The Markets This Week — Expensive US Wheat, Thin Margins & Questions Around Chinese Demand

Grains started the month of December with wheat in the driver’s seat thanks to concerns out of Russia and Australia. In the Land Down Undaa, ABARES, the Aussie version of the USDA, cut its official wheat production estimate by one million tonnes (or about four per cent from its previous estimate) to 23.22 million tonnes, thanks to drier weather in the east and unusually wet conditions in the western part of the country-continent. In Russia, SovEcon says that “winter grains are actually in the worst state on record,” including 2009/10 when an unusually dry summer exacerbated elevated winterkill levels. The eventual outcome was a 62 million-tonne crop. That being said, SovEcon doesn’t think Russian grain exports will be slowed, which is probably why Russia shipped out 2.71 million tonnes of grain in November (vs. 2.55 million in November 2013), including 1.86 million tonnes of wheat.

Russia is even looking at making deals with Iran to ship them grain in return for oil, and pay in their respective currencies, not U.S. dollars (which is common practice). One thing supporting the sustained pace of exports is that the U.S. dollar and Euro are both enjoying record spreads against the Russian ruble. Ultimately, any price upgrades in the wheat market is tied to weather, but the exaggeration of the rumour that Russia could ban exports is bringing unwarranted premium to the market that will likely dissipate over the next few weeks/months (Make sales when you can, not when you have to!).

U.S. wheat is still overpriced compared to the rest of the world market as indicated by the most recent Egyptian tender (which was won by Ukrainian and Romanian supply). Strong U.S. soybean exports continue to support the oilseed complex as 1.2 million tonnes were sold in the last week of November, well above market expectations. Volumes have slowed down though over the past few weeks but still well above the five-year average. The reason for the slowdown versus last year is that more buyers might have increased confidence in South America’s ability to ship product more efficiently.

That being said, the USDA’s Buenos Aires office lifted its estimate or the Argentine soybean harvest to a record 57 million tonnes, two million higher than the official USDA forecast. However, the bureau said that given the Argentine government’s position in the market and current economic environment, “many farmers’ sole aim is to survive the production cycle.” To be honest, there may be a few producers in other major growing regions who will feel the same way over the next year should the supply and demand fundamentals remain in place and grain prices remain low.

The big question in reality is what will China do in terms of consumption though as they consume more than 60% of all world soybean exports. With Chinese crushers looking at their fifth straight year of negative margins, and with signs that the Chinese economy is slowing, new programs may be put in place over the next few years to protect domestic interests.

I’d be remiss not to at least point out that there’s a war of words going out there regarding the sale of the former Canadian Wheat Board between the political parties in the House of Commons and even producer groups voicing their opinion to have provincial governments buy CWB assets. The reality is, none of this has anything to do with your grain marketing strategy – it’s just noise.

Staying in government chatter, this past week Statistics Canada came out with its production estimates from this year’s crop and surprised the heck out of a lot of analysts with their numbers for canola and wheat. 15.56 million tonnes of canola were said to be taken off, almost 1.5 million tonnes more than September’s estimate and almost one million tonnes higher than the average estimate from analysts. As for wheat, 29.3 million tonnes of the cereal was seen as harvested this year, up 6.5 per cent from the previous estimate and 1.5 million tonnes higher than the average trade guess. Durum and oat output were both bigger than the trade was expecting at 5.2 million tonnes and 2.9 million tonnes respectively but many are questioning the quality of the crop (good milling specs for wheat and weight on oats). Soybean production was another bright spot for the Canadian agricultural sector as we saw the fifth straight year of record production of the oilseed (as if there’s not enough already available worldwide!) The question really becomes now moving this crop and although wheat shipments have been relatively strong, there is concern over the additional canola supply available. Simply put, the cashflow situation come spring-time could interesting on most farms as bin doors stay shut with canola remaining below $9.50/bu (although lower oil prices should help some!)

The Canadian government extended its order for the two Canadian railroads, CP and CN, to ship Canadian grain but the level was dropped from a combined one million tonnes weekly to a variance of tonnage, depending on the week, through to the end of March (or another four months). The new mandate pegs minimum movement by each railroad at 345,000 tonnes thru December 20th, 200,000 tonnes from December 21 – January 3, 2015, 325,000 tonnes weekly from January 4 – February 21, 345,000 tonnes from February 22 – March 21, and then 465,000 tonnes for the final week (March 22 – 28). The new requirement clearly has some weather risk premium built into it, much like the rest of the market right now.

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