Canola field NSW

A few weeks ago, we wrote that the world's corn stocks were getting worryingly tight. Earlier this week, the USDA tightened them even further by cutting US corn yields after a dry-ish finish to their season.

The report cut US corn ending stocks by 7mmt, significantly below traders’ expectations. Soybean stocks were also cut below expectations, again courtesy of some tweaks to final yields. Wheat was relatively unchanged and initially did not illicit a price response in the market. However, corn is the grandaddy of agricultural commodities so when corn rallied hard, it was only a matter of time before wheat followed suit.

Canola has seen a lot of volatility this week. Oilseed prices had been buoyed by crude oil rallying after new sanctions on Russian oil companies, concerns over Argentina’s soy crop and importantly, the US clarifying the use of used cooking oil (UCO) in renewable fuels. The USDA has effectively banned the importation and use of UCOs in biodiesel production. This had the effect of buoying prices for canola and soybean oil as the primary feedstock of biodiesel.

Last night, however, rain appeared in the forecast for the parched Argentine corn and soy crops. Crop conditions had been sliding due to La Niña induced drought conditions, so this rain should it materialise, will help arrest any further slide. Also, the US sank the boot into their Canadian neighbours suggesting that canola oil imports would not be off the table should a tariff dispute erupt between the two countries.

The weakness in the soy market soon spilled into both corn and wheat, dragging them off their recent three-month highs and closing just above long-term support levels.

Russian weather across the agricultural region remains unseasonably mild. There are two trains of thought on this. If it remains warm, wheat could sail through the winter period relatively unharmed and bounce into spring in better condition than when it went into dormancy. The other thought is that a relatively soft crop becomes extremely vulnerable if the weather turns quickly colder. Russian weather is going to be a major driver of prices over the next few months.

Lastly, next Monday heralds the inauguration of Trump’s presidency. There is a line of thought that the proposed raft of tariffs will spur inflation which will likely reduce the US Fed’s ability to cut interest rates. This is a key factor in why the USD is so strong at the moment. Trump is however starting to walk back on some of the election rhetoric, so it will be interesting to watch how everything unfolds in the next few months.

Next week

As we move into the next month, South American harvest results will be closely watched as will the weather in key production areas.

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Click on graph to expand

Click on graph to expand

Sources: Next Level Grain, SovEcon, USDA, Stone X

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