video that surfaced of other world leaders, including Canadian Prime Minister, Justin Trudeau, and French President, Emmanuel Macron, mocking President Trump at a post-NATO conference mixer. [3]

Subsequently, President Trump has publicly called Prime Minister Trudeau, cancelled his press conference, and left the NATO summit. [4] The implications of this sort of behavior from his global political counterparts is likely further economic challenges. More specifically, in retaliation for this public humiliation, Trump might relook at trade with Canada and is now more likely to go ahead with his threat to put a tariff of 100% on $2.4 Billion of French goods including cheese, champagne, and luxury goods. [5]

Harvest 2019 Wilts in Australia

In their December production estimate, ABARES (the Aussie USDA) said that below-average precipitation and above-average temperatures has significantly reduced Harvest 2019 crop production potential in the Land Down Undaa. [6] The most pronounced decline is found in Western Australia, which is expected to see just 11.55 MMT of all types of grain come off for Harvest 2019, or a 35% drop year-over-year! Conversely, thanks to some timely rains in the southeastern state of Victoria, the Harvest 2019 of all crops is expected to practically double from last year to nearly 7.2 MMT.

The drought in Australia continues to weaken Harvest 2019 prospects

Digging into specific crops, 2019 Aussie wheat harvest is expected to fall by 8% year-over-year to 15.85 MMT. This updated estimate falls in line with some of the forecasts from private entities but it is nearly 2.5 MMT below the 17.2 MMT that the USDA estimated in their November WASDE report. Further, this is a drop of 17% from ABARES’ December forecast and more than one-third below both the five- and ten-year averages! Take a look at some of the other comparisons of Harvest 2019 crop production in Australia against this year’s previous estimates, last year, and the five-year average.

Australia's wheat harvest 2019 continues to fall

Harvest 2019 in Australia was another drought-riddled crop

Very simply, the effects of three years of drought on the east coast and the past year of dry conditions in Western Australia are rearing its ugly head in terms of Harvest 2019 is able to produce. That said, it the globalized trade game, one country’s production issues from Harvest 2019 is another’s gain. Case in point, while there is likely some higher protein available in Australia (due to drought conditions), they certainly won’t have the quantity to export a lot of it. This means that more of it will be used within domestic milling needs, leaving the door open for Canadian or American wheat exports to take advantage.

One specific market is China, where they are changing the way they administer their wheat tariff rate quota. [7] This should open up the wheat market in China a bit more for Canada and the U.S., but Canada has already seen some solid shipments with 1.75 MMT sailed to the People’s Republic in the 2018 calendar year and 1.16 MMT in 2019 through the end of September.

Will December Grain Markets Be Better?

As we’ve flipped the calendar into December, the usual “Santa Claus rally” headlines start to appear. While this is a seasonal dynamic, I’m getting a bit less optimistic about corn and soybeans will be able to do this month. First off, you’ve got a challenging geopolitical environment (as mentioned above) that is increasing the risk of further global economic downturn. Second, despite a slow start, Brazil’s soybean crop is looking relatively decent and corn production is expected to be a record. [8] Third, there’s a lot of carried over crop from 2018 that will compete for Harvest 2019 sales.

Combined with what’s left out in the field for Harvest 2019, it doesn’t seem like major grain buyers are willing to blink on steadily increasing their bids. Unfortunately, it’s a poorly held secret that bills will need to be paid and in a game of chicken for grain markets, this is looking more and more like a buyer’s market for most crops.

This explicitly includes corn, soybeans, yellow peas, canola, and milling wheat, albeit the sketchiness around rejected falling numbers is another column on its own! Specific to beans and corn, I’ve started to see basis pull back in a few areas as buyers are saying that they cannot dry enough grain and aren’t as aggressive in buying for nearby movement. Conversely, we’re seeing some stronger international strength (and hence better prices) for green peas, lentils, oats, and flax.

Bottom line here is that we’re in a reminder phase that grain markets are cyclical. I might be biased, but my three rules to working through these cycles: (1) Know your cost of production; (2) Know you cashflow needs (and when!); and (3); know the quality of the grain that you have. These are data-driven principles that many would be well-served to think about as you reflect on this tough last year and start to prepare for 2020.

To growth,

Brennan Turner
TF: 1-855-332-7653
@FarmLead on Twitter

Due to some travel this morning, futures grain markets data is not included in today’s FarmLead Breakfast Brief, but you can review them here.

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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