October 26 – The Rocket Science of Grain Prices

More volatility in grain prices? It’s not exactly rocket science we’re dealing with.

“When you launch in a rocket, you’re not really flying that rocket. You’re just sort of hanging on.”
– Michael P. Anderson (US astronaut)

Good Morning!

At 7:12 AM CDT in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.2789 CAD, $1 CAD = $0.7816 USD)

Dec Corn: -0.3¢ (-0.05%) to $3.508 USD or $4.486 CAD
Jan Soybeans: +1¢ (+0.1%) to $9.873 USD or $12.626 CAD
Dec Soybean Meal (per short ton): -$0.40 (-0.15%) to $315 USD or $402.87 CAD
Dec Soybean Oil (cents per lbs): +0.10¢ (+0.3%) to 34.53¢ USD or 44.16¢ CAD  
Dec Oats: +0.5¢ (+0.2%) to $2.768 USD or $3.539 CAD
Dec Wheat (Chicago): +0.3¢ (+0.05%) to $4.358 USD or $5.573 CAD
Dec Wheat (Kansas City): -0.3¢ (-0.05%) to $4.333 USD or $5.541 CAD
Dec Wheat (Minneapolis): -0.3¢ (-0.05%) to $6.213 USD or $7.945 CAD
Jan Canola: +5.4¢/bu / +$2.40/MT (+0.45%) to $9.159/bu / $403.85/MT USD or $11.714/bu / $516.50/MT CAD

As of today, October 26th, 2017, Winnipeg ICE futures for Milling Wheat, Durum Wheat, and Barley have been de-listed due to lack of trading volume / open interest.

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The Rocket Science of Grain Prices

Grain prices are mixed this morning.

Canola prices are finding some legs thanks to a weaker Canadian Dollar (more on that later). Also in the green, soy oil is following canola higher.

As Garrett mentioned in Grain Markets Today, soybean prices struggled yesterday. Soybean prices dipped due to benign Brazilian weather forecasts and the accelerating progress of the U.S. harvest.

That progress could see new delays with rain forecasted across the Midwest. [1]

In my opinion, this weather could impact corn prices quickly. There is still a lot of corn out in the fields, and we could see smaller final yields. Heartland crop consultant Dave Mowers says that leaving the corn in the field to dry down may lead to a 10% to 20% decline in the crop. [2]

Yields shrink the longer corn sits in the field.

Smaller yields translate to a higher price.

It’s not exactly rocket science.

New Forecasts for Grain Prices

Rabobank recently updated its forecast for agricultural commodities.

The firm believes that corn is the best bet right now for higher prices. They think that corn could hit $4.00 USD/bushel on the Chicago Board of Trade in 3Q2018. July and September 2018 contracts are currently sitting near $3.80 and $3.90 respectively.

Are harvest delays and smaller yield expectations why they’ve issued this bullish outlook? [3]

It turns out, it isn’t. Rabobank’s primary argument is that growing conditions in Brazil are becoming less-than-ideal. Currently, the market isn’t offering anyone $4.00 until the March 2019 contract.

However, Rabobank expects wheat prices to face an “uphill struggle into early 2018.” Their forecast for Chicago wheat prices is in line with current May 2018 contract prices.

For soybeans, Rabobank forecasts 2Q2018 futures prices to stay below $10.00 USD/bushel. These expectations are lower than futures board soybean prices, which are sitting above $10.00.

The firm’s bearish logic centers on the expectation for strong export competition from South America and larger U.S. production. These two factors will likely weigh down prices for more than a few months.

When we add in the possibility of even higher acreage in 2018 than the 88.7 million planted in 2017, the bearish factors begin to mount. [4]

We think that the time is get closer to pulling the trigger on another block of oilseeds, be it canola or soybeans. Are yours posted on the FarmLead Marketplace?

Does Brazil Like North American Wheat?

Wheat acres and production are lower in Brazil.

This year, only 4.74 million acres were planted, a 9.5% decline from 2016. The downturn is mostly due to lower prices.

Compounding the smaller acreage is smaller yields, down almost 20% from last year to 38 bushels per acre. This number translates into a crop of just 4.88 million tonnes, a figure that is a 5-year low.

Considering that Brazil has domestic demand for about 11 million to 11.5 million tonnes of wheat, they’ll have to import more.

Right now, Brazil currently taxes any wheat at 10% that is imported outside of the Mercosur trade bloc (made up of Argentina, Brazil, Paraguay, and Uruguay). However, the Brazilian government is thinking about killing the tax to bring in 750,000 metric tonnes from any location. [5]

Normally, Brazil partners up with Argentina. However, Argentina’s wheat quality may be sub-par given all the rains they’ve had.

With Argentina potentially not being the best dance partner this year, a lot of eyes are peering north to the abundant supplies in North America. It’s worth noting though that the Black Sea is still a strong contender to supply Brazil’s needs.

Canadian Loonie Dips Lower

Yesterday, the Bank of Canada left interest rates unchanged in the Great White North.

The central bank said that the strong Canadian Dollar has weighed on inflation and exports. After the announcement, the bank’s leaders said they would be “cautious” with future rate increases.

The market took this as a bearish signal, and the Canadian Loonie could fall below $0.78 cents USD (or $1 USD = $1.283 CAD) for the first time since mid-July 2017.

As a reminder, the Loonie hit a 15-month-low in early May 2017, dipping below 73 cents USD before going on the rally we’ve seen the last five months.

The next big factor for the Canadian Dollar will be whether the U.S. Federal Reserve increases its interest rate. The “Fed” meets again next week, but the market doesn’t expect the next rate hike until December. The Fed has signaled that a rate hike will come during their final meeting of the year. The Fed also is pushing for at least two other hikes in 2018.

If the Fed does increase rates, we may see the CAD-USD trade sink back to pre-summer rally levels (and where we saw things trade from early 2016 through to May 2017) at that $0.75 – $0.78.

Updated Biodiesel Policy

The U.S. Commerce Department official enacted new import duties on soy oil from Argentina and Indonesia. [6]

For Argentina, the U.S. will charge as much as 70.05% on biodiesel originating from the country.

For Indonesia biodiesel, the tariff rate was set at 50.71%

This import tax debate is subsequently spilling over into the argument over America’s renewable fuel standard (RFS).

The Advanced Biofuels Association says that the import taxes are not good for America because:

“applying these duties would ultimately lower the available domestic supply of biodiesel…moving forward, raising the costs of the RINs for obligated parties to comply with the RFS and increasing consumers’ prices at the pump.”

The Environmental Protection Agency was considering steps to dilute the ethanol/biodiesel mandate by allowing product exports to count towards domestic quotas. This would likely make things a bit more profitable for refiners, but ethanol-processors would be disadvantaged because RIN values would deflate.

The effect on the farmer was that these changes to the RFS – which acts as a bit of a foundation for soybean and corn prices – could negatively impact the rural economy.

Ultimately though, Big Corn has won over Big Oil, mainly thanks to the efforts of many Midwestern politicians. [7]

The EPA has backed down from cutting biodiesel quotes and promised that it would drop the idea of ethanol exports.

This translates to the status quo being preserved.

From a demand perspective, there’s still a lot of corn and soybeans that will go into meeting the RFS mandate.

Again, it’s not rocket science.

To growth,

Brennan Turner
President/CEO | FarmLead
1-855-332-7653 (Toll-Free)
www.FarmLead.com
@FarmLead (on Twitter)

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.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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