Wheat prices jump into August — This week in the grain markets

This week, winter wheat prices touched a three-year high, but it didn’t last. Chicago SRW wheat prices for September 2018 gained 5 per cent or about 26 cents US/bushel to close at $5.56. While the December 2018 contract was up 5.4 percent — or nearly 30 cents — to finish a tad under $5.80. In Kansas City, HRW wheat prices were up about 35 cents across all contracts with the September closing this week at $5.67, while December almost touched $6.

It was incredible to watch the December SRW contract pop all the way up to $6.13 USD / bushel in Chicago before a swift retreat. The reason: Confusion over Ukraine’s wheat export policies moving forward. According to a Facebook post, the country said it would limit shipments of milling wheat due to production concerns thanks to the ongoing drought across Eastern Europe. But a later post by the fifth-largest exporter in the world clarified its statement to suggest it wasn’t proposing “strict limits.”

Now, it’s expected that Ukraine’s Ag Ministry will sign a memo that sets limits for traders for the 2018/19 marketing year. This is reminiscent of the export restrictions that Russia placed on exports back in 2010 to 2011 after a drought and high heat hindered crop production.

While European weather and Ukrainian policies hit the headlines this week, conditions continued to deteriorate for wheat farmers in Australia as well. The country’s Bureau of Meteorology says the country is experiencing its second warmest summer (December to February) on record. Its autumn months (March to May) have been among the driest and hottest in measured history.

On that note, in Minneapolis, new crop spring wheat prices gained nearly 4 per cent to now sit at near $6.30 USD / bushel on the December 2018 contract and $6.45 for the March 2019. This was mainly due to playing follow-the-leader to winter wheat prices. There are also some ongoing concerns over the drier conditions in part of Western Canada and North Dakota.

Switching gears, on Tuesday this past week, soybean prices rallied and September contracts pushed above $9 for the first time in weeks. The reason? A rumour that the Trump Administration was prepared to meet China in the middle and discuss ways to end the ongoing trade battle; however, those rumours turned out to be just that.

As part of the 180, the White House is planning to impose a higher 25 per cent import tariff on $200 Billion worth of Chinese imports, up from the 10 per cent initially planned. China’s response was probably best summed up by Wang Yi, China’s top government diplomat, who says, “We hope that those directly involved in the United States’ trade policies can calm down, carefully listen to the voices of U.S. consumers … and hear the collective call of the international community.”

We know the trade war is starting to show its effects on the balance sheet of farmers in terms of the cash grain prices being the lowest they’ve been in a few years. Now, we’re starting to see the implications for those of the industry. Specifically, ADM’s operating profits more than tripled in the April-to-June quarter as they benefited from higher processing volumes in South America. Conversely, Bunge was bullish on soybeans last quarter – the wrong bet – and ended up losing about $125 million on the trade!

This comes at a time that the price of Brazilian soybeans delivered to China are hitting crop-year highs seen in April. This has been the result of mainly a weaker Chinese currency, with the Yuan down about 8 per cent since February against the American Dollar. For clarity, soybean prices on the international market are still traded in US Dollars, regardless of the trade war. The net result is that Chinese crush margins are now in negative territory.

To close the week though, soybean prices closed up about 2 per cent, with the November 2018 / new crop contract now back above US$9/bushel in Chicago. Corn prices also gained more than 2 per cent, with the December 2018 contract now sitting near $3.85 while the May 2019 contract is back above $4. Canola was little changed on the week, with the November 2018 contract now sitting at $494 CAD per metric tonne, whereas as the January 2019 was able to finish at $500.30.

The Canadian Dollar was another factor that impacted canola futures this week as it made a seven-week high, closing at slightly above 77 cents USD, due to bullish news on a new NAFTA, oil prices rallying, and expectations of a strong economic growth in the Canadian economy. Improved crush margins was one of the factors that supported canola prices this week.  The metric has improved by 50 per cent or $17 CAD per tonne (or roughly $14 USD per tonne) to $52 CAD per tonne (or roughly $40 USD per tonne).

Moving forward, we’ll get the next WASDE report from the USDA on Friday, August 10th. In this report, we’re expecting to see some updated numbers on European. American, and Australian wheat production. Also, in this WASDE, we’ll get the first production estimates of the American pulse crop (peas, lentils, and chickpeas).

This week we saw INTL FCStone project the U.S. soybean harvest at 4.574 billion bushels off an average yield of 51.5 bushels per acre. Those numbers easily top the July USDA harvest projection of 4.310 billion bushels and the yield estimate of 48.5 bushels per acre. For corn, FCStone pegged U.S. 2018 corn production at 14.562 billion bushels, off a whopping 178.1 bushels per acre. Compare this to the July WASDE’s numbers of 14.023 billion bushels, with an average yield of 174 bushels per acre.

Overall though, the market priced in some of this additional wheat production risk this week. There might be more catalysts to the upside as yield reports continue to come in from Europe and now, North America. For corn and soybeans though, with decent crop conditions in the US, and ongoing trade war challenges, sideways prices might be the norm through the end of August as the crop size becomes more known.

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Categories: Grain Markets / Markets / Opinion