January is now in the books, and grain producers are turning their attention to the second WASDE report of the year. The USDA will offer its latest WASDE numbers next Thursday, Feb. 8th.
Across the grain complex there are plenty of numbers we’re looking forward to reading. Revisions for U.S. wheat acreage and production, Argentinean soybean productions and yields, and U.S. exports to Mexico are just a few that will shape grain trading over the next month.
But to understand where grain prices will be heading, we must take a hard look at major events and factors in the month that has just ended. This is our January recap of grain prices and the global factors impacting your farm or agribusiness’ bottom line.
Corn Prices Rise in January
March corn prices closed the month at $3.615, up about 3% for the month. The December corn contract ended at $3.933 for the month of January, up 1.7% for the month.
The January WASDE didn’t really sneak up on corn three weeks ago.
The numbers were the usual round of disappointment that we’ve gone used to in years past. The USDA hiked its average yield expectation to 176.6 bushels per acre.
The agency also increased production expectations by 26 million bushels (or 660,430 MT). Ending stocks did decrease by 2.5 MMT thanks to a downward revision in corn feed expectations.
Argentina’s corn crop is facing many of the same weather pressures as its soybean crop. The weather prompted Rabobank to slash its production forecast this week by 2 million MT to 39MMT. The bank also cut Argentina’s exports forecast to 28 million MT (a 1.5 million MT cut).
Corn prices are back at levels we haven’t seen since early December.
But we’ve got a few key stories that need to be considered moving forward. First, China has been buying up Ukrainian corn due to quality concerns and paperwork issues around U.S. grain. We knew that China was pushing for significant changes in shipment quality around soybeans.
The short-term trend around U.S. corn exports could be highlighted by an interesting story of Ukrainian corn and China that slipped under the radar,
Speaking of China, the IGC hiked global corn ending stocks by a staggering 50%.
IGC pegged global corn stocks at 206 MMT in November. For December, that figure hit 322 MMT.
All that corn appears to be hiding in China, where total reserves hit 250 MMT. We’ll be paying close attention to global corn stocks in the February WASDE.
March Soybean Prices Touch $10
This week, March soybean prices hit their highest levels since early December, finishing off a big rally over the second half of the month.
The November 2018 soybean contract rallied about 35 cents, or up 3.6%.
On the day of the WASDE report’s release, March soybean prices fell to as low as $9.445 USD per bushel at the Chicago Board of Trade
Two weeks later, the March 2018 contract topped out at $10.0475 per bushel. For the month, that contract added 3.2%% or about 30 cents for the month of January.
The late January rally in soybeans came on the back of worsening dry conditions in Argentina and harvest delays in Brazil. Weather premiums temporarily pushed front-month contracts above $10.00 per bushel, creating a terrific opportunity for farmers to capture some gains.
As we explained in detail for our GrainCents soybeans subscribers last week, it’s time to take action and have a plan, particularly with news and of wetter weather expected across Argentina next week.
The January gains came despite the fact that the USDA’s attache in Argentina made no moves on its production expectations for the nation’s crop.
The January WASDE projected total production of 56 MMT of soybeans, which was a 1 million MT reduction from its previous report. The agency blamed delayed planting for the revision.
Though the USDA didn’t shift its position during the month, plenty of other analysts around the globe hacked at this production figure with a scythe.
• Rabobank cut its soybean forecast to 51.5 MMT.
• Cordonnier cut its already lower projection of 52 MMT by another 1 million tonnes (51 MMT); and,
• The Rosario Board of Trade cut its yield expectations by 13% and projected a 9% year-over-year production decline to 52 million MT.
While Argentina dominated the monthly headlines, markets certainly had plenty of other stories worth catching up on if you missed them.
First, Brazil’s 2017/18 soybean crop will be its second-largest ever.
Ports are about to get flooded, and China will likely be a major buyer.
With more than 86 million acres of soybeans planted this year in Brazil (despite the weather delays), the crop size is not far off from the record set last year of 114 million metric tonnes.
The total harvest is expected to climb just above 110 million metric tonnes. That figure is an upward revision from the 109.43 MMT discovered in a Reuters survey two months ago.
We’ve witnessed some weather delays to the Brazilian soybean harvest, but this will likely resolve itself soon.
Second, the USDA slashed its yield expectation during in the January WASDE report.
This would be bullish, but we’re still facing a massive crop that could be a record… on top of even more acres in the U.S..
Finally, it’s important to keep an eye on China. We know that the world’s largest soybean purchaser has been turning more and more to Brazil as its preferred source. Better protein content in Brazilian soybeans have put American soybeans on their heels. Also factor in some the trade issues between the US and China, is it a surprise that China put a 1% dockage limit on US soybeans?
The question is what country is going to step up in the years ahead.
China is running out of farmland, and soybean imports will remain a critical part of its agricultural economy.
With feed demand rising, we know that China isn’t going to invade another country for the farmland.
Winter Wheat Prices Rally
In Chicago this month, March soft red winter wheat prices hit their highest levels since October 2017.
The final day of January concluded a volatile month that started with optimism, evolved into weeping in a dark corner, and then saw its five-day sugar-high end with a lecture about rational expectations.
The March 2018 contract closed the month at $4.5175, up 5.8% from where December closed. On that note, December 2018 / new crop winter wheat prices climbed nearly 6% to finish above $5.10 USD / bushel in Chicago.
