Summer Wrap



summer Wrap_Grain Navigator AUG 20
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Executive Summary


The knowns are trickling in. Now we can finally start making some wise marketing decisions. Globally, grain production will be smaller than originally predicted. Historically this marketing season would be bullish. However, there are many other factors that need to be considered. In my opinion the biggest influences of commodity prices in 2021/22 will be political, financial markets and logistics. As the market is trying to digest all these outside forces, volatility and price extremes should be expected. This year the theme will be expect the unexpected.

Overall Market thoughts

Market risk is the absolute biggest factor for the next 60 days. Except for harvest, production risk is largely mitigated. During these times it would be wise to remember what happened in 2008 when the market abruptly collapsed. Recently, the lumber futures ran from about 450 up to 1700 then crashed right back to 450 in a few short months. (see graph below) Fundamentals matter, just not as much as big money. In other words, fundamentals will give you market direction, big money will give you the swing. Big money has the ability to push $13 canola up to $25 then take it back down to 10.

Remember, this market is at generational highs which means the risk factor is huge. Not only because of extremely high prices but because volatility is massive. In these times it is critical that farmers know the risks and understand the rules of the game. At this point it’s all about risk management and finding the balance between profit and speculation.



 

Canola

SENTIMENT: Extremely cautious bull

World Stage:

Last year the world produced about 71 MMT of canola of which 19.6 came from Canada about ¼ of the global production. In 2021 Canadian canola production is going to be closer to 15 mmt if not smaller. This is huge. This means countries will be scrambling to find canola. A very bullish scenario.

Market Zoning and Timing:

At this point there is a high probability of seeing canola reach 1000/mt again like it did in the spring. However, what happens if the market has already priced in worst case scenario and the market doesn’t rally, but drops down to 15?

Don’t laugh this is a real question and a very real possibility.

At this particular point in time I could easily make a case for canola to drop back down to $13/bu or make the case for it to rally to $30. Regardless, the market does what it wants whether it makes sense or not. Remember the market can remain irrational longer than you can remain liquid.

The number one marketing decision a farmer can make this year is deciding exactly how much he is willing to risk and then figure it out.

For example:
10,000 bushels of canola at $20/bu is $200,000 of that $200,000 how much of that are you willing to risk? Is it 50K or 100K or 5K. A $5000 risk would imply that there is actually no risk and 100% of canola should be sold immediately. On the other hand a $50,000 risk means that you are ok with selling canola at $15. However, on that $50,000 risk how much are you expected to gain if the market rallies or what’s the point? This means a reasonable ROI needs to be figured out. If you are certain that the market is going to rally to $25 which is a 25% ROI, that’s a good investment. The only reason anyone would do such a thing is because they are pretty certain that the price will be higher in the future.

Risk To Reward Management:

  • The real question is why did canola go to $20 in the first place? How much of this rally was speculation and how much was genuine fundamentals? Consider this. Perhaps fundamentally the market is justified to be at $15 which mean the remaining $5 is pure speculation which can disappear in an instant.

  • In my personal opinion, I think fundamentally the price range should be between 720 and 880/mt. However, I do think some short term rallies will present themselves and of course the US soybean crop needs to be harvested and evaluated.

  • In the spring canola rallied above $1000/mt. Last year canola was around $440. Currently Canola is just over $860/mt which means both upside and downside. For much of the last 20 years canola was closer to 440 than 860.

  • The elephant in the room is of course the US soybean crop. The US soybean crop is looking pretty good. On course to be 118 MMT which will be the 3rd largest ever. It is 6 MMT larger than 2020 and 22 MMT larger than 2019.

  • As MR. T say’s “I pitty the fool” who forgets about the US crop.

Smart Contracting:

  • If $20/bu is not high enough what are you waiting for. If you don’t know, sell. Sell everything.

  • Again, the only reason why 100% of production is not sold immediately after harvest is because of potential price increase.

  • It goes without saying, know your grades and how much is available for sale.

  • Storage risk now becomes huge.

  • At these current prices there is a whole new set of factors that need to be considered.

  1. Everything is magnified

  2. Storage risk becomes much higher.

  3. Volatility becomes huge as daily swings can easily be 50 cents a bushel

  4. Buyer willingness to participate in the market is greatly increased.

  • At this point the smartest thing to do is to take the majority of canola and sell it at these record prices. Then keep back a percentage that you are willing to speculate with.

  • With the amount that will be used for speculation have an idea of trigger price.

Current Trend and Looking Ahead:

  • At the end of the day this is an unprecedented market. The potential is there to go up to $30/bu or right back down to $12. This is honestly the reality of the situation. There is simply so much stuff happening in the world right now it is impossible to predict what will be the trigger event that moves the market up or down.

Chart

this is a 5 year canola chart.

  • Previously canola bounced between 440 and 550. Obviously, it is rallied way up to 860 range which is very significant.

