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Will heavy carryout keep a lid on grain prices? – This week in the grain markets

By: Brennan Turner

October 4, 2019

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Grain markets ended the week mostly in the green, thanks to a somewhat bullish U.S. quarterly stocks report, an expansion of the ethanol mandate and some challenging harvest weather.

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On Monday, the USDA served up its report for grain inventories in the U.S. as of September 1st, 2019.  Going into the report, the market was fairly bearish, given slow farmer sales and a reduction in U.S. corn and soybean exports. Accordingly, the USDA ended up providing some bullish support to grain markets as both corn and soybean inventories as of September 1st came in below pre-report expectations.

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On the flip side, ample carryover in many crops in Canada, as reported by StatsCan a few weeks ago,  might mean that we must temper our expectations for grain prices rallying on the account of all the rain and snow that’s fallen on the Prairies lately. That said, canola prices finally broke through some resistance levels as traders are starting to recognized the negative impact all the recent snow in Western Canada could have on the size of Harvest 2019. Canola prices on the futures board gained ground every day this past week as less-than-ideal weather continues to plague the progress of harvest for the oilseed (let alone other crops).

Historically, canola prices start to find some strength as we move in the fourth quarter of the calendar year, with values starting to temper out towards the end of November. Thereafter, canola prices are a bit stagnant in December before usually finding a little more momentum to the upside in January. This year, we’re likely seeing a fall rally in canola prices taking place a little earlier than usual given the headache that the snow has created.

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The “white headache” has occurred in every single province across the Canadian Prairies, grinding combining progress to a halt. In talking to a few producers over the past week, I’ve heard their remaining fields left to be harvested described as “soup,” “muck,” “disgusting,” and “slop.”

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Hear Shaun Haney and Brennan Turner discuss this week’s market moves here:(Column continues below)

Like canola prices, hard red spring wheat prices have also started to find some strength, as quality becomes a big question mark. However, as mentioned, I don’t think we’ll see the quality rallies like that of Harvest 2014 since there’s so much grain that’s carrying over from last year. In next week’s recap, we’ll dig more into what’s happening in the cash markets, relative to what the futures are doing.

Overall, many areas will need to see sunshine and wind for a few days to get the combines back in the field. We certainly know that grain dryers are going to be going full tilt again until at least Christmas.

Concerning Harvest 2019 in the U.S., it looks like weather across the Midwest will trend drier over the next week, after the wet start to October. This should give those crops still working on getting to a mature state a few more days to do so. That said, cooler temperatures are rounding the corner here, with the Northern Plains and Great Lakes states getting closer and closer to that freezing mark. The I-states aren’t expected to see frost until late next week, but that’s also a little beyond when frost usually shows up in the Corn Belt.

While many American farmers have been watching it rain over the last week or so, Brazilian farmers are waiting for some moisture to get their soybean planting campaign going. The state with the most amount of soybean production, Mato Grosso, has seen only 2% seeded while #2 producer, Parana, is at 10% – the slowest start in the past 7 years. The problem is that both the near and long-term forecasts aren’t really calling for an abundance of rain. One model has fairly dry expectations for the next week, while another is forecasting 75% of normal precipitation over the next 2 weeks.

That said, the USDA’s attaché in Brazil is forecasting a 2019/20 soybean harvest in brazil of 123.5 MMT, with exports estimated at 75 MMT. Compare this to the USDA’s official estimate in the September WASDE of 123 MMT in production and 76.5 MMT of exports.

On a related note, Rabobank said earlier this week that China’s hog herd was cut in half in the first 8 months of 2019, due to the ASF virus and they’re expecting that number to top 55% before the calendar year is done.

Put bluntly, there is limited evidence available today to suggest a solution to stop the spread of the African Swine Fever will be identified soon. That said, it’s likely that we’re going to see some long-term ramifications to this significant reduction in the pork supply chain in the People’s Republic.

On the flipside, the U.S. pork value chain has room to grow and it’s likely that the industry could be coming up more in trade talks between Washington and Beijing, which start up again next week.

Finally, on Friday, the White House announced that they will maintain the 15 billion gallon blending requirement for the Renewable Fuel Standard. This has been a point of much contention for producer organizations and producers themselves, as the Trump administration has given out many exemptions to refineries to not have to blend ethanol with their gasoline. In addition to the assurances that the full legal limit of blending requirements will be met, the Trump administration also confirmed its pursuit of expanded access to E15 gasoline to consumers (versus the more common E10 blends).

Overall, there are a few factors that we must be cognizant on the demand side of things. Tough harvest conditions over the next few weeks might help cash bids creep higher. That said, the highs of Q4 2019 aren’t likely to be seen in October, so I continue to reiterate the importance of focusing on getting the crop in the bin, with good harvest samples, and getting those samples tested.