Getting away from artificial prices – This week in the grain markets

Grain markets this week finished higher for the second straight week as the complex seemed to wake up from the nightmare it’s been in the last few months.

Corn prices had a fairly good week in Chicago. Front-month and next-month contracts added a few percentage gains as markets kept a close eye on European weather and U.S. export figures. Right now, U.S. corn exporters have the wind to their backs — at least through the balance of the summer. Ongoing domestic and weather problems continue to rattle supply chains in Argentina, Brazil, and Ukraine.

Brazil’s supply chains are frozen over trucking costs — Argentina is facing higher basis costs — and Ukraine has been hammered by dry weather conditions which have reduced the nation’s corn export numbers. The nation’s 2017/18 corn exports hit 1.5 MMT in June. That figure was a 17 per cent drop from May and a 20 per cent decline from last year, according to UkrAgroConsult.

Speaking of Europe, news of an agreement between the U.S. and Europe to bolster American soybean exports offered some optimism to the market. As such, front-month and November 2018 contracts popped at least 20 cents as international buyers snapped up cheap soybeans.

The other big news this week for soybeans was that the White House announced $12 billion would be made available for farmers to lessen the blow of Chinese import tariffs. This is a great step by the Trump administration, but the mechanism/delivery and timeliness of the funds will be important. This is because farmers have some big bills to pay in the next few months and grain prices are artificially depressed due to the trade war, making things pretty tight in the bank account.

More explicitly, the American farmer is dealing with the lowest amount of working capital in the last decade, and so the cash likely can’t come soon enough. There has been some reporting that the $12 billion will help American farmers immediately.

Between everything I’ve read, and knowing how government aid programs are executed, I would be surprised if American farmers who apply for this money will see it before the end of next year’s, 2019/20 harvest. This U.S. government operates differently than past administrations and perhaps, this time will be different?

There is a possibility that China could implement even further tariffs on U.S. soybeans — should the White House execute their full-court press on Chinese imports. I posited to a few news organizations this week, including CNBC and Bloomberg that, if this were to happen, current soybean prices could certainly become the new normal.

Winter wheat prices popped in Chicago and Kansas City as traders eyed ongoing weather challenges in Europe and American exports. A variety of reports hinted that a number of farmers could face crop failure and possibly even bankruptcy as hot temperatures continue to pound the continent.

The IGC put total production this week for Europe at 139.9 MMT. That figure is down from its previous estimate of 147.3 MMT. That would be lowest output in six years. Several Eastern European countries like Latvia and Lithuania have declared states of emergency. Swedish fields have seen just 12 per cent of normal rainfall. Wildfires have spread across Greece. It’s so hot in Europe that wildfires are actually happening in Scandinavian areas of the Arctic Circle.

As such, front-month and December 2018 contracts in Chicago added at least 14.5 cents thanks to concerns about the European and Russian wheat crop. In Kansas, HRW wheat prices were up a quarter for the week.

Spring wheat prices surged more than US$.35/bushel in Minneapolis after results emerged from the annual Spring Wheat Tour in North Dakota. Wheat Quality Council scouts shattered any hopes that we will see a record spring wheat crop.

The most immediate impact was seen on day one, which toured through the southern areas of North Dakota and parts of South Dakota and Minnesota. The first estimate on yield put production at 38.9 bushels per acre. That is one just bushel higher than the drought-stricken yields from last year and well below the five-year average of 44.7 bushels.

On day two, tour participants estimated spring wheat yields at 41.3 bushels through the north-central and northwest regions of North Dakota. That figure is 5.5 bushels higher than what we saw last year, but still 3.4 bushels lower than the five-year average.

The final day put the final estimate for North Dakota spring wheat at 41.1 bushels per acre. While this is three bushels above last year’s final yield, it’s almost more than four bushels below the five-year average of 45.4 bushels per acre. It’s also a stark contrast from a record 48 bushels per acre that the USDA is currently forecasting for average spring wheat yields in North Dakota.

This is all very interesting considering that the USDA ranked the North Dakota spring wheat crop as 88 per cent good-to-excellent (G/E) last Monday! Overall, the USDA reported a G/E rating of 79 per cent for the overall American spring wheat crop. For perspective, going into Monday USDA Crop Progress report (Week 30), the five-year average for U.S. spring wheat quality rated G/E is 62 per cent.

Overall, the move in the grain markets seen the past two weeks is a bit of a correction away from the artificial effects government intervention has had. Why do I say artificial? More than anything, when you see government intervention like today, the market becomes a mirror version of itself, but at a higher or lower step function than what it should be.

For example, soybean prices in Brazil are much higher today than they were when there were no tariffs on U.S. soybeans. Conversely, U.S. soybean prices are much lower today than they were without Chinese import taxes. Since soybean prices are one of the major drivers of grain prices, there are effects that it can have on other grain, including corn prices and wheat prices.

There may be some readers who can preach back to me the saying that even I’ve used, “the market is the market is the market.” Indeed, we play the game in front of us, not the one we’re hoping for. The point, more than anything though, is that because the event that’s driving current soybean prices lower is not a natural supply and demand factor, but government action and said government policy could change tomorrow for all we know.

Then, the market will do a knee-jerk correction back to where the real variables of supply and demand are putting the price equilibrium. Until then, It will still feel a bit artificial.

Categories: Grain Markets / Markets / Opinion