Grain markets this morning are in the green, although weaker oilseeds demand has soybeans on the cusp of having their worst weekly performance in a month.
“Sometimes the probabilities are very close to certainties, but they’re never really certainties. – Murray Gell-Man (American physicist)
Oilseeds Demand Certainties and Uncertainties
Grain markets this morning are in the green, although weaker oilseeds demand has soybeans on the cusp of having their worst weekly performance in a month. Despite the swirling questions of oilseeds demand, Chinese state grain-buying company COFCO says that the country will start to “speed up purchases” although they’ve already bought a lot, with 9 MMT expected to arrive in May, June, and July.  Benign weather is also weighing on the complex as some good rains are falling on the Midwet, which has had one of its fastest starts to the planting campaign ever.  Of course, this would lead to delays in finishing Plant 2020, but traders don’t seem too concerned about that.
Ethanol production is starting to pick up a bit with volumes processed last week, increasing slightly to 617,000 barrels per day. This is still 41% behind the same week a year ago, but it is better than the peak weakness in ethanol production, which was running 48% behind a year ago. That said, ethanol plants are starting to start back up as states ease their stay-at-home orders and more people start driving. Ethanol player Green Plains is extremely bullish, saying they expect a boom in ethanol demand since less people will want to take public transportation in fear of catching COVID-19. 
I have my doubts about this though as people’s behaviours have changed and they’re figuring out how to do things at home (i.e. baking, sewing, haircuts, and even office work, etc.) that they would normally be going out for.  Further, mass transit use is way down in China, despite their re-opening up. Also, there’s more bears than there are bulls in the short-term when it comes to ethanol/gasoline demand. More specifically, the EIA said this week that reduced gasoline demand will likely persist through the end of 2021.  If you’re looking at demand for other distillates like jet fuel, the return to pre-COVID-19 demand levels could take a decade, not years. 
An Inflection Point for Oilseeds Demand
Speaking of biofuels, later today at 11AM CST, we’ll get the NOPA soybean crush report for the month of April and expectations are for strong demand to continue. The average pre-report guesstimate is that we’ll see 170.483M bushels of soybeans that were used in April (or 4.64 MMT if converting bushels into metric tonnes). This would be a record for the month of April but still behind March 2020’s soybean crush of 181.374M bushels, which was a new record for any month.
A month ago, I talked about the significance of soybean crush from a demand perspective, and how it’s basically holding up for the soybean market, as well as how canola crush is doing similar things for canola prices. And while we often think about domestic soybean and canola crush, international crush demand is also important, namely in China. On that note, China’s crush volumes are expected to climb in the 2020/21 crop year as they slowly rebuilding feed demand after 2 years of declining pork production due to African Swine Fever. 
While global oilseeds demand was pegged by USDA in the May WASDE report to grow by 2% year-over-year in 2020/21, global oilseeds production is set to grow by 5%. This is mainly due to the U.S. soybean harvest looking big yet again, and Brazilian farmers expanding their acreage for the umpteenth time to produce yet another record soybean harvest. China’s imports of soybeans in 2020/21 were pegged by the USDA at 96 MMT. While there has been some strong oilseeds demand from China these last few weeks, but it is still falling short of the Phase One trade deal terms.  Through Week 36 of its 2019/20 crop year, U.S. soybean exports are tracking 4% higher than last year with 34.66 MMT sailed.
One of the outlier factors to consider in oilseeds demand is changes in meat demand in Asia. Due to the African Swine Fever, pork prices jumped significantly, especially in China. Thanks to this spike in prices, more consumers there are opting for poultry over pork. This is notable as it requires about half the amount of feedstuffs to grow a kilogram of poultry compared to pork.  In these emerging markets, consumers can be very price-sensitive and so (although, ask yourself, wouldn’t you eat less bacon if prices tripled?). Overall, crush volumes will continue to play a very important role on the soybean balance sheet, especially with a healthy amount of supply carrying over from 2019/20 and more-than-adequate production in 2020/21.
One bullish dynamic is that the world’s largest exporter of soymeal continues to be plagued by logistical issues as the water levels in Argentina’s Parana river are likely to remain low until next year, limiting the filling of boats to full capacity. However, it’s expected that a hydro dam co-owned by Brazil and Paraguay are going to release water through its spillway that will eventually make its way to the Parana River to help alleviate the historic low levels.  Quite literally, 80% o Argentina’s agricultural exports run through this river so it’s kind of important!
On the canola side of things, the USDA is expecting Australian production to rebound, and with it, exports should improve by 17% to 2.1 MMT. Conversely, Canadian canola exports in 2020/21 are estimated by the USDA at 8.9 MMT, a drop of 300,000 MT from the 2019/20 estimate thanks to stiffer competition in the European market from Australia and the Ukraine. Conversely, China’s rapeseed/canola imports in 2020/21 are estimated at just 2.5 MMT, about half the levels reached back in the 2017/18 crop year.
