High Level Take: It’s a stock rebuilding year. Even with poor Canada yield (i) acreage is high, (ii) prices have been extremely high for 2 years creating solution-ingenuity that at the margin includes digging deep into Eastern Europe or Black Sea for supply, possibly even with a splash of guar gum substitution in meat binder. Hefty early contracting, even if 2023 yields didn’t meet Act of God threshold, creates sufficient market ready. Toss in some global importer affordability woes, specifically how it is bought, amid statistical awareness that Canada demand only averages 12,000t a month, can’t see anyone being surprised, fooled or unprepared by tightness this year. As such, mustard price cycle has likely peaked, for all types.
We have another political development to watch. This time, it’s the upcoming election in Argentina. First round vote is set for October 22.
Elections are nothing new, but the front runner, Javier Milei, is the leading candidate. One of his campaign pledges is dollarization, which really means pegging the peso to the US dollar with the hope that such action would dampen inflation. Running around 110% per year, the current measure of printing of money and spiraling currency is perceived to be malfunctioning. A US dollar peg was attempted roughly 30 years ago, sort-of worked for a while but lost support during recession, at which point the peg was abandoned in 2002.
We could write a thesis on the Pros vs Cons of a US dollar peg, including the initial groundwork hurdle of building reserves to purchase currency in circulation. Instead, my thought process gravitates to what this might mean in our Agriculture Sphere.
Argentine farmers are known to be reserved sellers. They retain inventory as a hedge against inflation, only recently becoming motivated to sell if a special peso currency program was announced. What happens if currency is pegged to the US dollar? Inflation concern is apt to dissipate. Instead of Argentine farmers back-loading market ready supply to crushers and exporters, the risk becomes front-loaded. And just like the seasonality of cheap Black Sea volume availability during August-October, a cheap volume of Argentine corn and oilseeds would be available around April. Another basketball of volume through gardenhose risk event. It would risk distorting trade flows outright and timing, including the anticipatory nature of it.
It is not a given that Javier Milei will win the election, nor would he adopt a US dollar peg, nor even be able to do it expeditiously. But to think it won’t happen is a mistake.
WRAP: Argentina crushes most of it soy and is considered a major oil and meal exporter. In a normal year, Argentina can be expected to export about 40 MMT of corn. While US has biased demand growth policy to domestic ethanol and biofuels in past 15 years, the US and all know this, has progressively become the residual supplier of grains and oilseeds to the world, surrounded by a growing presence and theme of cheaper offshore choices or origins. Argentina could risk joining the list of countries like Brazil and Black Sea motivated to sell, each at different calendar points.
Trade will likely discount a final Canada production expectation in a range of 17 – 18 MMT as the conclusion to growing season had some yield offsetting parts. Setting aside individual differences, whatever the number, when perception of crop size stops getting smaller and instead becomes “it is what it is”, canola would be ripe for a sell-off correction because discretionary demand still requires periodic large volume participation from China amid a reminder that cheaper offshore choices and origins exist. Basically a version of past two years but without the early hefty export commitment, and think that cross-road risk is now. As such, sustained bullish momentum needs outside leadership help, like ongoing Russia port bombing or US soy drought.
Domestic Refined Bleached Deodorized vegoil basis levels are firming. This is the main feedstock that Renewable Fuel processors use until pre-treat capacity ramps up.
Canada canola price discovery has moments when it falls apart when reliance on discretionary offshore demand is needed. Canada canola also has leadership moments when China is buying; not case today. Canada canola also has leadership moments when timing overlaps with a North America domestic event, like a deeper Renewable Fuel feedstock reload. Amidst all the supply what-ifs, latter would seem to be the main fundamental that’s quietly propping up US soyoil and ICE canola right now.
Nice to have these because that’s what helps generate independent moments of frothiness to a Canada supply/demand that can only consume about 11 MMT of canola that way (crush and US exports). Rest of supply won’t fly at prevailing relative math.
The concept of market ready is an underrated analytical term, and one that is rarely used. Closest alignment would be harvest pressure, but that is too narrow of thinking.Market ready refers to amount of grain that is accessible at any one time. There is no way to quantify it, rather aligns with market behavior specific to surplus or deficit. This is different than a myopic focus on a supply/demand. Market ready can correlate to crop quality, timeliness of harvest (start and speed), amount of on farm and commercial storage, price signals like flat price, desire by farmers to supply-push, number of country participants.
Examples of impaired market readiness align with tardy harvest, quality problems (example 2016 durum fusarium year, or couple lentil wrinkle years). Examples of fluid market readiness include better than expected yield, fears of lower price. Recent examples have been Brazil soybeans and corn. Cratered basis is indicative of too much market ready supply trying to find a home. An anticipated summer period is wheat because Black Sea & Europe should have lots to sell.
WRAP: There are moments when market behaves as if it is trying to ram a basketball size amount of volume through a garden hose. Best if understand market readiness.
Russian political landscape is evolving in ways that ought to reshape the conventional way we view wheat global price discovery. You may have read news about two major firms electing to leave Russia this week. Root of business decision looks to be about abandoning grain origination.
