Grain price standoff continues. USDA will be out next week (Nov 10) with an updated WASDE report, no big changes are expected, Corn, Soybean, and Wheat markets all look to be going in with a fairly neutral bias (bearish assumptions priced in). This does set up the possibility of a fast move in either direction if there are any surprises. Not much we can do to protect ourselves or to expect benefit from. If we knew where the surprise was coming from it wouldn’t be a surprise and the market wouldn’t move. Even if there is a surprise in this report I doubt it will be big enough to cause a sustained move in either direction. With each passing day of low volatility (Cash even less volatile than Futures) I am becoming more convinced that we have a global grain trade set-up which is going to take something significant to change. I expect that something has to come from the USA. Either a crop loss, or a significant trend change in the US Dollar. I am a fundamentalist, Supply and Demand trumps all. However, global currency set-ups are influencing S&Ds from the demand side of the equation right now which is why the supply side stories like yield are being passed over so quickly. Here is how the Greenback has performed against global currencies in the past 3 years.
Currency benefits are easy to measure in Canada. A weak Loonie vs USD means our goods are cheaper relative to theirs and demand shifts North of the border. This benefit right now is clear in the grain trade. Our cash grains like Lentils, Peas, Flax etc are trading at premium prices to our US neighbours. It doesn’t hurt that we did not increase our supplies of these cash crops to the same extent they did this crop year either. We are able to sell at a farm gate premium and still sustain excellent exports because our weak dollar makes us cheaper on the global export stage. In the past 12 months our competitiveness vs the US has improved by 15%. I read an analyst this morning suggesting our dollar would stay below 0.80 vs USD until at least late 2017. Good. I hope he is right. Expensive winter vacations are a small trade off for the benefits we see on the farm with a weak dollar.
It is not just that weak Canadian Dollar has made us more competitive vs US prices, but we have also significantly devalued vs our other important grain customers. You only need 49 Indian Rupee to buy a loonie today, 12 months ago it would have been 55, so 10% savings on Lentils and Chick Peas destined to India. That alone would have helped exports. Having a second consecutive poor crop, and seeding into poor conditions again made Pulses a home run this fall. In China it has gone from 5.45 Yuan per Loonie to 4.8, a benefit to the Chinese when shopping for Canadian Canola, Flax, Peas, and pretty much everything else we sell of 12%. Big picture when it comes to Global currency pattern, Canadian farmers are one of the biggest “winners”. Although the same can be said for our export competitors in Australia, Russia, and the Ukraine right now.
Clearly this currency story in grains goes well beyond Canada and the US, it is a global influence. There have been huge changes in other pairings that are influencing flows of grain as well. The US and South America (both Brazil and Argentina) are the undisputed heavy weights in Soybean and Soybean product exports. China is the dominant importer. If they are not buying from the US they are buying from South America. Argentinian Peso is a little over 10% “cheaper” vs US dollars which helps their direct exports, but their exports are not the concern. By far the majority of South American Soybeans, and Soybean products like Meal and Oil exit through Brazil. The USD has risen against Brazilian Real by almost 2 fold in the past 12 Months! One USD buys 3.8 Real today (high was 4.2). In December of 2014, just 12 months ago, one USD only bought 2.5 Real.
Let me over simplify the implications for China in US Dollar terms:
Chinese buyer calls farmer in Missouri and says “I have $100 United States Dollars; how many Soybeans will you sell me?”
Farmer replies “I want $9.50 per bushel; I will sell you 10.5 bushels.”
Same buyer hangs up and calls a farmer in Mato Grosso, Brazil and asks the same question. “I have $100 United States Dollars; how many Soybeans will you sell me?”
Brazilian farmer replies “I hear the Americans are selling for 9.50 per bushel, I will give you a deal and let mine go for $25bu, in Brazilian Real” So the American wants $9.50bu and the Brazilian wants $25bu, which is the better deal?
Chinese buyer grabs his calculator and replies “15.2 bushels for $100 US Dollars, you have a deal. $25 Real per bu it is.”
So why are there growing stock piles of Soybeans in the United States? Margins are tight for them, and yet their competitors are killing them on forex. I don’t think any farmer in the world wants to see El Nino pattern than the US. They desperately need South American Soybean supplies decreased. Otherwise they need this currency trend to change, the latter is going to be much more difficult. The US is losing to all of it’s competitors due to Forex right now, and it is clearly showing in flat, bottomed out futures, slow exports, and building on farm stocks.
An important competitor of the United States for Wheat and Corn exports are Russia and the Ukraine. USD vs Russian Ruble has been volatile in the last 12 months, but currently one USD buys 66.65 Ruble, 12 months ago it would have only bought 45. Australia is an exporter of Wheat, Pulse crops, and oilseeds. Their currency has lost over 40% vs the Green back. Global currency trend is having the most negative impact on US raw material exporters, farmers of course being exactly that. Farmers in the US are said to be holding record stocks, and for good reason. Profit margins on Wheat, Corn, and Soybeans are down again this year, and for some who didn’t get the right rains, there may not be any profit at all at today’s prices.
So on the surface, and overall we are benefiting from this currency trend. However, Wheat being priced against US Futures, and Canola’s tight correlation to US Soybean futures caps our upside for those two crops. The forex benefit is clear in historically very good Wheat Basis, and more difficult to measure, but trust me it is supporting Canola vs Soybeans Futures as well. But, if this currency trend shifts and US farmers finally start seeing some demand again causing futures for Wheat, Corn and Soybeans to break off this bottoming trend we may not benefit to same extent in Canada that they do when the futures run. Gains in Wheat futures will almost certainly be offset by widening Basis, flattening out cash bids. Wheat strategy is still to lock in Basis with as much time for potential futures move as possible. For Canola; if Soybean futures run, but Canadian dollar also rebounds any Bullish influence to Canola will be lost and futures will not rise at same trajectory as Soybeans. This makes Canola strategy much more difficult than Wheat, thankfully there is one similarity…low volatility in Cash bids. Whatever the currency/futures move is, it is likely going to be partly offset by basis. Bullish or Bearish Futures, if move is being influenced by forex it will be partially muted. This brings me back to where I started…Grain price standoff continues. Nobody moves, nobody gets hurt.
As you see in following charts, this is about as quiet as grain Futures markets get. Canola, Soybeans, MGE Wheat, and Corn have basically done nothing. The good news is that they (Canola being the exception) are at or below previous 5 year lows. This makes me believe traders are waiting for a reason to trade them higher, and discounting anything Bearish right now. However, market will not sit still forever so something better give before spring. The longer we go sideways the greater the risk of giving up and setting another leg down becomes.