Rural Voice Market Commentary – November 10, 2020
by: Scott Krakar
Grain and oilseed markets have been trending higher and higher as we roll through harvest. The biggest and most apparent driver of this strength are the large volume purchases from China. On top of this export demand, and adding to the markets push higher are: the growing prospect of inflationary pressures potentially developing, an expectation of lower US crop production this season, south American crop fears and a successful large trial of a Covid 19 vaccine by Pfizer. These all add to the bullish sentiment rounding out the 2020 growing season.
China has been continuing its large scale ag purchases from the US. On the soybean front this is expected to continue for the foreseeable future. South America is sold out until new crop supplies come on during harvest (winter 2021) and Brazil has recently purchased soybeans from the US, further demonstrating their tight local supplies. Fears continue to increase that the developing La Nina weather pattern could lower South American production this season – further threatening a drop in world ending stocks. Brazilian soy planting has been off to a slow start initially in the early part of the season, with severe dryness limiting the amount of soys planted in October through to early November. However planting did pick up as we moved through November – within the second week of the month estimates were for over half of the soys in the ground – with Brazil planting at a rate of about 2.5 million acres per day! (for context Ontario typically grows about 3 million acres of soys per year). With the dry field conditions in South America it will be unlikely to see bean prices fall significantly until production estimates can be more accurately anticipated. From this the market should stay strong to ensure that the US farmer plants lots of beans this spring.
The soy market will need the US farmer to plant lots of beans this spring as the US carryout keeps slipping. The November 10th USDA report showed US stocks dropping dramatically in the US as soy yield estimates were cut 1.2 bushels per acre to an average production estimate of 50.7 bushels per acre. It wasn’t long ago that we were facing US carryouts of 909 million bushels in the 2018/2019 crop year and 523 million bushels for the 2019/2020 crop year. Today’s most recent carryout estimate is for a dramatic reduction from the past two growing seasons, with the carryout currently expected at 190 million bushels. When considered in regards to stocks to usage ratio the result of these ending stocks are dramatic. In 2018-19 stocks to usage was very high at about 23%, dropping to a comfortable approximately 13% in 2019-20, and now for this growing season a mere 4% stocks to usage ratio. The take away from this is that while there are still beans yet to buy – the successful bidder will have to pay a lot for them.
While there are expectations that China will continue its US soy buying spree, due simply to the fact that they need soys this crop year, news flashes indicate that this may not be their intention long term. After the US election, China has already announced their desire to step away from the Phase 1 trade deal they signed with the US, stating that it is too favorable to the United States. “A renegotiation is also in line with China’s wishes” – states an advisor to China’s State council. Whether the US administration is willing to renegotiate trade is yet to be seen. The US position seems to be that regardless of the government administration, China did sign the deal on their own accord, and as such they are bound to the agreement. Analysts indicate that it is unlikely that Biden would renegotiate the Trump deal with China anytime soon – as renegotiation could have the appearance that Biden is “soft on China”.
It’s not just South America that is dry. The US plains continues to see extremely dry conditions and rain seems elusive. The wheat crop in some large key states is well below the 5 year average conditions. Most notably the big wheat states of Kansas and Oklahoma are developing poorly along with Texas, Nebraska and Colorado. So how dry is Kansas? October was the 11th driest on record since 1895 with rainfall accumulation less than 17% of normal. What the impact of these dry conditions will be on final yields won’t be known for some time. The wheat crop will be entering dormancy soon so the yield effects won’t be demonstrated for 4-5 months or so. On the other hand states like Michigan, Wisconsin, New York and Pennsylvania are progressing well and the crop conditions in these states are pretty decent. From this we see that while the Hard Red Winter crop may be in some jeopardy, the Soft Wheat crop should yield well in 2021. Therefore Soft Red stocks are expected to grow year over year. Currently US Soft Wheat sales are weak – exports are the lowest since the 2016-2017 crop year and 22% below the 5 year average. Overall World wheat stocks are falling, but are still towards record high.