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Where the margin is 2020

Where the margin is 2020
February 6-7, 2020, Moscow

IKAR in Mass and Industry Media

June 24 – heavy USDA reports mean heavy trading, 25.06.19

Grain markets this morning are mixed as the complex trades sideways ahead of some important USDA reports today (crop progress) and Friday (quarterly stocks and acreage). We’ll also get an updated estimate of Canadian acreage from Statistics Canada on Wednesday, June 26th, released at 7:30AM CST (as a result, Wednesday’s FarmLead Breakfast Brief will be sent out a bit later to incorporate the data).

QT Weather suggests that the forecast over the first half of this week will continue to be wet across the Midwest and the Southern Plains. [1] This means limited progress on remaining acres to get planted and combining of the U.S. winter wheat crop. Conversely, the rains have become a bit bearish for hard red spring wheat prices and canola prices, as concerns of dryness are being alleviated with every moisture event, despite coverage being a bit spotty.


A Quick Look at Some Grain Exports

On the trade front, Mexico has ratified the new NAFTA – aka the USMCA – which means just the U.S. and Canada are left to ratify the updated free trade agreement. [2] After President Trump and Prime Minister Trudeau met last week in Washington, there’s optimism that the deal will be signed soon. [3] Further, President Trump suggested that he will help get the Canadian men detained in China back home to the Great White North. [4] As a reminder, the two men detained by China are a retaliatory act by Beijing for Canada detaining Huawei’s CFO, Meng Wanzhou. Arguably, canola has also been held hostage by the Chinese after the Chinese government revoked a few import licenses of Canadian canola exporters. As a result, we’ve seen Canadian canola exports fall off in recent months.


I think we might start to see a similar game of musical chairs in international canola trade, similar to that of which we’ve seen in the soybean trade. US soybean exports are down significantly in 2018/19 since the Chinese slapped a 25% import tariff on the crop. The ramifications of this are more Brazilian, Canadian, and Argentine soybeans heading to China, while U.S. soybeans have been travelling more frequently to those places that these countries have usually shipped to. For canola, this means that China could start buying more rapeseed out of the Black Sea, and on the flipside, Canadian canola might find its way into the markets those countries usually exports to.


Speaking of the Black Sea, Russian crop forecasters SovEcon and IKAR have both earmarked recent drier weather in the region as a bullish production factor, lowering their estimate of the Russian wheat crop to 80 MMT. [5] This means they’ve also downgraded their estimate for 2019/20 wheat exports to 37.6 MMT and 36.5 MMT respectively. Conversely, in the June WASDE report, the USDA raised their estimate of Russian wheat exports in the new crop year by 1 MMT 37 MMT.

Will Friday’s USDA Report be This Year’s Climax?

This is likely going to be one of the most important trading weeks of the 2019/20 crop year. Given the weather last week, there’s likely a few unplanted fields that got planted. We’ll know for sure later this afternoon when we get the crop progress report out at 3PM EST from the USDA, which I said in a FarmLead Breakfast Brief last week, would be the decisive compass for where grain markets go for the rest of the growing season. With the crop progress report out of the way, it’ll be back to weather-watching, and most analysts agree that things will trade rather aggressively, albeit within a range.

Then, on Friday, June 28th, we’ll get the USDA’s quarterly stocks and acreage report. This will be the climax of the week’s expected volatility as everyone is guesstimating what acres will end up at, and quarterly stocks will give us a better understanding of total supply from 2018/19 that’ll be carried over into the 2019/20 crop year. This might also give us an indication of how demand is faring amidst the higher corn prices, notably for the ethanol market. We’ll get into all the pre-report estimates in this Wednesday’s FarmLead Breakfast Brief, but there are a few analysts who aren’t expected the USDA to drop seeded acres too much in Friday’s report. One last thing to note is that Friday is also last trading day of both the month of June and the second quarter of the calendar year, meaning traders might want to clean up their books and take their profits off the board for reporting purposes.

With the acreage number under heavy debate, it’s healthy to look at the history of what the USDA does in it’s June stocks and acreage report. The Farm Journal notes that the previous record for latest corn planting campaign in the U.S. happened in 1995 and in that year, we saw corn yields go from a trendline of 125.6 bpa in March, to 119.7 in the June WASDE, to the NASS August estimate of 125.6 to 113.5 bpa in the final report on the crop year in the January WASDE. [8] Keep in mind that, in 1995, the growing season saw the weather change from super wet to super dry from start to finish. Accordingly, U.S. harvested corn acreage that year went from 68.5M acres in the May WASDE to 66M in the June WASDE report to 65M in the June acreage report. One thing to keep in mind though ahead of the acreage report is that the data is from farmers’ intentions as of June 1st, which was before a few more weeks of rain and it’s likely many farmers intended to plant, but eventually, couldn’t get the crop in.

For corn prices in 1995, Pro Farmer’s Brian Grete notes that an early high was made, then values pulled back over the summer before rallying again through the fall as production potential was hotly contested. With the market being up $1 USD/bushel since the middle of May, this sort of scenario is looking like it could mirror that of 1995. In that mindset, put options are being suggested by more than a few traders and risk management advisors.

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