Grain markets this morning are mixed as the complex digests everything from new tariffs from China in response to COVID-19 criticism to recovering meat prices.
“Being a good leader requires remembering that you’re there for a reason, and the reason certainly isn’t to have your way. High-integrity leaders not only welcome questioning and criticism – they insist on it.” – Dr. Travis Bradberry (American psychologist)
Meat Prices, China Trade Tactics in Question
Grain markets this morning are mixed as the complex digests everything from recovering meat prices to new tariffs from China in response to COVID-19 criticism.
Monday’s crop progress report showed that U.S. farmers have gotten 80% of their corn fields planted, a healthy clip above the 71% seasonal average, albeit the market was expecting to see 81%.  Similarly, grain markets participants were expecting to see a big soybean acreage number as well and they got it, with 53% of the crop in as of Sunday, versus the average pace of 38%. Spring wheat planting in the U.S. is now pegged at 60% through this past week, which aligns with last year’s pace but is still well behind the five-year average of 80%.
The June WTI oil contract expired yesterday, but we didn’t see negative oil prices like we did a month ago, which could be taken as a sign that the ramp down in production is working and, in that vein, storage concerns are easing. In outside markets, stocks went higher on the news of positive vaccine trial results from a company called Moderna.  However, it was subsequently discovered that Moderna left out some important data when it came to its vaccine announcement and the stock market fell. 
A quick macro thought before we get into the meat and potatoes today: the longer governments are willing to send them COVID-19 stimulus checks, the less likely they are to go back to work. This might be because they are scared of going to work if facing the public, or just because they’re getting paid to sit at home versus trying to find another job. Governments around the world are tapping every ounce of cash they can to try and keep the economy going but once these programs end in a few months, those workers are going to be laid off, therein potentially setting things up for unemployment claims to jump again this summer, starting in July.
Angst Against China Grows
Of course, that would not be the case if the economy is back up and running, but I have my doubts. The outlier case here is if the money-printing stops and everyone just goes about their business wearing masks. A new study coming out of Hong Kong suggests that airborne transmission rate drops by as much as 75% when surgical masks are used.  The kicker: the test was done on hamsters in cages. That said, Hong Kong has faced many pandemics before – namely the 2003 SARS event – and it’s becoming socially acceptable to wear masks (even though the Chinese government has technically banned their use because of the pro-democracy protests in Hong Kong). 
Speaking of ridiculous laws, China has effectively banned beef imports from 4 of Australia’s largest meat processors, citing issues with labeling and health certificates as the reason.  Further, China is immediately implementing an 80.5% tariff on Australian barley exports to the People’s Republic due to “anti-dumping”.  But let’s call it what it is: a political response to the Australian Prime Minister calling for an independent investigation into the handling of COVID-19 in the early days by the Chinese government and the World Health Organization (the W.H.O.). The tariffs on Aussie barley exports to China are set to last 5 years.
This move is significant considering that about half of Australian barley exports head to China every year, but with this tariff, they’ll likely be priced out of the market. This obviously opens the door for other countries like Canada, the U.S., Ukraine, France, and the Black Sea to ship more barley to the People’s Republic (check out my outlook on barley prices from a few weeks ago . That said, China has thrown U.S. and Canadian agriculture under the bus many times when there are political disagreements and the impact is obvious.
Thus, the question I am struggling with though is, should we be excited about this increased export opportunity, or concerned that China’s bullying and defending of lies is going to far? The facts continue to show that the Chinese government opted to suppress and censor vital information about COVID-19 in the early days. 
Therein, this week, President Trump called out the W.H.O. for being a puppet of China and wrote them a letter, calling for “major substantive improvements” within 30 days.  If the improvements aren’t made, President Trump says that the temporary freeze on the W.H.O.’s funding will become permanent. There are now over 100 countries who have called for an independent inquiry into how China has handled the pandemic.  It’s worth noting that over 100 leading experts on all things China have called this China’s Chernobyl, keeping track of dissident citizens who have died, disappeared, or jailed. 
In fact, Alberta premier Jason Kenney says China will soon face a “great reckoning” and that the western world must have a relationship reset with Asian superpower.  Conversely, no tough talk has come from Ottawa & Prime Minister Trudeau, albeit Canada’s ambassador to China, Dominic Barton, did, as he called for a “rigorous review” of the W.H.O and China’s ownership in spreading COVID-19 and upending the global economy. 
