June 22 – More Soybean Exports or Weather Premiums?

Grain markets are in the red to start the week as the complex pulls back after a few positive sessions, led largely by soybean exports demand from China.

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More Soybean Exports or Weather Premiums?

Grain markets are in the red to start the week as the complex pulls back after a few positive sessions, led largely by soybean exports demand from China. That demand for U.S. soybean exports helped soybean prices climb to its best levels in almost two months, and also pulled corn prices up with it. Wheat prices continued to be pressured by the accelerating northern hemisphere winter wheat harvest and generally good conditions for the spring wheat crop.

Futures grain prices weekly performance through June 19, 2020

Hanging heavy over the market though is the continued growth of COVID-19 cases, with a new record, one-day increase of over 183,000 new cases, mainly attributed to Brazil and the United State. [1] The economic impact continues to be a bit uncertain as more business continue to open up, but with new workplace and/or customer protocols are bit rocky.

On a macro level, many summer jobs just don’t exist for the workers in the 16-24 age category this year. These are important jobs, mostly in the retail, hospitality, and/or leisure spaces, which not only help the economy, but also help these young persons gain valuable skills that act as a foundation for future employment. It’s not like these jobs won’t ever come back, but with limited summer tourism happening anywhere, there’s just not as many jobs to go around. The optimist in me says this may spur a new wave of innovation, as young persons are forced to get creative and entrepreneurial to earn some summer spending cash. [2]

One more significant datapoint that I read this weekend came in the real estate market: U.S. home-loan delinquencies are now sitting at 4.3M, according to property information service, Black Knight. [3] This is the highest number since November 2011 and a massive jump from the 723,000 of mortgages that were in this state in April. Put another way, right now, more than 8% of all U.S. mortgages were past due or in foreclosure.

One positive though for the American housing market is that the current low-interest rate environment has helped push applications for new mortgages to the highest since 2009! [4] However, the depressed economic environment means that credit standards have tightened up, likely meaning not every person will be approved. More generally, while lockdowns have tested almost all businesses financially, it’s the general fear of going out and about that’s put larger pressure on the economy. [5] Haven’t you been a bit more conscious of what you’re touching when out in public?

Soybean Exports to Trend Higher?

Late last week, we got word that U.S. and Chinese officials had a secret (or not-so-secret?) meeting in Haiwaii at an American air force base. [6] U.S. Secretary of State, Mike Pompeo, had dinner with China’s top diplomat, Yang Jiechi, and then they continued their discussion on the American Pearl Habor military base. In it, Chinese officials reconfirmed their commitment to make good on the Phase One trade deal obligations, signed back in January.

Technically, new crop 2020/21 sales of U.S. soybean exports to China have now totalled 3.05 MMT (or just over 112M bushels if converting metric tonnes to bushels), which to date, is a six-year high, according to Reuter’s Karen Braun. [7] Conversely, Ms. Braun reports that old crop 2019/20 U.S. soybean exports sales to China have totalled 15.6 MMT (or 573M bushels) through Week 41, which is the lowest volume since 2008 (apart from last year when we were in the middle of the trade war). [8] Keep in mind that some of the blame for the depressed volume of U.S. soybean exports to China is because of rather large shipments of Brazilian soybean exports to the People’s Republic, but also the African Swine Fever which decimating the hog herd there.

Speaking of actual shipments, total U.S. soybean exports to all destinations is now sitting at 36.6 MMT, or about 1% more than this time a year ago. However, as you can see in the chart below, weekly shipments of U.S. soybean exports continue to track behind both what we saw a year ago, as well as the five-year average. More concretely, grain markets will be closely watching soybean exports sales as, even if China doesn’t meet its trade deal obligations, increasing its purchasing volumes would certainly be positive for soybean prices. [9]

U.S. weekly 2019/20 soybean exports through Week 41

Ultimately, China continues to talk a big game of buying more American, be it soybean exports or corn shipments or even ethanol, but it comes as Chinese-American are sizzling. For example, China banned poultry imports from an Arkansas Tyson Foods plant after a COVID-19 outbreak there. [10] But the WHO, USDA, CDC, and many other organizations continue to point out that there is no evidence of the transmission of COVID-19 through food. [11] Inherently, it feels like the smallest technicality (be it legitimate or not) seems to be enough to push China to renege on its promises to buy more American agricultural goods.

