Market Insider

Acknowledge the Storm and Carry On

Spring wheat prices have taken a beating in the past week as it followed the broader grain markets lower, but also concerns over GMO wheat in the Canadian supply chain. Basically, headlines are pushing demand to a standstill and with ample amount of supplies, new price equilibriums had to be found (regardless of the headlines). Old crop spring wheat bids at the elevator and on the FarmLead Marketplace on Western Canada have dropped by anywhere from 50 cents to no bid!

Also, pressuring the complex is decent spring wheat conditions. Rains across the Northern Plains and Western Canada have been starting to show the benefits. The USDA is currently pegging the portion of the US spring wheat crop that’s rated good-to-excellent (G/E) at 78%. This is up 8 points week-over-week, 37 points higher year-over-year, and well above the five-year average of 65%.

In Saskatchewan, the provincial government is pegging 83% of the spring wheat crop as G/E. That’s up 5 points from 2 weeks ago and 7 points better than the seasonal average. The Alberta Ministry of Agriculture says that 86% of the province’s spring wheat crop is rated G/E. That’s 5 points ahead the 81% G/E rating at this time a year ago, and 11 points ahead of the seasonal average of 75%.

In Europe though, dry conditions while we have seen a small improvement in wheat conditions in the United States, we have to keep a close eye on the weather in Europe. The grain trade association Coceral slashed its soft wheat forecast for the European Union to 138.8 MMT this year, down from their estimate of 140.5 MMT in March and nearly 3 MMT below last year’s harvest of 141.6 MMT. The biggest cuts came from Germany’s crop as ongoing dryness continues to reduce expectations for the year ahead. Poland also saw a large cut, in addition to producers along the Baltic Sea.

Dryness in Australia also has been lingering, forcing ABARES to slash its initial 2019/19 wheat production forecast of 23.7 MMT to 21.9MMT. This comes after the country just experienced an eight-year low in wheat production. ABARES expects that this figure and associated yields could continue to fall should farms fail to receive additional rains in the weeks ahead. In addition to Australia, you’ll likely hear more about the Black Sea and the Western Prairies from analysts as the summer months heat up.

But the headlines of trade are the biggest ones impacting trade. First, Italy decided not to ratify the European Union’s free trade agreement with Canada. This has less to do with Italy’s relationship with Canada than it does with the rest of the European Union. The Comprehensive Economic and Trade Agreement (CETA) is the first major trade deal signed by the European Union since 2011. But Italy claims that it is concerned about the protection of the nation’s specialty foods.

Second, Japan and South Korea have temporarily banned all imports Canadian wheat due to the finding of some GMO wheat trial varieties growing in a ditch in Alberta. While we all know that the trialed glyphosate-resistant wheat was contained, that’s not enough of a guarantee for major buyers who are very product-sensitive. Worth noting is the fact that Japan has imported, every month since August 2014, an average of 124,000 MT of Canadian wheat, or nearly 10% of Canada’s total non-durum wheat exports over that timeframe.

This is an interesting development for two reasons. First, Canada was on the verge of picking up significant market share in Japan thanks to the Trans-Pacific Partnership. With the United States not engaged in the trade deal, the 50% market share held by the U.S. in the Japanese market is up for grabs. Canada looked poised to benefit, but now it appears that Australia is sitting prettiest in the pecking order. This in mind, it’s entirely possible that the United States could move to rejoin the TPP, especially since US wheat exports continue to run below-average. Conversely, Canadian wheat exports are running a bit above-average. Ultimately, with this opening, the talk from the Trump administration in recent weeks might turn to action.

Ultimately, this week sucks if you’re a Canadian wheat farmer like me. It is important to understand though that the recent batch of weakness in wheat prices has not been an ordinary event in the markets. We are witnessing a dramatic overreaction to the “perfect storm” of factors that fueled a sharp downturn, namely driven by the heavy-handed trade war talks these last few weeks, and then, all of the sudden, this GMO wheat issue.

In times like these, that in order to navigate the storm, you need to stay your course and look at the aggregate forest, not just the trees. The fact remains is the complex is very oversold at this point. Further, we need to trust in our producer organizations and national trade bodies, who are entrusted with helping a federal government navigate some murky seas that they’re not familiar with it. While spring wheat prices have been battered in this past week’s storm, sunshine usually shows up eventually. And in the process of what is a two-year sales cycle of the wheat that my family produces, this is a drop in the bucket.

To growth,

Brennan Turner
President & CEO | FarmLead.com