Grain markets are mostly in the red as soybean prices continue to extend last week’s new five-week low while canola prices pull back from toying with the $500 CAD/MT mark.
“Procrastination gives you time to consider divergent ideas, to think in nonlinear ways, to make unexpected leaps.” – Adam Grant (American psychologist)
Are Canola, Soybean Prices Diverging a Sign?
Grain markets are mostly in the red as soybean prices continue to extend last week’s new five-week low while canola prices pull back from toying with the $500 CAD/MT mark. Traders are also positioning themselves for Wednesday’s August WASDE report from the USDA, which is looking pretty bearish, given the pre-report guesstimates. Wheat prices have taken the biggest beating in the past few days as those weather premiums built up over the last few weeks have completely disappeared. Put another way (and as mentioned in Friday’s Breakfast Brief, with the wheat harvest picking up, supplies appear adequate (for now!).
Outside grain markets, the political theatre continues to be obsessed with the China-American tit-for-tat, with Hong Kong and technology being in the limelight in this latest rounds of barbs. On Friday, the U.S. government imposed sanctions on 11 pro-communist China individuals in Hong Kong, including Beijing’s appointed leader of Hong Kong, Carrie Lam. . Further, President Trump signed executive orders last week that would limit functionality and availability of social media apps, TikTok and WeChat. 
China responded by saying this morning that it would impose sanctions on 11 U.S. citizens, including U.S. Senators Ted Cruz and Marco Rubio, for how these individuals “behaved badly on Hong Kong-related issues.”.  It’s anyone’s guess where this goes next but with so many countries doing “military exercises” in the South China Sea, one has to wonder if this boiling pot of political sentiment is about to spill over into armed aggression. 
U.S. Soybean Prices Under Pressure
Switching gears, China’s agricultural minister wrote in an opinion piece in the People’s Daily this past Friday that “Chinese people’s rice bowls must always be held firmly in our own hands, and should be full mainly of Chinese grain.”  The timing of this type of commentary is a bit suspicious as it comes about a week before a review of how the first few months of the Phase One trade deal with the U.S. are going. Hint: it’s not really “going”, as only about 20% of the Phase One trade deal obligations for agricultural, energy, and other industry purchases have traded in the first half of 2020. The point blank question to ask then, with 4.5 months to go in 2020, will China really a record amount of purchases to meet their Phase One trade deal obligations?
If you’re a risk manager, you’re probably betting that they won’t, given all the political rifts and lack of purchasing to date! That said, soybean prices in Chicago fell for 4 straight days to end last week as the aforementioned yield potential of the U.S. crop, as well as competition from Brazil weighed on the oilseed. Despite the largest one-day sale to China in 2 months announced on Friday (465,000 MT), soybean prices still had a pretty rough week, falling to their lowest values since the end of June.
Put simply, there are 3 major fundamental factors that are weighing on soybean prices. First up is the potential of a large U.S. soybean harvest, as the average analyst’s guesstimate for Wednesday’s WASDE report is for 51 bushels per acre, up 1.2 bushels from the July WASDE. Second, China isn’t doing much to help the case as a reliable trading partner, buying more from Brazil than the U.S., and the American soybean export campaign is reflecting that: with 4 weeks left to go in its 2019/20 crop year, U.S. soybean exports are tracking about 5% behind last year, with nearly 40 MMT sailed.
The third factor is the looming record soybean harvest out of Brazil – something I dug into at the end of July – and what they may export. Brazilian soybean traders association, Abiove, said last week that, out of a 130.5 MMT soybean harvest, they expect their members to ship out as much as 80 MMT of soybeans!  Thinking more currently, while China technically imported 10.1 MMT of soybeans in July (+18% YoY), the majority of it is still coming from Brazil. 
Further, Brazil’s national grain exporting agency, ANEC, says that its members are expected to ship out 6.72 MMT of soybean exports and 6.32 MMT of corn exports in August.  If realized, this would be a 33% jump compared to the same month a year ago, albeit, for soybean exports, it would be below the 8.02 MMT sailed last month in July. While Brazil is likely running out of soybeans for international buyers today, it’s likely they’ll have another record soybean harvest to supply said customers starting in January 2021. While we might see some weather premiums come about for soybean prices in November (when the Brazilian crop is in the middle of its growing season), if China’s not buying U.S. soybean exports, then soybean prices might not appreciate any weather concerns as much.
Canola Prices Remain Resilient
While the political tactics of the soybean trade can be debated, what is not in question is how well canola prices and the Canadian Loonie have performed since bottoming out back in March.  That’s not to say that the impact of COVID-19 on canola prices (or the Canadian Dollar) is over, but rather that the price rebound is presenting a decent selling opportunity at time when markets are usually pulling back. Quite frankly, limited competition on the railroads have helped canola exports soar in the past few months, with shipments from licensed exporters ending the 2019/20 crop year at 10.12 MMT, good for a 9% bump year-over-year.
New crop canola prices have ridden this wave as well, with cash values currently sitting about 10% higher than where we were a year ago, or about $50 CAD/MT higher. As the chart below shows though, we’re actually close to values that we saw in the 2018/19 and 2017/18 crop years; only 2019/20 is the anomaly in that markets were still trying to price in the impact of China’s restrictions on Canadian canola exports. But it looks like markets have figured it out, and that’s why canola prices are performing so well. In fact, canola exports are making its way to China via crushers in Europe (namely France) and the UAE, and since “profits are extravagant”, according to one China-based canola importer to spoke to Reuters, it doesn’t seem like the train is slowing down.
If you’re looking at canola prices through a basis lens, we’re actually not sitting all that much different than the past few years. As the chart below shows, canola basis is fairly strong right now, but it also shows that, if you’re doing a basis play the smart money is usually in locking in something back in late January or February.
Ultimately, COVID-19 has messed up a lot of plans many of us had for 2020, but canola prices seem like they may be returning to some sort of normalcy. However, we are in the most of August and this year’s canola crop looks pretty big in Western Canada, suggesting canola prices should pull back!  Further, as this pull back seems inevitable, it means knee-jerk movements are likely. Accordingly, you should look to reduce your exposure to the downside risk and consider locking in another sale, maybe two.
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At 8:25 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3392 CAD, $1 CAD = $0.7467 USD)
Sept Corn: +1.5¢ (+0.5%) to $3.093 USD or $4.142 CAD
Sept Soybeans: -1.5¢ (-0.15%) to $8.643 USD or $11.574 CAD
Sept Soybean Meal (per short ton): +$0.40 (+0.15%) to $282.40 USD or $378.20 CAD
Sept Soybean Oil (cents per lbs): -0.19¢ (-0.66%) to 30.66¢ USD or 41.06¢ CAD
Sept Oats: -1¢ (-0.35%) to $2.733 USD or $3.659 CAD
Sept Wheat (Chicago): -2¢ (-0.4%) to $4.935 USD or $6.609 CAD
Sept Wheat (Kansas City): -2.3¢ (-0.55%) to $4.133 USD or $5.534 CAD
Sept Wheat (Minneapolis): -2.3¢ (-0.55%) to $4.935 USD or $6.609 CAD
Nov Canola: -4.1¢ (-0.35%) at $11.07/bu / $488.10/MT CAD or $8.266/bu / $364.460/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.