Digging in, Jon Driedger from LeftField Commodity Research has done a fantastic job of analyzing the EU biodiesel market, oilseeds demand, and how Canadian canola exports may fare going forward.  Since EU rapeseed production continues to fall because of seed treatment bans and as a result, profitability in growing the grow has decreased substantially, this means the Bloc will need to rely on more imports. Ukraine is option number 1, but any reduction in EU or Ukrainian production means opportunity for Canadian canola exports.
Closing Macro COVID-19 Thoughts
While there is lots of buzz out there about the economy and store-front retail businesses opening back up, it’s unlikely to return to the pre-COVID-19 normal. I could point to China – COVID-19 ground zero – where economic activity is very weak despite the business being open for weeks.  Further, China’s factory deflation is deepening as the producer price index continued to fall in April, whereas the consumer price index rose.  A more relatable example of how this works in open, democratic societies might be in the American south where, according to OpenTable, restaurant visits are still down about 85% compared to a year ago! 
From a commodities demand standpoint, it’s a similar story for those that took a nosedive back in March as analytics firm, Streetlight Data, says that traffic volume across the U.S. is still down about 50% compared to January.  That said, after we get past the current cold spell, temperatures are set to rise notably and people are going to go out. However, it’s unlikely they’ll be going to their favourite watering hold or restaurant patio to knock a few back. Intuitively, this will continue to weigh on beer and spirits demand, something I mentioned in my outlook for barley prices in Monday’s Breakfast Brief. Further, it will weigh on oilseeds demand as less restaurant demand means less cooking oil demand.
The longer this goes on, the less likely the people who were laid off will have jobs to go back to. More companies – everyone from clothing brands and oil companies to local restaurants and bars – are filing for bankruptcy and the list is only going to grow.  Accordingly, all of these people who are laid off become more dependent on government support, but how long can that go on for?
Many more are in this camp, including Goldman Sachs, who thinks that U.S. unemployment will peak at 25%, but do see it coming back down to 10% by the end of 2020. Making things worse is that the job losses to date have largely been in the service industries, typically by workers making smaller incomes. The result is higher potential for residential arrears and/or housing foreclosures, of which the Bank of Canada says could double what it was back in 2009!  Put simply, the longer the shock to income, the greater likelihood of higher consumer insolvencies.
Let’s not be naïve: with more bankruptcies on their way because of the reduced spend on things like restaurants and clothing, there will be more layoffs that will “climb the income ladder” and affect more white-collar workers. The problem is, government stimulus checks will not be able to replace this higher income, forcing families to cut back their discretionary spending even further. As you can expect, this creates more negative trickle-down effects on the businesses that were barely able to get through the past 2 months.
Further, there will be obvious impacts on a housing market that has been riding fairly high the last few years, especially by debt-heavy Canadians.  Ironically, I have many friends who live in big cities (i.e. NYC, Toronto, Vancouver, etc.) who say their nice condos have basically become frustrating towers of torture, as amenities can’t be used and the proximity to their work/office is now irrelevant. As a result, we’re becoming more isolated and thus, focused on our own bubble, reducing any globalist views. The problem there is, if countries take this approach, in a globalized world, this will slow down any chance of economic recovery.
Bottom line: unfortunately, I (and many other economists who are a lot smarter than me) think the worst is yet to come.  My best guesstimates are tied to a combination of economic theory and currently available data. Inherently then, because of the incomplete data set, I, and the many others, could be completely wrong. While I’m not a fan of elongated and extensive Keynesian policies, more money-printing and fiscal stimulus checks from the governments has a chance to stave off deflation, by keeping demand for goods and services propped up, despite a drop in wages and/or the prices for said goods.  On the other hand, stagflation, which is when there’s weak economic growth but prices rise and (what we saw in the 1970s) might turn out to be a good thing. 
As this is a day-by-day situation, there is a lot of caution amongst politicians as to what the best next steps might be, which is the appropriate reaction. However, since there’s no playbook for this situation and the longer this thing drags on, the more politicized it becomes. This is intuitively exacerbated when only a few media entities are being granted the bulk of questions for the governments to answer, as is the case in Canada.  Frankly though, while politicians can and will lie, the data and numbers never do. And remember, rebooting an economy is a hell of a lot harder than shut it down. 
Have a great weekend!
At 7:50 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.4074 CAD, $1 CAD = $0.7106 USD)
July Corn: +1¢ (+0.3%) at $3.185 USD or $4.482 CAD
July Soybeans: +1.8¢ (+0.2%) at $8.388 USD or $11.804 CAD
July Soybean Meal (per short ton): +$0.30 (+0.1%) to $288.50 USD or $406.02 CAD
July Soybean Oil (cents per lbs): +0.14¢ (+0.55%) to 26.32¢ USD or 37.04¢ CAD
July Oats: -1.3¢ (-0.4%) to $3.038 USD or $4.275 CAD
July Wheat (Chicago): +4.8¢ (+0.95%) to $5.07 USD or $7.135 CAD
July Wheat (Kansas City): +4.3¢ (+0.95%) at $4.56 USD or $6.418 CAD
July Wheat (Minneapolis): +2.8¢ (+0.55%) to $5.108 USD or $7.188 CAD
July Canola: +0.2¢ (+0.02%) to $10.678/bu / $470.80/MT CAD or $7.587/bu / $334.53/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.