Pre-Harvest Grains & Oilseeds Update

Oct 05, 2020 | The Simpson/Caputo Group of RBC Dominion Securities


For agricultural producers, this year has been another one of headline risks, political tensions and large world crops.


Back-and-forth debate between the U.S. and China over trade and Phase 1 deal commitments has caused volatility in the market and been a hot topic the news for quite some time. Recently we have seen a falling U.S. Dollar Index, which will hopefully help support U.S. commodity prices going forward.

Unfortunately, the falling USD index has not produced the support we have typically seen in past years. The reason for this is the depreciation of competing export countries’ currencies. Since the beginning of 2020, the USD index has fallen 3.8% against the basket of G7 currencies like the euro, yen, pound, Swiss franc, Aussie, Canadian and New Zealand dollar. However, the U.S. dollar has strengthened against other emerging markets and grain-export competitive countries. As of this year to date, the U.S. dollar has strengthened 24% against the Brazilian real, up 18% vs. the Argentinian peso, and up 16% against the Russian ruble. So although U.S.-priced goods are getting cheaper in the world, our exporting competitors are getting even cheaper in comparison. This has somewhat negated the positive effects of a lower USD index, and we are seeing price driven moreso by  trade headlines and over-supplied conditions.


For soybeans, ending stocks are projected to fall year-over-year  with the latest estimate for the 2020/21 crop sitting at a carry out of 610 million bushels. Although this is tighter than the past two years, it is still a relatively comfortable number for trade. On top of this, a 475 million bushel increase in exports year-over-year is already priced into this balance sheet. This puts very heavy emphasis on any U.S. export sales made to China, as they account for a large portion of outstanding sales. As of late, the purchase pace from China has been impressive. However, with them making up such a high percentage of all exports, along with COVID-19 slowing down world demand, there is some major downside risk if political tensions between the U.S. and China sour. Seasonally speaking, prices tend to slump into September as the crop finishes developing. There is still time for weather to have an effect on this crop, but that window is quickly narrowing. Once harvest is well underway and yields are better known, the focus for prices will shift towards the South American crop and their growing season, as they look to plant another record number of soybean acres this year.

Corn has struggled to find a whole lot of price optimism amid large planted acres in the spring, along with the largest projected carry-out stocks since pre-1998. Unfortunately, this has made weather-related rallies in the spring/summer shallow, as it will take a huge crop loss to put the U.S. in a tight-ending stocks situation. That being said, the supply side of corn is nothing new to the market – we have been talking about these projections since 2019. The real wild card right now for corn comes from the demand side. China increasing purchases is supportive, but most likely is already priced into the 430 million bushel increase in exports from 2019/2020, and is about 100 million bushels above the 5-year average for U.S. corn exports. However, the export market for corn is only a very small percentage of demand. In a normal year, exports make up only about 14% of total use, while feed makes up 38% and ethanol makes up 37%.

The bigger demand drivers to watch are ethanol and feed use. Unfortunately, due to COVID-19, ethanol corn use has dropped and continues
to run below the pace needed to reach the USDA forecast. Feed use does continue to be strong as U.S. livestock herds continue to grow. World stocks also remain large, but heading into the end of the year, the biggest drivers for price to
focus on will be South American growing conditions, along with any surprise upticks in export demand.

The general opinion by traders for the wheat market has shifted very quickly over the end of the summer. From a U.S. point of view, ending stocks continue to slide year-over-year but remain at comfortable levels. Global ending stocks, however, grew to record levels this
growing season. One key takeaway from this is that a lot of that growth comes from non-exporting nations. If you look at the ending stock numbers for only the exporting nations, they were projected to be relatively tight with regards to wheat ending stocks until the Northern Hemisphere's harvest arrived. Timely rains helped to save Black Sea crops and yields continue to rise counter-seasonally in Russia as harvest progresses. It appears gains in the Black Sea region will offset any losses in European Union crops. Along with this, the Prairies look to bring in a large crop this year. Harvest pressure should continue to be a theme to prices until the Canadian harvest is well underway. After this, price focus will shift to Australian and Argentinian crops in September, with Australia currently experiencing good rains, and increasing forecasts while Argentina is dry to start their season.

As grain and oilseed prices continue to be driven by macroeconomic and political events, having a sound marketing plan for your crop has never been more important. Price reactions to these events are quick and sharp, and those who have a plan in place are in the best position to try to take advantage of it.