How market perception can often rule reality
Recent grain and oilseed prices have generally been bubbly. Sometimes market behaviour isn’t ruled by a specific event or number, rather the perception of subsequent change.
Here’s what commodity markets currently perceive:
The size of Argentina’s soybean and corn crop is getting smaller. It’s been that way for a while now. Argentina can import sufficient soybean supply from Brazil and Uruguay to service the majority of domestic crush, but it could also lead to larger United States soybean exports. Higher American exports might push U.S. 2018-2019 soybean carryout to under 400 million bushels. This perception was 600 a few months ago.
Argentina soymeal is cheaper than U.S. origin, while U.S. soybeans via Pacific Northwest port is the cheapest origin.
Vegetable oil dawdling
With the recent softer Canadian dollar, canola behaviour has been like peddling a bicycle uphill into a 50 mile per hour wind.
Saddled with an ample supply of palm oil, vegetable oil is a laggard with canola lugging additional headwinds of ample supply. Even with the recent softer Canadian dollar, canola behaviour has been like peddling a bicycle uphill into a 50 mile per hour wind.
The loss of Argentina and Brazil corn production can boost American corn export competitiveness and create a revised 2018-2019 U.S. corn carryout starting point of 1.8 billion bushels. This perception was 2.3 to 2.5 a few months ago.
Driven by lack of rain, particularly in the Western half of Kansas, the size of the American hard red winter wheat crop is getting smaller.
Overall, as long as trade war chatter resonates, Canadian versus U.S. dollar cross is apt to remain weak.
Perceived commodity shrinkage
Unique is that all three major commodities - corn, soybean and wheat - are perceived to be getting smaller, not in proportions that statistically convey a long-standing price uptrend today, rather for these reasons:
- the floor price is now higher
- a meal imbalance year is virtually guaranteed
- commodities will be more sensitive to potential North American weather tension
Related commodities like malt barley, canary seed, pulses or durum won’t directly benefit, but can derive indirect support from potential 2018 acreage shifts and marketing patterns.
Wheat strength is led by hard red winter class of wheat, not spring wheat. Russian HRW 12.5 per cent protein wheat (which is same as U.S. HRW 11 per cent) is valued at US$210 a tonne port and rising very slowly. U.S. HRW 11 per cent is around US$240 a tonne in the Gulf of Mexico. The U.S. wheat price is rising faster than the world price, which is why American wheat spurts have often been short lived. What is somewhat different this time is that there's a higher corn threshold and perception that world wheat stocks may begin to contract in 2018 and 2019.
Corn up, dollar down
With corn futures rising and Canadian dollar falling, delivered feedlot corn in Southern Alberta has moved from low $230 per tonne to about $244 for April-May. As such, barley price has some room to catch up. April to June shipment barley is likely going to need to be $245 per tonne to compete with corn. New crop barley has risen to $223-225 a tonne delivered at Lethbridge. Deducting truck freight into more northerly points of Alberta and the western half of Saskatchewan would create an approximate local price arbitrage.
A good rule of thumb and marketing point is to make sales when either there's a perceived threat of crop size getting smaller favourably to what should be positive market news.
Greg Kostal of Kostal Ag Consulting Ltd provides insight on commodity markets and marketing guidance. For more information, please visit www.gregkostal.com.