Rural voice Dec 2020

Optimism entered the markets as 2020 came to a close.  This optimism is the result of reports of multiple successful covid-19 vaccines, that will be available for distribution early in 2021.  This market confidence came even as viral cases spiked in many regions and further lockdown restrictions were announced.  The market optimism stems from the participants looking beyond the current crisis with the view that “The night is far spent, the day is at hand.”  From this market outlook, many downtrodden asset classes rallied as the year wrapped up and money flowed into these areas– including many stock markets and oil prices.  Industrial metals performed well also.  Copper rallied to 8 year highs and Iron ore prices were sharply higher, indicating that the outlook for manufacturing is projected to be busy.  How good was the money flow?  In November alone US focused ETF’s had inflows of cash of over $62 billion; the largest monthly inflow in history.  During this time agricultural markets also saw major price appreciation, as these large money flows pushed most commodities higher.  But this isn’t the only story as to why the ag markets pushed higher.  The grain markets appeared to have a fundamental shift and outlook story of their own.

There continues to be questions going forward as to what the new US administrations stance will be with China.  A top Chinese foreign diplomat was recently quoted saying that the nation is looking for a reset in relations.  This comes amidst the US commenting on the situation between China and Hong Kong, and China’s objection to the United States comments.  In respect to these comments a Chinese representative said that the US is continuing down the wrong path and that if the US did not stop interfering within their internal affairs, there would be consequences.  These consequences were not elaborated upon, but agricultural markets take notice as Chinese demand has been the driver for higher grain market prices.

China has been a big buyer of US soys as the market rallied, fueling the upside momentum.  This continued until prices reached such high levels, that Chinese interest in US soys waned, and China began washing back (selling back) cargos to US shippers.  Chinese crush margins declined as high prices caused revenues to fall and local bean reserves to grow.  In the meantime Chinese interest has declined, as they await the outlook on the developing South American crop.  This vast growing area has been notably dry, however recently forecasts have become more favorable and crop progress has been made.  As we move into the new year much of South America enters its key growing time frame.  There are likely enough concerns that weakness in the market should be supported, especially in light of ending stocks declining sharply in the US year over year.

The same story of China demand continues to be the story for the corn markets outlook as well.  In China, corn is trading at $10 per bushel, pushing the spread between US and China corn prices to historically wide levels.  US corn is currently priced cheaper than Ukrainian, and South American offers.  From this there continues to be the thought that China will need to continue to buy large volumes of US corn.  If some of these estimates are realized, then the US is likely to experience record corn exports.  This in the midst of the La Nina weather pattern being experienced and the risk this brings to South American production.  With this situation one could expect the corn market to be supported as we work into 2021 – as the market will need to continue to support new crop plantings.  Some analysts estimate that the US corn carryout could drop to levels not seen since 2013.

Wheat continues to the least exciting story of the grain complex.  Sure the Russian crop has its establishment issues – and many acres are at risk of winter kill.  22% of the Russian wheat crop is rated in the poor condition category.  But keep in mind that Russian wheat acres are up substantially and so this may not pose as big of a risk as some have been led to fear.  Whether this fear will be substantiated or not, is something that will not be know for some time now, until the spring arrives and the wheat emerges from dormancy.  Until then the market has begun to focus on production elsewhere – such as in Canada and Australia.  The Australian wheat crop was almost record high this growing season at 31.2 million tonnes, versus the all-time record of 31.8 million tonnes.  And it is not just Australia producing large volume of wheat.  Canada also had large production, with Stats Canada moving the western crop higher from previous estimates.  Canadian production was estimated at 35.2 million tonnes, the largest in years.  The Ontario wheat market has seen large demand recently.  The Quebec feed market has been drawing large volumes of soft red winter wheat as the price spread between corn and wheat has narrowed.  


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