Mar 9 – Pea Prices, Oil Prices, and Volatility Indicators

While we’re looking into pulses and pea prices today, grain markets are all down hard lower alongside outside markets as the coronavirus continues to dominate headlines.

“Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.” – Philip Roth (American author)

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Pea Prices, Oil Prices, and Volatility Indicators

While we’re looking into pulses and pea prices today, grain markets are all down hard alongside outside markets as the coronavirus continues to dominate headlines. Put another way, we’re starting this week exactly how we did last Monday, with coronavirus fears dominating markets.

Grain markets mostly ended last week lower except for canola and corn prices, with the former gaining because of a weaker Canadian Dollar. The latter found some gains on headlines that the USDA’s attaché in China believes the People’s Republic will import 6MMT of corn in the 2019/20 crop year as feedstuffs demand starts to rebound. [1] For example, piglet prices in China have hit new record highs as pork suppliers are paying up as they “are all eager to rebuild herds on expectations of fat profits from strong domestic pork prices.” [2]

Futures front-month grain prices weekly performance through Mar 6, 2020

Last night, to open the trading week, oil prices dropped by 31% – yes, you read this right – as panicked selling gripped the markets over overproduction concerns amidst dwindling demand (thanks coronavirus!). [3] I’ll dig more  into oil prices in a bit but just for reference of how significant this move was, it was the worst drop for oil prices since the Gulf War in 1991.

Coming back to the coronavirus quickly, as Forbes so eloquently wrote, the coronavirus “is officially now a Panic-Demic, not a pandemic”. [4] The impact on food prices isn’t yet all that pronounced but expectations are that you could see some Easter grocery store specials. [5] Keep in mind that the move lower in grain prices today is one of reaction to said economic fears. That said, efforts are being made around the world to contain the spread of the virus, but like the common flu and/or cold, you have to be diligent. Since people are acting irrationally (read: buying hoards of toilet paper and medical masks), governments are stepping in and declaring new travel and work restrictions.

The most notable is in northern Italy, where the country has locked down 17 million people (or a quarter of its population), as the government has effectively banned any movement. [6] It’s worth noting that these areas of Italy account for about 40% of the country’s economic output. The bottom line is that without a sight line to when the coronavirus panic may subside, volatility in ALL markets will continue at least through this week and probably next.

Pea Prices Watching India Again

One of the markets that has quieted down lately has been pea prices. In Western Canada, we’ve seen yellow pea prices trade sideways to slightly higher, but, like broader markets, the price action has been volatile. Comparably, green pea prices have fallen back from their highs seen about 6 weeks ago and are likely to stay around these levels for the next little while.

Yellow pea prices in western Canadian cash markets are trending slightly higher through Mar 6, 2020

Saskatchewan green pea prices chart through February 2020

The main reason that pea prices have quieted down a bit is because the outlook of the pulses rabi winter crop harvest in India is looking a little more promising. [7] The other reality is that pea exports have started to slow down a bit: when I wrote my outlook for pea markets in early January, Canadian pea exports were tracking about 45% higher than the same week in the 2018/19 crop year. Instead, through Week 30, Canadian pea exports have now totaled 1.57 MMT, up about 32% compared to a year ago.

Canadian weekly pea exports through Week 30 of the 2019/20 crop year are tracking 32% higher

Last week, I spoke in North Battleford, SK at the annual WARC Crop Opportunity Meeting and was asked a great question: will yellow peas or small red lentils pay better in 2020? Obviously, the asterisk going into my answer is intuitively that Mother Nature will have the final say but, from where I’m sitting today, yellow pea prices are going to provide a better return and let me explain why. I think more acres in Plant 2020 are going to chase green pea prices. Second, pea prices have found some demand from the plant-based protein craze (it’s not huge, but it counts) and more peas are going into that area than lentils are.

The other factor to watch in pulses and pea prices is if anything comes from a new trade deal between the U.S. and India. [8] Right now, U.S. pulses are charged a higher import tariff by India than Canadian exports but trade talks could yield an opportunity to also bolster other exporters’ agreements. That said, the most recent estimate of total pulses production by India was pegged at 23 MMT, which would be about 14% above the five-year average. [9] However, total consumption of pulses in India is estimated at 26 MMT, meaning India will have to import about 3 MMT.

Ultimately, while it might help pea prices today that India has to import this many pulses, my expectation is that we’ll see more government intervention by India in the next 6 – 9 months. And if history is an indicator – specifically October 2017 when I was looking at the lack of bullish factors from India for pea prices – then India is likely to provide some sort of price stabilizing measures. With this short-term policy-making to support farmers in India, you can expect some sort of negative reaction to pea prices and other pulses. While I’m not saying lentil or pea prices are going to tank like oil prices have, I do expect some pull-back whenever the government in India decides in insert itself as a market maker.

Oil Prices Highlight Coronavirus Panic

Oil prices tanked on Friday as Russia and OPEC failed to agree on how much to reduce their combined production by. [10] The goal was to steady oil prices by getting Moscow to reduce its country’s production by 1.5M barrels/day but Russia didn’t succumb to the strong-arming that Saudi Arabian officials were trying to employ. For some analysts of oil prices, they believe that this could be start of the end for the alliance between Saudi Arabia and Russia that’s lasted 3 years. The hope to reduce production comes as the fear around the coronavirus spreads and expectations are that 1Q2020 oil demand will be 3.8M barrels/day less than a 1Q2019. [11] This would be new record year-over-year decline.

Someone probably knew this new data ahead of Sunday’s market open, but the International Energy Agency officially lowered its demand forecast today, and when it comes from the IEA, you know it’s legit. [12] At the time of writing, oil prices have now lost nearly 50% from where they started the 2020 calendar year ago. This is a stunning bearish reversal and immediately makes one ponder where the bottom is going to be found. My guess is that we’re probably close to it as the last few times we’ve been at these levels (2009 and 2016), the market rebounded throughout the remainder of the calendar year.

Oil prices had the largest 1-day drop in nearly 30 years on March 9, 2020

The obvious difference between those decline and subsequent rebounds in oil prices and today is that we don’t know the true lasting economic impact of coronavirus. Will more of the world be quarantined? My guess is yes, especially in emerging/developing countries in Asia and Africa where healthcare systems are weak and the spread of the coronavirus is more likely. The problem is, if you’re a net-exporter, these are the trading partners you were previously hoping to see more demand from, not less.

A great week starts with a great Monday. It’s yours to make happen!

To growth,

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

At 8:15 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3369 CAD, $1 CAD = $0.748 USD)

May Corn: -6.5¢ (-1.75%) at $3.695 USD or $5.033 CAD
May Soybeans: -17.5¢ (-1.95%) to $8.738 USD or $11.902 CAD
May Soybean Meal (per short ton): -$3.90 (-1.3%) to $301.20 USD or $410.30 CAD
May Soybean Oil (cents per lbs): -1.20¢ (-4.15%) to 27.55¢ USD or 37.53¢ CAD
May Oats: -7.8¢ (-2.9%) to $2.605 USD or $3.549 CAD
May Wheat (Chicago): -8.3¢ (-1.6%) to $5.075 USD or $6.913 CAD
May Wheat (Kansas City): -10.8¢ (-2.4%) at $4.356 USD or $5.993 CAD
May Wheat (Minneapolis): -8.8¢ (-1.65%) to $5.165 USD or $7.036 CAD
May Canola: -14.5¢ (-1.4%) to $10.281/bu / $453.30/MT CAD or $7.547/bu / $332.77/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither th 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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