Mar 6 – Wheat vs Soybean Harvest & Sick Monetary Policy

Grain markets are mostly in the red as broader markets remain concerned about trade amidst some big wheat and soybean harvest data.

“There is one consolation in being sick; and that is the possibility that you may recover to a better state than you were ever in before.” – Henry David Thoreau (American philosopher)

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Wheat vs Soybean Harvest & Sick Monetary Policy

Grain markets are mostly in the red as broader markets remain concerned about trade amidst some big wheat and soybean harvest data.

On Monday, I talked about how the coronavirus is blanketing the markets with fear. Well, we’re finishing the week much like we started it as the broader equity markets continue to fall on fears of the economic impact of said coronavirus. Trans-Pacific shipping has slowed notably. [1] Within China, millions of truck drivers are sitting idle. [2] And despite an olive branch being extended, the Chinese government says that any effort from the Canadian government to improve relations with Beijing would be fruitless. [3]

Elsewhere, countries around the world continue to provide economic stimulus as a way to mitigate the financial impact of the coronavirus, including the U.S. putting up $8B and the IMF providing $50B. [4] Further, in an effort to slow the spread, citizens around the world are being told to say home, highlighted by Italy closing ALL of its schools and universities for the next 10 days. [5] Finally, earlier this week, the Bank of Canada cut its benchmark interest rate by 50 basis points (or 0.5%) to 1.25%, following the U.S. Federal Reserve’s similar interest rate cut. While good monetary policy is meant to maintain stability in the markets, interest rate cuts do not cure viruses. [6]

Black Sea Wheat Harvest Update

While I talked on Wednesday about oats prices and ABARES’ hopes of Australia’s wheat harvest rebounding 2020, where the 2020 wheat harvest looks relatively strong is in the Black Sea. SovEcon says that the emerging winter wheat crop in Russia is looking pretty good from the surface, but some rain will be needed soon to boost soil moisture reserves. [7] Total grain production in 2020 should exceed 125 MMT according to Russia estimates, including the second-largest wheat harvest ever in Russia of 77 MMT (the record was set in 2017/18 with 85.2 MMT combined).

The Ukrainian Deputy Ag Minister is expecting Harvest 2020 to revert back closer to average production after last year’s record haul. [8] Of note is the government’s expectations to see its winter wheat harvest fall about 5 MMT YoY to 23 MMT and, like Russia, some moisture would help the crop today. Further, total grain exports could pull back from the expected 52 – 55 MMT for the 2019/20 crop year, to 40 – 45 MMT in 2020/21.

Nearby in Kazakhstan, the country’s wheat harvest 2020 should improve by about 500,000 to 12 MMT and farmers there are hoping for some better quality than this past year’s harvest. More acutely, the USDA’s attaché in Kazakhstan recently said about 50% of 2019/20 Kazakh wheat harvest was graded as a #3, while a further 25% was graded #4 quality. [9]

With the better quality, the USDA is expecting wheat exports in 2020 from the Black Sea country to improve by 300,000 MT to 5.5 MMT. For context, other Central Asia countries like Uzbekistan, Afghanistan, Azerbaijan, and Turkmenistan buy most of Kazakhstan’s wheat. However, it’s important to note that more Kazakh wheat, namely durum, has been going to Italy and Turkey. We’ve mentioned a few times in the past that Kazakhstan’s durum market share on the global stage has been steadily increasing.

Soybean Harvest, Exports, and Taxes

Yesterday’s export sales report from the USDA was fairly bearish for soybean prices, with soybean exports sales totalling just 346,400 MT, versus expectations of 500,000 MT to 1 MMT. Further, despite the U.S.-China trade deal coming into effect in mid-February, they haven’t really increased their interest in U.S. soybean exports with sales last week being their weakest since early September. To date, American soybean exports sales to China so far in the 2020 calendar year have totaled just 1.13 MMT, which is well below the 2.83 MMT bought back in 2017, before the trade war started. [10]

However, one of the headlines that’s supporting soybean prices a bit is that China is granting one-year tariff exemptions for some of its crushers on imported U.S. soybeans, wheat, and DDGs. [11] As a reminder, as of February 14th, Chinese tariffs on U.S. soybean exports was 27.5%, making American beans relatively noncompetitive with that which is being shipped out of Brazil.

Speaking of Brazil, some dry weather has slowed down the soybean harvest, with roughly 40% of the crop in the bin, compared to 45% at this time a year ago. [12] Mato Grosso, Brazil’s top soybean-producing state, about 80% of the soybean harvest is complete, will above the seasonal average of 63%. Conversely though, farmer in central and southern states are well behind what they were a year ago as dry weather throughout the growing season has not only stunted growth, but also delayed the growing timeline a bit. For example, farmers in Rio Grande de Sul are just getting their soybean harvest started and some expectations are that yields could fall by 15% year-over-year.

That being said, INTL FC Stone upgraded its estimate of the Brazilian soybean harvest by 200,000 MT to a record 124.2 MMT, including 34.5 MMT from Mato Grosso alone (which would be a 2 MMT bump compared to last year’s soybean harvest). Compare this to the 125 MMT soybean harvest estimate from the USDA in their February WASDE report. Also, FC Stone basically matched the USDA’s corn harvest estimate for Brazil, estimating that 101.1 MMT will get cut this year, including an estimated 74.3 MMT second/safrinha corn crop.

Meanwhile, next door in Argentina, the soybean harvest is estimated by the USDA at 53 MMT, but their office in Buenos Aires thinks that the final number could be closer to 54.1 MMT. [13] Comparably, the Rosario Grains Exchange is expecting a soybean harvest of 55 MMT while the Buenos Aires Grains Exchange is forecasting a 54.5 MMT soybean harvest. One of the variables that might negatively impact production numbers is push from environmental groups in Argentina to create new pesticide-free buffer zones around communities/population centres. While Argentine farmers have to contend with that, the bigger issue they’re facing is the ongoing intervention from the government intervention on the export side of things.

The 2021 Argentina soybean harvest is likely to be smaller due to higher export taxes

Earlier this week, the Argentina government raised its taxes on soybean exports by 3% (or 300 basis points) to 33%, albeit this only applies to farmers in the country to combined more than 1,000 MT last year. [14] For those who harvested less, there are 5 further tax brackets, with those who took off less than 100 MT in last year’s soybean harvest only having to pay 20%. For context, 77% of Argentina’s soybean harvest is taken off by about one-quarters of the nation’s farmers. Farm consultancy AgriPac, is estimating that impact won’t be felt in the 2020 soybean harvest, but in 2021, as they’ve already reduced their estimate by 3 MMT on 2.5M less acres planted.

Have a great weekend!

To growth,

Brennan Turner
TF: 1-855-332-7653
@Combyne on Twitter

Due to some travel, I have not had time to put futures grain markets data in today’s Breakfast Brief but you can review them here at your convenience.

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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