  • Anyone who understand Fibonacci numbers knows that 880 is 1.6 times 550. This potentially means that the new range of canola will be around 720-880 although the market needs to hold this range or canola prices will fall back to their previous range which is between 10 and 12 bucks as soon as supplies replenish.

Moving Forward:

2021 crop

  1. Decide today exactly how much you are willing to speculate with and keep it back.

  2. Sell the rest.


2022 crop

  1. Look for opportunities at 1000/mt on a futures only contract


 

Wheat

SENTIMENT: bullish

World Stage:

Spring wheat in Canada and USA is a complete disaster. Last year Canada produced 35 MMT of wheat. In 2021 the official number is 24 MMT and could be less than 20 MMT.

USA official wheat numbers are down 3.5 MMT, Russia is down 12.8 MMT, Australia is down.

At least in China the production is up by 1.7MMT to 136 MMT. Although, I’m not sure how they did it when they have lost a minimum of 10% of crop to flooding. 20 bucks says China had a massive wreck this year.

The only region that is said to have better crops is the EU which is stating an increase of 12.6 MMT for 138.6 MMT

However, that being said very little of this data is accurate as harvest is incomplete. The best thing that we can do is compare to another la Nina year and see what happened. I’m assuming 2011 was similar and should have similar properties. In 2010 global production was 688 MMT. In 2012 it was 650 MMT which is roughly a 5% drop in global production. Let’s assume that 2021 will also have a 5% drop in production. This would turn the 776MMT down to 737 MMT. A very bullish number. All that matters is whether the production is increasing or decreasing. Any production issue is considered bullish.


Market Zoning and Timing:

  • From previous La Nina years it would suggest prices topped out near the end of the calendar year, which would mean sometime between November and early January. Perhaps a good time to sell?

  • If this La Nina year is a repeat, then wheat has some serious upward potential, like 2 dollars per bushel potential. That would mean CPS wheat could go as high as $12 delivered to elevator. HRS could even go as high as $14!

Risk To Reward Management:

  • On the futures side of things there is a pretty good chance of Kansas wheat hitting that 8-dollar mark which would mean CPS wheat would get very close to $11.

  • It is also my opinion that out of all the ag commodities, wheat has the most potential to rally. Therefore no rush when it comes to contracting. The reward potential is much higher than canola or barley.

Smart Contracting:

  • Once again targets are going to be your best friend this year.

  • Nothing wrong with selling 50% of the remaining crop at one dollar above todays price, Which would be $11 CPS and $12.50 HRS. This is good money.

  • On the remaining amount just wait it out and see if wheat reacts like it did in 2011.

Current Trend and Looking Ahead:

  • Wheat is in a bullish trend and will probably continue.

  • Previous la Nina years would suggest that the market peaks out in mid to late winter.

Chart


 

Barley

SENTIMENT: Neutral to slightly bearish

World Stage:

  • There is no doubt that world barley production is down this year. In 2020 production was 160 MMT and in 2021 it is projected at 149 MMT.

Market Zoning and Timing:

  • Even though production is down, I’m neutral to slightly bearish. Here are a few reasons.

  1. The price is already at all-time highs. Double from last year.

  2. The export and malt programs will not be adding new sales for this year as supply is extremely tight and fulfillment risk is too great.

  3. Multinational grain companies have the ability to source from all over the world.

  4. US corn will put an upper limit on the Lethbridge barley price. The US corn crop could be the 2nd largest on record.

  5. Cattle on feed? How does this change with current prices?

Risk To Reward Management:

  • The risk for lower prices increases substantially as existing end user contracts are filled. New contracts in the export, malt or feed industry could be substantially reduced. Essentially, barley demand stabilizes to meet supply. This doesn’t necessarily mean the barley price will drop drastically, it just means a significant rally is a long shot.

  • At this point 8.50 barley is pretty good.

  • Downside risk is much higher than the upside.

Smart Contracting:

  • At this point it can be 8.50 barley is awesome. Just sell into the cash market.

  • FOB pricing from a licensed and bonded company is a must. Load by load payment is a must. None of this complete the contract nonsense.

Current Trend and Looking Ahead:

  • Barley is at all-time highs. There is very slight harvest pressure but it’s the smallest in years.

  • Malt barley price is now over $9/bu

  • Price action on barley should be limited unless there is a problem with harvesting the corn.

 

Charts




CONCLUSION

There is no question that this year’s drought is playing into the market and will likely be a very large influence for the remainder of the year. However, do not negate the fact that commodity prices are already at record highs. The real question is how much higher can these prices go if at all? Remember, the northern hemisphere harvest is far from complete and anything can happen.


Yes, there is a potential for higher prices, but how much are you willing to risk? In years like this it is very wise to remember the old saying “There is room for both the Bulls and Bears, but the Pigs always get slaughtered.” I guess what I’m trying to say in this whole thing is don’t be a pig. Overall, I think this year is a year to be a very cautious bull which means take enough money off the table so that you can farm again next year.



Thanks

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