In Kansas City, hard red winter wheat prices on the March 2018 gained 40 cents, or 9.4%, from the end of December to the end of January. December 2018 hard red winter wheat prices climbed 7.4% for the month to close above $5.30 USD / bushel.
Why the rally? Let’s start with a little thing the millennials keep calling, “the Polar Vortex” (I just called it a cold spell).
We started the month with a frigid cold snap that blanketed most of the continental United States. We had already experienced significant drought in November and December, leaving most of the wheat-producing state with a lack of snow cover and exposure to any significant weather volatility.
With temperatures falling into the single digits (Fahrenheit), concerns began to emerge about winterkill.
These weather concerns would remain dormant, however, for most of the month. The January WASDE report quickly sucked the oxygen and optimism away, even though we had confirmed that U.S. wheat acreage fell to a level not seen in more than 100 years.
The WASDE report did catch a number of wheat analysts off guard, particularly on the carryout figure. The USDA hiked its carryout figure from 960 million bushels to 989 million bushels.
The average analyst forecast called for a carryout of 959 million.
Right after the release of the report, front-month contracts in Kansas City plunged.
But it would be short lived.
For several months, we’ve watched Russia’s wheat trade dominate the global spectrum.
But January is notoriously a tough month for the Russian ports. Cold weather creates a string of bottlenecks that reduce the country’s ability to keep their foot on the gas.
Combine that with the ongoing drought conditions across the United States, and the final two weeks of the month were prime for some gains.
The questions moving forward are whether prices will get a pop in prices in the summer. Analysts are projecting that U.S. winter wheat prices could pop in the summer.
But there is one major factor that they are leaving out. You can learn all about it and expectations for U.S. crop by picking up a free three-week trial in GrainCents.
Oats Prices Outperform
In January, oat prices recovered from the December doldrums. The March 2018 contract started the month at $2.4075 and rallied as high as $2.79 on January 25. By closing at $2.655 on Wednesday, the March contract closed the month up 10.28%.
It was that sort of pop that fueled our trade recommendations last week. Our GrainCents readers captured a lot of upside before prices reset in the last 48 hours.
As we said in earlier this month in the 2018 oats outlook, a number of factors would play into higher prices moving forward. One thing that we didn’t really tap into due to the unpredictable nature of the factor is short-covering. There isn’t massive volume in the oats market, and many analysts have been attributing the run up in recent weeks to managed money
That is part of the story. Oat prices do sometimes follow wheat prices, which saw gains and some volatility over the month.
If you’re growing oats, you probably know that there isn’t much coverage of the crop. This is one of the reasons why we started GrainCents, to dive each day into the oats markets and provide in-depth insight into the bullish and bearish factors impacting grain. In addition, and most important, we tell you exactly when it’s time to sell your oats and capture profits.
We’ll get into more later but this month was dominated by geopolitical speculation. While the Trans-Pacific Partnership is about to get the rubber stamp, many people in the oats complex are more focused on China, which is not a member of the TPP free-trade agreement.
Given that January is the month for forecasts and outlooks, it was important to think about Chinese demand in the market. Dietary transition – a fancy agricultural economist’s way of saying “More money, better food” for a rising middle class – is a major trend in China.
But it’s not just pork and beef that are on the menu. Demand for oat-based products like oat rice, breakfast bars, oat milk, and more are rising. This has many people wondering if Canadian oat producers have a future in China.
Right now, China’s imports are almost entirely coming from Australia.
What needs to change for Canada to become a major exporter? Will there be a major surge in Canadian planting?
These are the types of questions I received from journalists this week who cover the space.
My answer is this: The trade groups representing oat producers and Canadian trade delegates need to start banging on the door in China. Currently, Canadian oats are priced out of China due to tariffs.
Meanwhile, Australia has a free-trade agreement that enables them to source nearly every oat that makes its way across China.
Given that Canada and Australia have very similar economies, the tariff issue leaves the former at a deep disadvantage. The silver lining is that Canada has been trying to get something in place…
And given the rise of demand, there could be a day that China seeks to diversify its source of oats at a time that its middle class is demanding more and more of it.
With that in mind, one shouldn’t anticipate this to happen overnight or factor it into their planting considerations.
Geopolitical Risk in Grain Markets
Finally, we must make sure that we leave today with an update on global geopolitical risk.
In March, Canada will join 11 other nations in the Trans-Pacific Partnership.
Meanwhile, the United States will remain on the sidelines thanks to a decision by the Trump Administration to pull out of negotiations. Protectionism continues to rise in the United States, marked by recent tariffs imposed by Trump’s team on washing machines and solar panels.
The decision to remain out of this trade deal threatens the nation’s dominant market share in the Japanese wheat market highly vulnerable.
Canadian and Australian wheat producers will likely be the biggest beneficiaries given the fact that wheat tariffs will fall by $65 per tonne.
Sidenote: We walked through the impact of TPP for most of our GrainCents crops, but wheat is likely to see the most impact.
As noted below, Canada already provides a robust amount of wheat to Japan, with a five-year average of 1.552 million metric tonnes.
Meanwhile, negotiators concluded the sixth round of talks to reposition the North American Free Trade Agreement.
It appears that everyone was trying to put a positive spin on the latest developments. Despite U.S. threats to pull out of the treaty, Mexican officials said that we are at a “much better point” after this latest round of discussions. Trade officials will meet in Mexico City for nine days of additional negotiations on Feb. 26.
As we’ve discussed at FarmLead Insights, any significant change to or elimination of NAFTA would have a profound impact on farmers in all three countries.