Markets soar skyward as supply and demand forces align

It wasn’t only Jupiter and Saturn aligning in December to produce an awe-inspiring sight.

Strong demand for oilseeds and worries about global production aligned to cause canola and soybean futures to soar to levels not seen since 2014.

From Dec. 1 to Jan. 8, March canola futures rose 14.5 percent.

That lagged behind the 18 percent gain in March soybeans and soy oil, but note that canola’s rise was limited by the concurrent two percent rally in the Canadian dollar.

Grains also rallied in that period with Chicago March corn up 18 percent and Minneapolis March hard red spring wheat up 10 percent.

These strong prices are needed to ration demand and encourage increased seeded acreage this spring in North America.

Regarding demand, canola exports as of Jan. 3 stood at 5.2 million tonnes, according to the Canadian Grain Commission’s weekly report. At that date we are only 43 percent through the crop year but we have already exported 51 percent of the 10.2 million tonnes that Agriculture Canada forecasts will be full-year exports.

Domestic demand to Jan. 3 is at 4.57 million tonnes, or 45 percent of the full-year forecast of 10.2 million.

If canola continued to disappear at this pace into export and domestic pipelines we’d run out of supply before the next crop was harvested.

It is a similar story in American soybeans, with price increases needed to ration demand.

I’m focusing on oilseeds in this column, but I should also note that Canadian crop exports are at a record pace.

Bulk exports of the 15 crops that the CGC tracks stand at 24.4 million tonnes, up 33 percent over the same point last year.

Now let’s look at supply. The South American soybean crop is in a critical yield setting stage this month.

With the La Nina well underway in the Pacific Ocean, December was dry in much of Argentina, Brazil, Paraguay and Uruguay.

Weather forecasts made Jan. 8 extending out to Jan. 21 showed only normal to below-normal rainfall across Brazil and Argentina. There was no above-normal rain expected to make up for past deficits.

This column was written before the Jan. 12 United States Department of Agriculture monthly supply and demand update that could shed new light on South American prospects.

The trade expected the USDA would make modest decreases in its Brazil and Argentina soybean and corn production forecasts.

The USDA is usually cautious when scaling back forecasts so I expect the Jan. 12 report will not be the last word on South American production.

Every week with below normal rainfall will add upward pressure on oilseed prices.

Another uncertainty that likely won’t be settled by the USDA report is the question of China’s corn import demand.

Back in November the USDA’s attaché in China pegged its forecast for 2020-21 China corn imports at an aggressive 22 million tonnes.

In December, the USDA cautiously increased its formal forecast to 16.5 million tonnes from 13 million in November.

Corn futures prices on China’s Dalian exchange continue to soar, reaching the equivalent of almost US$11 a bushel in the May contract last week.

Chicago futures last week were just shy of $5 a bushel, so it would be cheaper for China to import more American corn.

However, some analysts, such as Darin Friedrich of StoneX Group, note not all of China’s corn consumption is tied to critical livestock feeding. A significant amount goes to processors to make ethanol, starch, lysine and other products and a portion of that is exported. The government encouraged the corn processing and ethanol industry when its problem was surplus corn stocks, but now that there is a deficit, processors will have to take a back seat.

“Why would China’s leadership want to increase its dependence on the U.S. for a key staple grain just so that some processors can continue to export starch to Indonesia or Malaysia?” Friedrich asked.

He argues that Beijing will put food security over processors’ profits and so will limit the amount of corn that processors can import.

I have no idea which argument will prove true.

Beyond the fundamentals of crop supply and demand, world investors are putting money into commodities, hoping that the roll out of the COVID-19 vaccines will control the pandemic enough to see improved economic growth in the second half of the year.

They might be right, but on the other hand this terrible virus might yet have surprises.

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