Where Do Meat Prices, Industry Go Now?
While I usually cover grain markets in the Breakfast Brief, there’s a lot going in meat prices that’s worth understanding; obviously, the number of animals that need to be fed, impacts the amount of grain needed to be fed to said animals. The USDA said last week that 4.7 Billion pounds of meat production will be lost from April alone, snapping a 7-year run of consecutive increases.  The good news is that processing capacity at packing plants in the U.S. are starting to rebound, but the disruption over the past 2 months has backed up about 2M hogs on American farms. 
However, the impact has been obvious, with retail meat prices skyrocketing, whereas livestock prices have tanked.  This has pushed President Trump and over a dozen states to call on the Department of Justice to investigate the discrepancies between farmgate and retail meat prices. 
Unsurprisingly, meat production is expected to stay depressed as social distancing and revamped safety measures likely put processing capacity anywhere at 60% – 90% of normal.  Put simply, the backlog in packing plants will continue to last for months.  In the meantime, China is trying to buy more meat in order to keep its citizens happy (albeit not from Australia, as mentioned).  More concretely, as American pork processing capacity has fallen by 40% since mid-March, U.S. pork exports to China over the same period have quadrupled.
Accordingly, ag lender CoBank is suggesting that meat prices could average up to 20% above what we saw in summer 2019, as 30% less meat makes its way to the grocery store.  But, in order to keep American supply chains optimized, President Trump has questioned out loud if the U.S. should cancel meat trade deals (note: the U.S. imports a lot of cattle from Mexico and Canada). 
This comes as summer BBQ season is upon us and more questions that answers about what sort of demand there will truly be from the consumer this year. Due to the working conditions flagged in my meat packing plants, there have been more calls to boycott “corporate” meat, which is helping both local butchers/meat lockers, but also plant-based protein companies.  The problem is moreso at the food services & restaurant level though as limitations are different in each locale in terms of openness and serving capacity. One scary datapoint comes from OpenTable estimates that one in four American restaurants will go out of business, thanks to the COVID-19 lockdowns. 
Ultimately, going forward, COVID-19 and African Swine Fever (ya, don’t forget about it as it’s still out there!) are going to drive meat prices, both here in North America and aboard. However, due to higher meat prices today, and less people working full-time (and government stimulus checks set to run out in a few weeks), the USDA is estimating that American per capita annual meat consumption will fall by about 10 lbs this year.  From a grain markets standpoint, low livestock prices usually mean less animals; the market produces less because there’s less demand for the commodity. With less animals to feed, there’s been weaker demand for feedstuffs, thus pushing soybean crush margins lower, as reported by Bloomberg.  Ultimately, I see more trade spats emerging over food as reduced processing capacity, volatility in food values, especially meats, and an increasing number of frustrated (and likely unemployed) citizens start to hit a breaking point.
Bottom line is if trade restrictions, when it comes to meat, do emerge in the U.S. or Canada, then we should probably expect lower meat prices here at home while the world meat prices increases. It’s the same thing if Russia or Ukraine limits its wheat exports, wheat prices elsewhere rise. I’m not in favouring of this type of government intervention in these uncertain COVID-19 times, but after all, it’s an election year in the U.S.!
At 8:00 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3891 CAD, $1 CAD = $0.7199 USD)
July Corn: -1¢ (-0.3%) at $3.203 USD or $4.449 CAD
July Soybeans: +3.8¢ (+0.45%) at $8.463 USD or $11.755 CAD
July Soybean Meal (per short ton): +$1.60 (+0.55%) to $286.20 USD or $397.56 CAD
July Soybean Oil (cents per lbs): +0.03¢ (+0.1%) to 27.11¢ USD or 37.67¢ CAD
July Oats: +1.5¢ (+0.5%) to $3.173 USD or $4.407 CAD
July Wheat (Chicago): +5¢ (+1%) to $5.038 USD or $6.997 CAD
July Wheat (Kansas City): +4.8¢ (+1.1%) at $4.463 USD or $6.199 CAD
July Wheat (Minneapolis): +6.3¢ (+1.25%) to $5.145 USD or $7.147 CAD
July Canola: +1.1¢ (+0.1%) to $10.723/bu / $472.80/MT CAD or $7.719/bu / $340.37/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.