Grain markets are in the red today, extending this week’s losses, despite rumours of more U.S. corn and soybean exports purchases by China.
“It is certain, in any case, that ignorance, allied with power, is the most ferocious enemy justice can have.” – James Baldwin (American author)
Corn, Soybean Exports and a (Small) Bullish Case
Grain markets are in the red today, extending this week’s losses, despite rumours of more U.S. corn and soybean exports purchases by China. And, I mean, why wouldn’t they? Yesterday on the Chicago futures board, corn prices and soybean prices touched key support levels and new contract lows of $3.01 and $8.10 USD/bushel respectively!
Yesterday’s corn and soybean exports sales report came in at the low end of expectations, but there was 272,000 MT of soybean exports booked by China that was announced. In terms of actual shipments, U.S. soybean exports have noticeably slowed, tracking less than 5% above last year with just under 33.2 MMT sailed through Week 33 of the 2019/20 crop year (or about 1.22 Billion bushels if converting metric tonnes into bushels).
Worth noting on the corn and soybean exports front is the fact that Argentina’s Parana River has seen a historic drop in its water levels. This means that that company’s trying to ship recently harvest crops aren’t able to do so effectively since they can’t load boats to capacity.
Politics in the Age of COVID-19
This comes, however, as there are many politicians in both the U.S. and China who are “seriously re-thinking” their political and economic relationship.  While they and twenty-one (21) other nations around the world recently agreed to keep borders open for food and agricultural trade, it feels more like just talk than anything.  In this vein, while the world is dealing with the economic (and human) toll of the COVID-19 virus that was not properly contained in China, the People’s Republic decided earlier this week that it was above Hong Kong law and arrested at least 15 of the leaders of Hong Kong’s democratic movement. 
Put simply, China continues to lay down the law when it comes to political assimilation – either you’re in with their communist gig, or you’re in the way. While many world leaders have publicly condemned China for their blatant dismissal of democracy in Hong Kong, an independent country, Canadian Prime Minister Justin Trudeau did not, saying that he’s closely monitoring the situation. Keep in mind that back in 2013, Trudeau said he admired the economic benefits of China’s dictatorship.  I’ll admit though, China is not the only country who’s politicians who are using the COVID-19 crisis to shore up their political power.  After all, the rule of thumb in politics is to never waste a good crisis!
That said, even developing countries are wising up to China’s ways though, with the President of Tanzania cancelling a $10B loan from Beijing, saying the terms and conditions of the deal were such that they could only be accepted by a drunk or crazy person.  Keep in mind that this is a country that’s going to need cash to combat COVID-19 and like many other emerging economies, were already dealing with a credit problem. More aggregately, the U.N. says that the developing world will need more than $1 Trillion USD in debt agreements to be cancelled, or else they’ll suffer massively dealing with the economic fallout from COVID-19. 
Switching gears, U.S. unemployment continued to climb by the millions as the total number of Americans who have filed for unemployment in the last 5 weeks as totaled 26.5M people. This translates to more than 20% of the country’s working population being out of a job!  This falls in line with the broader reality that more businesses are inevitably going to shut down, the longer it takes to re-open the economy again. From ethanol plants and meat processing facilities in the U.S. to small corner shops around the world – with no customers to serve, 10,000s of businesses are being forced to close their doors.
More Corn, Soybean Exports for China’s Animals?
Speaking of meat, it’s been estimated by one union that at least 5,000 U.S. meat and food-processing workers have been exposed to COVID-19.  With roughly 25% of America’s meat-processing capacity now offline due to COVID-19 shutdowns, retail prices for beef have hit new record levels (this is what happens when demand stays strong but there’s way less packaged meat products to go around!). 
Conversely, with these plants shut down, there’s obviously nowhere for the animals from livestock producers to go. Quite literally, farm-gate prices for Canadian hogs has fallen about 30% to unprofitable levels, meaning pig farmers have started to call their herds, unless the Canadian government provides $500M in direct assistance.  In the U.S., it’s arguably in a worse situation with more plants shut down, which is leading to the possibly of 200,000 pigs being culled in Minnesota alone!  Analysis from Dermot Hayes, an economist at Iowa State University, suggests that the top 40 hog producers in the U.S. will lose at least $18M each.  Each! That’s $720M in losses.
That said, with China’s economy slowing starting to open back up, there are a lot of rumours buzzing that they’re going to be buying more American corn and soybean exports to (A) help reduce the record high domestic prices there and (B) fulfill the obligations signed in their trade deal back in January. For the former point, China is a bit short on feedstuffs after global tradeflows have slowed with ports either closed or operating at smaller capacity.
In fact, Reuters is reporting that China is looking to buyer more than 30 MMT of crops to protect itself from further supply chain disruptions.  This would include about 10 MMT of soybeans and 20 MMT of corn, the latter being the most significant as, right now, it’s estimated that Chinese corn importers are making about $70 USD/MT on imported corn as Chinese corn prices ares sitting at 15-year highs. This would intuitively be a a positive for U.S corn exports and demand in general, considering weakness from ethanol processors. Quite clearly, through Week 33, U.S. corn exports have started to ramp up, with 21.65 MMT sailed now (or 852.3M bushels if converting metric tonnes to bushels).
Unfortunately, with cheap corn and soybean exports available from the U.S., China’s barley imports are expected to fall to 6 MMT.  This is intuitively a bearish factor for Canadian barley; through Canadian barley exports are tracking 16% behind a year ago with 1.54 MMT sailed through Week 37. With the domestic market for Canadian barley prices remaining strong for now, listing any remaining old crop or even a new crop contract on the Combyne cash grain marketplace is a more common occurrence these days.
Looking at the bearish factors, China’s agricultural ministry is expecting the pork supply in the People’s Republic to be under pressure this current calendar quarter, with pork prices likely peaking in September.  This new forecast comes as Chinese pork production dropped 29% year-over-year in 1Q2020, the sixth straight calendar quarter of declines as the industry continues to work on eradicating the African Swine Fever in the Chinese herd. Ultimately, the intensity of uncertainty for grain prices – namely unknowns when it comes to demand – translates to being extra diligent to knowing (1) your cost of production and (2) your cashflow needs at different points over the next year.
Have a great weekend!
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 = $1.4058 CAD, $1 CAD = $0.7114 USD)
July Corn: -1.3¢ (-0.4%) at $3.248 USD or $4.565 CAD
July Soybeans: -2¢ (-0.25%) to $8.388 USD or $11.791 CAD
July Soybean Meal (per short ton): -$0.70 (-0.25%) to $292.40 USD or $411.05 CAD
July Soybean Oil (cents per lbs): -0.07¢ (-0.25%) to 25.97¢ USD or 36.51¢ CAD
July Oats: +0.3¢ (+0.1%) to $2.818 USD or $3.961 CAD
July Wheat (Chicago): -2.5¢ (-0.45%) to $5.423 USD or $7.623 CAD
July Wheat (Kansas City): -5.3¢ (-1.05%) at $4.88 USD or $6.86 CAD
July Wheat (Minneapolis): -1.8¢ (-0.35%) to $5.18 USD or $7.282 CAD
July Canola: +0.7¢ (+0.05%) to $10.478/bu / $462/MT CAD or $7.454/bu / $328.64/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.