Grain markets this morning are mostly in the green ahead of today’s monthly WASDE report, once that is largely going to be focused on demand.
“The hardest thing to do is to be true to yourself, especially when everybody is watching.” – Dave Chappelle (American comedian)
Today’s WASDE Report: What Grain Markets Are Watching
Grain markets this morning are mostly in the green ahead of today’s monthly WASDE report, once that is largely going to be focused on demand. Supporting grain markets has been cooler temperatures, including a few nights of frost across the Canadian Prairies and U.S. Northern Plains.  This has continued to support canola prices, helping more analyst join my timestamped call from a few weeks ago that cash canola prices are now more likely to get closer to $12 CAD/bushel, than unlikely. 
Before digging further into grain markets, I wanted to first pay homage to the victims and their families of the September 11, 2001 terrorist attacks. In today’s Mach speed of news and social media posts, it’s easy to get caught-up in the runaround, but thinking about where you were on this day nearly 20 years ago is enough to stop you in your tracks. Put another way, it’s important to slow down and reflect, even in the crazy pace of harvest time.
Speaking of slowing down, I have a quick ask: as part of FarmLead’s open-source approach to all things agricultural, we’re trying to understand the number of grain contracts that a farm makes per year, relative to the number of acres that they farm. If you’re a farmer, I’d appreciate if you could take 5 seconds and vote in my Twitter poll below ( just a heads up, clicking on the image below will take you to the Twitter app or website. If you don’t have Twitter, just reply directly to this email with your answer and I’ll count the vote accordingly! Thanks!).
Macro Factors I’m Watching
Moving forward, the world is a much different place than it was back then, and as it relates to the markets, the biggest change likely came this year in the form of central banking policies. I’ve seen inflation estimates range from 2 to 20% this year, but almost all economists agree that we’re toying with deflation.
As a quick economics lesson, deflation is when “demand for most goods and services declines and the providers of these goods and services lower prices to compete for fewer consumer dollars.”  The lower demand results in lower company revenues, which then results in company layoffs, and thus, less income earned by individual workers, which leads to even further reduced demand for goods and services.
Bottom line: deflation is a very bad thing and, as I explained in my example, can compound into a worse situation. And as a reminder, U.S. unemployment remains about 4 times higher than pre-COVID-19 levels and things aren’t expected to improve, especially in the restaurant industry as, with fall/winter coming, those patios have to close and patrons can only eat inside (which inherently means less customers in our social-distanced world). 
This in mind, Adam Tooze, Columbia University history professor, has done a great job of explaining in The Guardian how central banks of used various tools over the years to keep inflation and unemployment in check.  His conclusion, however, is that the loose monetary and fiscal policies might be here to stay, but moreso, central banks are “becoming more complex, more diverse, and more multipolar.” From my vantage point, there are way more moving parts to monetary policy decisions by central banks these days, making the system more fragile to cracks. This isn’t a great situation to be in.
With the expansionary spending by the U.S. Federal Reserve, the U.S. Dollar continues to depreciate, allowing other currencies to make gains against the Greenback. For example, the Eurodollar has climbed 5.5% against the Dollar this year and is now near an all-time high, on a trade-weighted basis.  Complicating things in currency and equity markets is this week’s pull back in oil prices, which are now sitting at their lowest level since June. The drop in oil prices is largely because demand still hasn’t rebounded, prompting the likes Saudi Arabia and other Middle Eastern producers to discount their crude exports. 
This is great though for energy net importers like China, who can buy way more product on the cheap! The bad news, however, is that Asian buyers aren’t likely to buy more because they already bought a ton of energy supplies when prices were even lower back in March and April! In fact, only 4 out of 10 Asian oil refiners surveyed by Bloomberg said they would buy more Saudi oil, despite the price cut! 
Today’s WASDE Report Defined by Demand?
In fact, it’s been well-documented the commodity-buying binge that China is on, and nowhere is this more evident than records they’re smashing in grain shipments.  Between record soybean imports, record corn reserve sales, and high expectations for record corn and wheat imports, how the USDA pegs China’s grain demand in today’s WASDE report will be very closely watched.
More concretely, industry expectations are that we’re going to see more than 11 MMT of corn imported by China in 2020/21, but the USDA’s estimate in the August WASDE report was just 7 MMT. Keep in mind that the most bullish analysts think China’s corn imports number could finish as high as 25 MMT, due to the current low global prices, relative to the current near-record level of domestic corn prices in China.  Inherently, there’s lots of buzz that this increase in Chinese demand for American corn could more than offset the drop in corn-for-ethanol demand, another line item that will be watched closely in today’s WASDE report. 
