This is actually a trick question. No two years are ever the exact same (Mother Nature guarantees this) but what we do try to watch for are patterns that can help us understand the direction that things are going. We got some final direction for 2018 in the middle of December when the USDA released their monthly WASDE report.
In it, the USDA raised production of soybeans in Brazil to a new record of 122 MMT. For comparison, the Brazilian oilseed processors association, ABOIVE, is pegging the 2018/19 soybean crop in Brazil at 120.9 MMT. They’re also expecting a new record amount of exports at 82.7 MMT. Comparably, the USDA’s estimate in the December WASDE report for Brazilian soybean exports in 2018/19 was raised by 4 MMT from last month to 81 MMT.
Should the weather conditions maintain their current ideal patterns over the next 6-8 weeks, we could certainly see Brazil challenge the American production mark of 125.2 MMT. The biggest question mark (other than the weather) in the soybean equation is China. The USDA held Chinese soybean 2018/19 imports at 90 MMT in this month’s WASDE report. However, China is starting to buy U.S. soybeans again soon as part of their commitment to better trade relations with the U.S., albeit most will be destined for Chinese state reserve stockpiles.
However, should a deal be found by China and the U.S. to end the trade war, it’s likely that you won’t see a significant amount of U.S. soybeans start flying out of American ports. Very concretely, the Brazilian crop is still looking large and attractive to Chinese buyers. Thus, the 955 million bushels of U.S. soybean carryout might only drop below 800 million, or maybe even 750 million bushels. However, this still means that we still have a large supply of American soybeans to work through.
I think grain markets are starting to recognize this as soybean prices have been a bit tempered with the more recent announcements of Chinese soybean purchasing. As it relates to canola prices, they’ve been playing follow the leader with soybeans and without a clear stronger trend of demand – be it domestic crush or exports – there isn’t many other fundamentals for canola to follow other than soybeans.
For wheat, global ending stocks for the 2018/19 crop year were raised by nearly 1.5 MMT from the last WASDE report, but this was mainly attributed to U.S. and EU wheat ending stocks climbing as a result of less exports.
On the bearish side, Russian wheat exports were raised by 1.5 MMT but Australian wheat exports basically offset that, as they were lowered by 1 MMT from last month, thanks to their smaller crop. With bigger Russian wheat exports, this will put some pressure on U.S. wheat prices for similar protein levels.
Exporters and Russian ag ministry officials met this week to align on what do with wheat exports going forward. There have been rumours swirling for a few weeks now that the Russian government might step in to prevent food price inflation and put a cap on wheat exports.
On that note, currently, Russian wheat exports are flying out of the ports. As of December 1st, Russian on farm wheat stocks are down 29% year-over-year. With Russian livestock feedstuff demand maintaining a pace similar to last year, it’s expected that the amount of exportable wheat supplies are quickly dwindling. This likely translates to a window of opportunity opening up in 1Q2019 for other major wheat exporters.
And it seems like we’re starting to see some of that competition today. China has become the 4th largest buyer of U.S. spring wheat (mainly for blending purposes though). On that note, through Week 27 of the 2018/19 U.S. wheat crop year, American hard red spring wheat exports are tracking 4% above last year’s pace with 3.27 MMT (or 121.2 million bushels) shipped out.
A similar dynamic has been seen in Canadian non-durum wheat exports, as China has been a very large buyer, helping support domestic cash wheat prices. With this in mind, shipments through Week 19 of the Canadian crop year are tracking nearly 19% higher; Marketing-year-to-date, 6.9 MMT of non-durum wheat has been exported from Canadian ports.
Combined with the smaller Australian and Argentine wheat harvests in 2018, the Southern Hemisphere harvest is seemingly providing a good window of opportunity for wheat prices as we flip the calendar into 2019. However, more analysts are expecting wheat prices to correct in 2019 – year-to-date performance of Chicago SRW wheat prices are up nearly 25%! That being said, pretty much every major wheat producer/exporter is expected to plant more of the cereal for the 2019/20 crop year. Thus, while you and I are thinking about better marketing opportunities for wheat prices in 1Q2019, we should also be just as quick to consider 2019/20 wheat sales at the same time.
Overall, geopolitical risk will continue to be the first drivers of grain markets as we turn to 2019, followed by fundamentals like export activity and 2019 acres. For the likes of canola and wheat, be cautious of hoping for prices to keep going higher and sell into those rallies; after all, there’s a healthy amount of both still available at home and around the rest of the world.