Russia looks to be positioning itself for greater control over domestic grain trade. Yet anybody could still buy free-on-board (fob) port. Coming through lens that duration of war and sanctions could be lengthy, think Russia is slowly metamorphosing businesses to circumvent existing sanctions. Adage to become, you want our cheap grain, you’ll have to do it with our transportation and internal payment & pricing terms. Russia just needs time to change it.
Think of a two-tiered price grid. Those importers who are on good political terms with Russia and can operate without offending the West, ought to be able to access that market in a more predictable way with cheaper price. This loop ought to lack transparency. Those who are not on good political terms with Russia or don’t want to risk offending the West, or want specific quality attributes, will be dependent on next layer of a more expensive price choice and origins. Many operate this way already.
Russia looks poised to cozy-up with China and others, and anytime that occurs, price and transparency dilutes, so does predictability. Russia still needs to export wheat, but the composition of how and who is at risk of changing in coming years.
Pigeon peas are a deficit crop balance calendar 2023. India would normally be expected to produce about 4.25 MMT and import about 0.75 MMT a year from Myanmar and East Africa. India pigeon crop size was forecast by government at 3.6 MMT but trade perceives and price is behaving as if its lower. This past week, Tamil Nadu allowed its 20,000t tur dal tender to include split dehulled green lentils. This can incrementally help feed discretionary green lentil demand, but north half of India can engage in substitution with a modestly cheaper red lentil, and in doing so free up more supply for those that must have higher priced pigeon peas in their diet. Substitution demand is a boring calendar year grind. Patience is required because secondary demand is different than primary demand.
We must also chew through remaining market ready supply from Australia (ABARE estimated it at a monstrous 1.4 MMT) and from summer Canada/Kazakhstan harvests, made easier if price of competing crops soften. Remember that importer affordability issues remain. The world has to grow into Canada’s price, yet pigeon pea is all you need to know why directional risk for red lentils ought to be grindy-higher into later 2023. Averaging various India domestic points would suggest red lentils being about Rupee 1500 per 100 kg cheaper than pigeon pea, or about US $185/t. This a big deal. This and many other trend price expectations have been researched. Please flip me an email or call.
New crop Canada peas reportedly offered US $400/t bulk landed China, about US $45/t lower than old crop bulk. With an allowance of US $30/t for ocean freight, 0.75 currency, less a comfortable autumn new crop all-in-cost/margin of say C $90/t, trade could bid $11/bu generic SK elevator if (i) needed to and (ii) could sell US $400/t landed China.
Russian origin peas are reportedly trickling into China now, small tonnage. Do not believe bulk logistics via Black Sea is a practical volume option, as is a volume of inconsistent quality at one time, but believe the truck/rail ground method and acceleration process is engaging. Peas are not a flax, but it took ~ 3 years for flax to metamorphose into a more meaningful trade shift. We can now only monitor how snippets of cheaper pea choice alter trade flows and sentiment. We know China can be a commodity import sponge if price is competitive against another feedstock, but if peas aren’t, then nit-pick emerges.
The two most important fundamental components of wheat are not necessarily common topics within coffee-shop talk, it is that
(1) both Russia and Australia have large enough sized crops to be able export volume (capped by capacity) right through respective 2023 harvests begin. Cheaper price ensures this happens, Russia leads in Africa/Mid-East while Australia in Asia.
(2) user behavior has shifted to combat high price, part of it is deploy patience, even hope that a cheaper choice will become available.
Where domestic supply/demand imbalances exist, strong basis and futures inversions can do most of the work. Can come up with a few reasons for modest strength including return of disruptive war or corn drought, but the likelihood of reversion to a price uptrend seems low. Bounces yes, uptrend unlikely.
- Wheat is deserving of evolving into an uptrend if (i) led by corn, (ii) Black Sea wheat price participates and leads, (iii) geopolitical disruption occurs, (iv) 2023 weather wreck. Since the answer to all of these today is no……explains directional bias. Through a Western Canada lens, wheat is leaving fast, such that we’ll eventually reach sold out status with gravitation to basically zero shipping margins.
- The world including China will play the cheaper choice trump card at the price discovery table all day long, and unless it makes economic or strategic sense, will only selectively chase other origin higher priced choices.
- While we can micro-manage South American corn production prospects, smaller but regular availability of cheaper Polish/Ukraine corn is your 250 mil bu of US origin export demand variance squelch button. The bigger prize is this…..killing time until 2023 US production prospects cement.
- Soy has demand moments linked to timing of China buys. Brazil to be the core cheaper export hub Feb forward, with Argentina weather a perception influencer, but whose market read supply is to only engage when government offers a Peso program now.
- Week ago US Environmental Protection Agency (EPA) announcement has stymied the “now” vegoil bull. Capacity increases and growth from Sustained Aviation Fuel and Renewable Fuel is not really a major 2023 story, rather “later” in 2024.
Above fits into narrative that has been researched with trend ideas always refined. Please reach out for more detail.