Grain prices were lower again over the past week, extending the January losses. Good growing conditions in South America and the coronavirus were cited as the main reasons. Weakness in other markets, such as energies, added to the negative tone.

 

Early harvest has started in southern Mato Grosso, with strong yields. The crop still maturing is receiving ample rainfall and moderate temperatures. It is appearing more certain that Brazil will harvest yet another record crop.

 

As of Feb 3, there are over 20,000 cases of coronavirus, with 427 deaths, mainly in China. The threat of the epidemic getting worse has markets worried and the media is obsessed with the contagion. It is definitely affecting some industries, such as travel.

 

It has also affected grain prices. Phase 1 of the US/China trade deal included large ag purchases by China. However, “in the event of a natural disaster or other unforeseeable event”, they may not reach the quantities promised.

 

Some think the coronavirus could give China an excuse to not honor the trade deal. History shows they have not always been the best at honoring contracts, especially when it comes to trade. Apparently, the US will raise tariffs again if they don’t meet their targets.

 

Energy futures remain very weak. Crude oil broke $50.00 per barrel for the first time in 13 months. Natural gas futures haven’t been this low in nearly four years. Energy stocks are the weak link in stock markets, so the TSX is lagging the S&P in the US.

 

The Canadian dollar has been weak lately as it is a commodity currency. This is one of the main reasons I don’t like basis contracts. Grains and our dollar both rallied strongly in December. At the start of 2020, Hensall’s board soybean basis was $2.10 over March, while soybean futures hit 9.73.

 

Today our soybean basis is 2.45 over March, while March futures closed at 8.80. If a farmer sold the basis only at the end of the year, he would have lost out on 35 cents of basis gain. Plus, to date,  he would have suffered the $.93 drop in Chicago.

 

Marketing is about taking risk off the table. Basis contracts don’t do that. In the example above, the producer would still be subject to further depreciation in Chicago. Flat price sales keep it simple compared to basis contracts.

 

Frank Backx

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