Commentary

Rural Voice June 2018

Trade issues are front and centre in today’s media, with US President Trump speaking and behaving in an unconventional and provocative way.  It appears that the US administration is not sparing any nation in their attempt to rewrite and negotiate new trade agreements.  Canada too is in the cross hairs, with steel and aluminum tariffs being enacted, threats of automobile tariffs and the constant attack on the Canadian supply management system, most vocally with the dairy industry.   The Canadian dairy industry is quick to point out that Canada has a trade deficit in dairy with the US, meaning Canada buys more dairy products from the US than we sell to them and that 10% of the Canadian market is open to tariff free imports, a much greater percentage than the mere 3% of the US industry.  But nonetheless the dairy industry appears to be a constant irritant to the US as NAFTA is renegotiated.  To date Canadian politicians continue to show unwavering support for our current system.  President Trump stated that Prime Minister Trudeau’s statements at the G7 summit “will cost Canada a lot of money.”  Will Canadian politicians have a difficult time holding this support while they attempt to salvage trading agreements to prevent injury to our trading economy? 

Overall local crop development is off to a good start.  Much of the province has been planted in good conditions and the early heat has accelerated crop development.  While there are some areas of the province that continue to be too wet, many acres are starting to face drying conditions and timely rains would be welcome.  Crop conditions are very similar throughout much of the US, perhaps even better with the USDA indicating overall crop condition ratings at historically high levels.  Throughout much of the US corn belt subsoil moisture is below normal levels.  To date, this growing season is reported to be one of the driest and warmest years combined this decade.  This warm and dry weather has been supportive to early crop development but it highlights the need for adequate rainfall throughout critical crop development periods. 

The corn market has recently seen a large break, in the range of about 40 cents from the recent highs.  This may be a bit early to remove weather risk premium from the market as large yields are not assured at this stage of the growing season.  With current crop conditions rated so well the market appears confident that big yields will be achieved.  US corn usage has been large, exports are running strong and this demand situation is likely to continue.  The large demand for US corn highlights the need for large yields to prevent market tightness.  Even if average US corn yields equal last year’s record, ending stocks of US corn will fall year over year.  If exports do pick up somewhat and yields fall slightly to 171 bushels per acre (the avg yield during the 2014/15 growing season) then ending stocks would fall to the third tightest level on record.  If this occurred the stocks to use ratio would be similar to that of the 2012/13 season. 

Wheat futures have rallied significantly recently on concerns that the Russian wheat crop will be greatly reduced from last year’s enormous crop.  Last year the Russian wheat crop was 85 million tonnes and this year is forecast to be 68.5 million tonnes this year.  It appears that the dry weather will likely continue in that region and if crop conditions worsen yield estimates will fall.  Russia is not the only region that is downgrading their wheat crop size due to drought.  Australia is also lowering their crop estimates by 1.8 million tonnes from their March estimate to 21.9 million tonnes.  If these important growing areas do continue to have yield estimates cut then one would expect futures prices to continue to rally.  The only difficulty in expecting this to occur is that US wheat futures have risen far above world wheat values already.  The Russian wheat crop is the one with the problem and yet Russian wheat values are significantly cheaper than US wheat.  Recently Egypt tendered for wheat and at that time US product was priced at over $50 per metric tonne more than Russian production.  This is not only the case with US wheat in comparison to Russian wheat.  French wheat works into Mexico cheaper than from its US neighbour.  Given the fact that US wheat is already priced well above other world producers one has to wonder how much further US prices can go?

US Soybeans similar to corn have been advancing well and crop conditions are very good.  If these conditions continue and yields run an average of 52 bushels per acre (the average yield during the 2016/17 growing season) then ending stocks of soybeans would grow to record high, approaching 700 million bushels.  The Brazilian currency is trading at low levels, at an exchange rate not seen since 2016.  The drop in their currency encourages producers to grow more acreage of beans due to higher profitability.  Add in trade fears and political risk and soybeans prices may face negative headwinds.  But as we all know, soy yields are made in August.  We still have time for the market outlook to change.