Weather Premiums Fading or Just Starting?

Hindsight is always 20-20 but as we creep further towards the end of June, weather premiums on the future boards generally start to fade. As mentioned in last Wednesday’s Breakfast Brief, last week’s USDA crop progress report showed deteriorating conditions in the western Corn Belt and corn prices might be starting to reflect that. Further, given the extremely large short position held by fund managers in corn futures, a short-covering rally induced by weather has the possibility of materializing.

Similarly, rainfall forecasts in Ontario haven’t come true, and the crop is maybe a week or two away from losing its full yield potential. Of course, there’ll be those who say it is already toast, but like the grain markets do, I’ll take that with a grain of salt as one area doesn’t make up the entire harvest! As I mentioned in my weekly grain markets column on RealAgriculture.com, there’s a similar dynamic playing out in spring wheat and canola markets as southern parts of Alberta and Saskatchewan are looking for a billion dollar rain. [12]

Accordingly, we’re seeing more calls to lock in some sales, especially in old crop corn. [13] This idea makes sense, especially considering how much corn is going to be carried over into the new 2020/21 crop year on October 1st! That said, while futures values may pull back on the aggregate health of the entire crop as the growing season moves forward, basis levels are more likely to improve in the dry areas. In fact, basis levels in places like North Dakota have been the best we’ve seen all year, meaning some strong activity on the Combyne Marketplace lately. However, good-looking corn crops in places like Iowa and eastern Corn Belt are keeping pressure on the futures, suggesting the weather premium in the paper trade is fading. [14]

Looking for outlier events, my feeling is that the only thing, apart from weather, that would support agricultural commodity prices climbing higher over the summer would be weakness in the U.S. Dollar. This would help U.S. soybean exports further, as, compared to the Brazilian Real, Chinese buyers are better off buying American right now (in a pure financial sense).

A healthy perspective from Stephen Roach, the former chairman of Morgan Stanley Asia and current faculty member at my alma mater, Yale University, suggests that there is some downside risk to the Greenback these days. [15] The likelihood of a weaker U.S. Dollar is mostly rooted in the idea that the currencies of China and the E.U. appreciating significantly. While it’s unlikely we’ll see a major currency move between these 3 in the next few months, the long-term implications of the current trade and political environment gives legs to the idea that the U.S. Dollar could weaken.

To growth,

Brennan Turner
TF: 1-855-332-7653
@Combyne or @FarmLead 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 = $1.3573 CAD, $1 CAD = $0.7368 USD)

Sept Corn: -2.3¢ (-0.65%) at $3.375 USD or $4.581 CAD
Aug Soybeans: -2.3¢ (-0.25%) at $8.738 USD or $11.86 CAD
Aug Soybean Meal (per short ton): -$0.50 (-0.15%) to $288.80 USD or $391.99 CAD
Aug Soybean Oil (cents per lbs): -0.08¢ (-0.3%) to 28.62¢ USD or 38.85¢ CAD
Sept Oats: -0.8¢ (-0.25%) at $2.84 USD or $3.855 CAD
Sept Wheat (Chicago): -1.8¢ (-0.35%) to $4.835 USD or $6.563 CAD
Sept Wheat (Kansas City): +1.3¢ (+0.3%) at $4.375 USD or $5.938 CAD
Sept Wheat (Minneapolis): -1.8¢ (-0.35%) to $5.333 USD or $7.238 CAD
Nov Canola: unchanged at $10.834/bu / $478.10/MT CAD or $7.989/bu / $352.24/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.

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