Chinese demand for Canadian soybeans goes quiet

Traders are connecting Canada’s arrest of a Huawei employee with the slower demand

Compared to two weeks ago, Ontario grain and oilseed prices are relatively unchanged for old crop delivery positions. However, new crop prices are unchanged to slightly lower.

Seasonally, farmer selling tends to increase in January while export demand moves through a slower period.

Argentina corn and soybean crops have experienced favourable weather; however, Brazilian soybean production has been lowered due to below normal precipitation and above normal temperatures.

Official delegations from the United States and China held trade talks Jan. 7-9. Trade rumours suggest that China has bought soybeans and other U.S. commodities but actual volumes are unknown due to the U.S. government shutdown.

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Chinese buying interest for Canadian soybeans and other agriculture products has gone quiet due to the Canadian arrest of Huawei chief financial officer Meng Wanzhou.

The Canadian dollar has strengthened, which has also weighed on Ontario domestic bids and export offers. It appears that the Bank of Canada and the U.S. Federal Reserve will not increase interest rates in the first quarter of 2019. The dovish tones by the Central Banks is somewhat supportive for the Canadian dollar in the short term.

Quick look

Soybeans: Brazilian soybean production is estimated lower, but still beating U.S. prices in China.
Corn: Europe continues to buy lots of corn from eastern Canada.
Wheat: North American flour mills appear to be well covered as far as wheat supply.

Soybeans

Chinese demand for Canadian soybeans and canola has evaporated. Without going into detail, vessels loading with Canadian soybeans and canola waiting to unload in China are enduring non-tariff barriers such as additional quality testing at the port. These delays are adding unexpected shipping costs. Companies with contracts on the books are concerned about future government interference. This could eventually result in contract cancellations. It is strictly Chinese retaliation for the Canadian arrest of Huawei executive Wanzhou on behalf of the U.S.

Private trade estimates have lowered Brazilian soybean production by three to four million tonnes from last month due to adverse weather. Brazil’s soybean crop is estimated in the range of 117 to 118 million tonnes, down from the USDA December estimate of 122 million tonnes and down from last year’s output of 120.3 million tonnes. Argentinian production estimates are unchanged from last month ranging from 54 to 56 million tonnes, up from 37.8 million tonnes last year. Flooding and excessive rains are causing some concerns in certain areas but there is a fair amount of time for crop development.

There has been trade talk that Chinese government agencies have bought a significant amount of U.S. soybeans. The private trade has been absent because Brazilian soybeans are US$5/tonne to $8/tonne cheaper than U.S. soybeans for January through March shipment positions. Despite the lower production estimate from Brazil, significant harvest pressure is right around the corner.

In the U.S., strong export and domestic soymeal demand has supported the soybean crush margin. This will change once the Argentine harvest moves into full swing later in April. Remember, Argentina is the world’s largest soymeal exporter in a normal year. U.S. exports of soymeal will slow down significantly from April forward causing crushers to saturate the domestic market.

What to do: In recent issues, we’ve advised Ontario soybean producers to be 80 per cent to 90 per cent sold on their 2018 production. We’ve also recommended that producers be 20 per cent sold on their expected 2019 crop.

Corn

We continue to see strong exports of eastern Canadian corn to Europe. The drier conditions in northern Europe last summer resulted in lower corn and barley production.

Canadian year-to-date corn exports for the week ending Jan. 6 were 782,000 tonnes, compared to 386,400 tonnes last year. Ontario exports are expected to ease during January through March due to the freeze-up of the lakes. At this time, U.S. corn out of the Gulf of Mexico is most competitive on the world market for nearby shipment positions. Argentinian offers move in line with U.S. export prices for April forward because their harvest moves into full swing during March.

In Central Argentina, the corn crop is moving through the pollination stage while the northern regions are comfortably in the grain-filling stage. There are no major crop concerns with Argentine projections near 42.5 million tonnes, up from 32 million tonnes last year.

In Brazil, despite the drier conditions, the first crop corn estimate is around 27 million tonnes, similar 26.8 million tonnes last year. Brazil’s second crop corn seeding will move into full swing in February. Early estimates have this safrinha crop in the range of 62 to 64 million tonnes, up from 54 million tonnes last year. Keep in mind this is an educated estimate because this second crop corn is not seeded.

What to do: In previous issues, we advised farmers to be 50 per cent sold on their 2018 production. Given the year-over-year increase in exports, the Ontario domestic market will function to ration demand causing domestic prices to trade at a premium to export values.

At this stage, we don’t believe there is any South American weather premium in the corn futures. We’re expecting basis levels to strengthen over the next month and the futures market has potential to incorporate a risk premium due to the drier conditions in Brazil. We believe the downside is limited so farmers can be patient on further sales. For new crop, we anticipate a sharp year-over-year increase in U.S. acreage this spring. We’re going to be more aggressive on new crop sales during March and April.

Wheat

January is typically a slow month for the wheat market. The Argentine and Australian harvests are wrapped up while the Northern Hemisphere winter wheat crops are in dormancy. Domestic Canadian and U.S. flour mills appear to be well covered for their nearby requirements.

The Ukraine and Russia received 150 per cent to 200 per cent of normal precipitation during December. Sufficient snow cover will protect the crop from extreme temperatures in January and February. Much of Germany and Poland received 125 per cent to 200 per cent of normal precipitation during January replenishing moisture reserves in the drought regions from last summer.

Spain, Italy and North Africa are on the drier side. There are no concerns for the U.S. winter wheat regions. The seasonal rains occur in Kansas during April, which is a bearish period for winter wheat prices.

Most of Alberta and Saskatchewan has received less than 40 per cent of normal precipitation over the past 30 days. North Dakota has also received below normal snowfall. Western Canada tends to experience 18-year weather cycles and the years from 2001 to 2003 were quite dry. Keep this in mind because we’re expecting some fireworks in the spring wheat market this summer.

What to do: We’ve advised producers to be 40 per cent sold on their 2018 wheat production. We’re looking for a minor rally in February before the Northern Hemisphere winter wheat crops come out of dormancy.

The Russian export pace is expected to slow later in winter, which will allow the world market to ratchet higher.

About the author

Markets Analyst

Jerry Klassen is the manager of Canadian operations for Swiss-based grain trading house GAP SA Grains & Products.

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