Commentary

Rural Voice December 14, 2018

Many US markets have shown a high level of uncertainty, as political ambiguity has created trade and other financial concerns.  Stock markets have fallen aggressively from their once lofty heights as enthusiasm about increasing world growth has dwindled.  At the same time, with trade tariffs in place, US interest rates have been rising, not only increasing borrowing costs but also underpinning US dollar strength and weakness in foreign currencies such as the Canadian dollar.  While interest rates were at their lows many investors invested in stocks, with this investment vehicle being viewed as the only way to get a return on money.  With interest rates now rising other opportunities are surfacing and stocks aren’t viewed as one of the few investments that will provide a return on capital.  If inflation were to continue to increase, commodities may catch a bid from their current levels as investors chase potential yield.  Lately many money managers have greatly increased investment in commodities; their expectation would be for higher prices in the New Year. 

Recently the US and Chinese governments announced after the G20 meeting that they had come to an agreement that would lower the trade imbalance between the two countries.  Basically this “trade war truce” agreement was reported to be in place for 90 days while specifics of the deal were established.  This announcement was very unclear as to what the details would be, however China did announce that they would be buying US energy and agricultural products.  Likewise because the announcement did not give clarity to the market there was little impact on the prices in the grain and soybean markets. 

The following week after this announcement, President Trump said that China would be buying a “tremendous amount” of US soybeans.  At the time of this writing it is reported that China may purchase up to 27 cargos or more of US soys, however less than this amount has been confirmed.  These Chinese purchases are reported to be bought by the government agency that is responsible for managing state reserves of various commodities.  Since these purchases are being made by the Chinese government buying agency the purchases are exempt from the 25% tariff; any private purchases would still have the Chinese tariff to apply.  

After the Chinese purchases were announced the market had little reaction to the news.  This is because there is simply too much supply of beans to get the market to react in an aggressively bullish way.  If Chinese purchases are only a token amount, even 2 million metric tonnes, this will not be noticeable in the US balance sheet.  The market has been anticipating the announcement of Chinese purchases for the last month or so.  If this is all that China buys the market will likely be disappointed and prices could fall further.  In the most recent USDA report world ending stocks of beans are estimated to be 115.3 million tonnes, up almost 18 million tonnes from only two years ago.  Brazil is expected to be adding to the pile again this season.  Brazil is having great weather this growing season and current expectations are for them to produce 122 million tonnes.  It is reported that soybean crush margins in China are negative – meaning soybean crushers are losing money operating in today’s price environment.   This doesn’t bode well for continued demand into this marketplace.

Locally our market here in Ontario has seen a dramatic swing in demand for soybeans.  Throughout much of harvest, while China and the US were in the earlier stages of the current dispute, China had an insatiable demand for Ontario grown beans.  Because of this demand we saw strong basis levels as ports purchased all they could to ship to this market place.  Over time this demand for local beans has contracted as Chinese buyers slowed their purchases.  Consequently prices for Ontario beans have also dwindled and basis levels have softened substantially.  

Harvest struggles in much of Ontario remain.  There are still soybean fields yet to be harvested in mid December and even more corn yet in the field.  Between rain and snow conditions this fall there just haven’t been enough decent days to get harvest completed.  Each day there are more reports of some corn fields being destroyed because of high vomitoxin levels, although overall much of the crop will be harvested. 

The wheat market continues to see Russia and other black sea region players dominate the export marketplace.  There continues to be rumours that Russia will run out of wheat and that demand will fall to the US.  This talk has continued throughout the fall and yet, even up to mid December, US prices are not competitive with Russian offers.  US wheat exports are way behind the pace expected by the USDA.  The result of the continued competition in the export marketplace has pushed US wheat values to low levels as they search for price competitiveness.  Adding further negativity it was reported recently that Egypt, the worlds largest buyer of wheat, was having credit issues and were unable to pay for shipments of some boats that were arriving in their ports.