Market Insider

Taking Sides

Grain markets are trending lower for the most part as we push through to the end of January with geopolitical risk and South American weather continuing to guide things. The “America First” platform that new United States (U.S.) President Donald Trump is pushing out is leaving an ugly cloud hanging over global commodity trade, and subsequently creating more risk in the markets. Moreover, there are many unanswered questions on biofuels policy in Washington, D.C. right now as small-town manufacturing workers are likely to gain the most under the new administration, not the American farmer. First, Trump officially pulled out of the Trans-Pacific Partnership (TPP), the Pacific Rim deal that would allow more open trade between countries representing 40 per cent of the world’s gross domestic product (GDP), including Canada, Australia, and Japan. Second, he has started to the process to renegotiate the North American Free Trade Agreement (NAFTA), (which the market did not really react to it) and it has been made fairly clear that the new U.S. government is more interested in the Mexican side of the deal.

More simply put, the 49th Parallel is one of the most active borders when it comes to trade. Supporting the Canadian-U.S. partnership is the announcement that the Keystone XL and Dakota Access oil pipelines are back on the table to get digging on. This is a positive for the Canadian dollar (largely dependent on the price of oil and ability to export its natural resources), which put some pressure on domestic grain prices this week. As per for hard red spring wheat western Canadian cash prices dropped more than three per cent, with durum and Canada Prairie Spring (CPS) wheat cash prices also pulling back, on average, 4.5 per cent and 3.3 per cent, respectively across the Canadian Prairies. Canola was really the only bright spot of the week with futures leading most of the 4.3 per cent gain on the cash market, recovering most of the losses its seen since the start of 2017. Demand has been the big driver, as has competition with soyoil, which is staying elevated while there are still questions on the Argentinian soybean crop and what is happening with available palm oil supplies in Southeast Asia (still below average but likely to rebound in the second half of 2017).

Apart from the trade policy action with the new U.S. government, the market’s focus continues to be on South America where better weather in Argentina and new forecasts in Brazil continue to suggest a record soybean and corn crop for the total continent. With Brazil at the point where only harvest rains could negatively affect numbers, the early January rains across the country were welcomed by the additional acres planted this year (as per Companhia Nacional de Abastecimento (CONAB), soybeans +2 per cent year over year to 83.8 million acres, corn area is up seven per cent from last year to 39.8 million acres and wheat is unchanged at 5.2 million acres). As per AgRural, Brazilian farmers have sold 37 per cent of their 2016/17 soybeans, compared to 48 per cent at this time a year ago and an average of 44 per cent over the past four years). Next door in Argentina, the drier weather of late has relaxed bullish tensions in the market but it is estimated that 4.9 million acres of soybeans (or about 10 per cent of total area) still needs to be planted, and these acreage would equal nearly four million tonnes of production.

Speaking of acres, Informa Economics pulled back its estimate of 2017 American soybean area by about 150,000 to 88.65 million acres. Considering where soybean prices are at today (still above $10/bushel in Chicago), these are profitable levels for most producers, but we are still cognizant of the 2016/17 record production carryout, estimated 2017/18 production, and the aforementioned fact that South American farmers are behind in their sales, meaning as those sales ramp up, pressure will get put on the market. On the flipside, there is a case that if the corn market can get closer to $4/bushel by another quarter or so, the likelihood of 2017 U.S. corn acreage staying similar to that of 2016 would increase (we will still see above 90 million no matter what). Right now, market prices are supporting all the aforementioned acreage and accordingly, managing some of the price risk exposure of that area/production and taking a side on the profitable side of the balance sheet is hard to ignore.

To growth,

Brennan Turner
President & CEO |