Worth also mentioning is how Chinese wheat farmers aren’t selling to the government as they have willingly in the past, as they think wheat prices are going to rise, given the corn supply concerns.  Staying in wheat, in today’s WASDE report, we’re likely to see higher production numbers from Russia, Australia, and Canada, whereas the EU, Ukraine, and Argentine wheat harvests are expected to fall.
The import profit margin remains strong, despite corn and soybean prices the last few weeks inching higher on ideas of a smaller U.S. harvest. After all, this week’s crop progress from the USDA shows that the corn and soybean crops are “stumbling to the finish line” as good-to-excellent (G/E) ratings for both fell 1 point from last week to 61% and 65%, respectively .  Keep in mind that this is still marginally better than the 55% G/E rating that both corn and soybeans had at this time a year ago!  Nonetheless, a U.S. corn crop of close to 15 billion bushels and 4.3 billion bushels of soybeans are expected to be shown in today’s WASDE report from the USDA.
WASDE Report: U.S. vs Brazil Soybeans
Most analysts agree that the smaller American harvests are responsible for the drawdown in global ending stocks, but, given how close we are to harvesting said crops, a lot of the focus in today’s WASDE report is on the demand side of things. Contributing to this theory is the fact that we’re getting nearly daily reports from the USDA of export sales to China, including the largest one-day total in almost 2 months on Tuesday, as 664,000 MT were booked.  Through yesterday’s UDSA export sales report, China’s new crop soybean purchases from America are good for an all-time high.
Arguably, the reason that China is buying more American is because they’ve been aggressively buying from Brazil, but not Brazil barely has any supplies left over and is literally going to have to import some soybeans, corn, and rice!  That said, total soybean imports by China in the 2020 calendar year are up 15% year-over-year with 64.7 MMT imported thus far, but August’s imports did fall 5% from July as the pace of cargoes coming in from Brazil slowed.  Nonetheless, as a bit of leading indicator into today’s WASDE report, the USDA attaché in China upped their estimate of soybean imports to 95 MMT (their previous estimate was 91 MMT), albeit this is still below the official USDA targe of 99 MMT put out in last month’s WASDE report. 
Meanwhile, the Brazilian 2020/21 soybean crop hasn’t even had a seed planted yet and still, the crop keeps getting bigger: A recent poll of analysts suggests that 131.7 MMT will be harvested.  That’s a 4.5% jump from 2019/20’s (current record) soybean harvest of 126 MMT (as per the USDA) and up from the 130 MMT consensus previously estimated last month. It’s not hard to understand the planting decisions by Brazilian farmers to put in more soybeans, especially since soybean prices there
Overall, grain markets continue to inch higher on the ideas of stronger demand narratives, albeit I continue to be cognizant of downside risk here as more of Harvest 2020 gets completed. In this vein, grain markets have pushed higher and if we don’t see enough numbers that support this bullish narrative – be it on the supply or demand side – we could see a pretty aggressive sell-off today. Put another way, if demand expectations are realized, it’ll likely be a quiet day (but keep in mind that rarely have we gotten a WASDE report without some fireworks in grain markets). As you’re in the combine over the next few days (or maybe weeks!), remember to keep tabs on what’s happening in cash grain markets on the Combyne grain marketplace platform.
If you’re one of our top Combyne users in September, you’ll have the opportunity to have a private conversation with myself about grain markets in early October. This past Wednesday, we did just this for our top Combyne users in August, and it was a great convo, honestly making me consider doing more of these intimate grain markets conversations and less Breakfast Brief writing. I’d love to hear your thoughts though so let me know what you think!
Have a great weekend!
At 7:25 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3183 CAD, $1 CAD = $0.7586 USD)
Dec Corn: +1.8¢ (+0.5%) to $3.668 USD or $4.835 CAD
Nov Soybeans: +5.8¢ (+0.6%) to $9.833 USD or $12.962 CAD
Oct Soybean Meal (per short ton): +$2.10 (+0.65%) to $314.80 USD or $415 CAD
Oct Soybean Oil (cents per lbs): +0.22¢ (+0.65%) to 33.25¢ USD or 43.83¢ CAD
Dec Oats: unchanged at $2.723 USD or $3.589 CAD
Dec Wheat (Chicago): +2¢ (+0.35%) to $5.503 USD or $7.254 CAD
Dec Wheat (Kansas City): +4¢ (+0.85%) to $4.78 USD or $6.301 CAD
Dec Wheat (Minneapolis): +1.8¢ (+0.35%) to $5.373 USD or $7.083 CAD
Nov Canola: +3.4¢ (+0.3%) at $11.596/bu / 511.30/MT CAD or $8.796/bu / $387.85/MT USD
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