Grain markets continued their march higher towards the end of October, with nothing spooking the funds from continuing to push the complex up. For the week, soybeans and corn each pushed above their 100-day moving averages but ended up only gaining 2% and 0.75% respectively for the week. Wheat was the loser for the week, down 1.3% whereas canola and oats spent most of the week heading higher. For oats, prices jumped another 4% this week and are now up 30% over the past month, while canola gained 3.15% over the past week and is now up 11.5% in the past 30 days. Ultimately, the market is being scared into trying to price in the issue of this many uncombined acres in Western Canada.

Despite about 20% of all acres left to combine in Saskatchewan and 25% in Alberta, the International Grains Council recently raised their global production estimates. With output outpacing consumption, the I.G.C. expects global grain inventories to end 2016/17 at nearly 500 million tonnes, up 5% year-over-year. This includes the global carryout for corn climbing to a record 221 million tonnes, up 6% from 2015/16 thanks to a record 1.035 billion tonnes of production worldwide (+7% year-over-year). The more interesting caveat here though is that the I.G.C. is flagging China to account for a minimum of 40% of all global grain supplies with about 200 million tonnes in reserve (although many will argue it’s more).

While minimum support prices for Chinese corn farmers are gone in a shift in policy to try to whittle down corn stocks, the state purchase price for Chinese wheat will stay unchanged at ~$350 USD / MT ($9.50 USD or $12.75 CAD / bushel). As such, there’s no real incentive for Chinese wheat growers to switch into something else, like soybeans (although in some areas, farmers are being paid to plant beans)! This is a sign of poor policy planning by the People’s Republic as, while domestic Chinese wheat demand has stayed flat for the past decade, domestic inventories have tripled.

Even more astounding is that over the same 10 years, Chinese soybean imports have grown an incredible 200%. However, a 20-year analysis of China’s soybean trade by the University of Illinois shows that imports’ growth is slowing, but demand from other countries is helping offset the decelerating pace, as well as the increase in global soybean production. On that note, the I.G.C. also points out that global carryout for soybeans will come in at 32.7 million tonnes (a historically comfortable level) and also point out that planting in Brazil is progressing nicely, but forward sales of the crop have been slow thanks to lower domestic prices year-over-year and higher debt levels.

On that note, it’s estimated that about 1/3 Brazil’s soybeans are now seeded (ahead of the average pace) but that acreage growth is slowing. 2 years ago, the year-over-year growth in Brazilian soybean acreage was up 8%, last year it was up 3.5%, but this year it’s only climbed 2% to 101 million acres (this is a good example of the law of saturation). One surprise this week out of Brazil was that they sold a handful of cargoes to China. This put some pressure on the soybean complex as it’s more aware now that Brazil & Argentina still have about 10-12 million tonnes of soybeans left to sell at a time when the about half of America’s 50-52 million tonnes of soybean exports are contracted during the Oct-Dec quarter.

Most agree that, moving forward, soybean prices will be dictated by export demand and South American production prospects. However, with the additional fund money buying into the market, Societe Generale is the first major analyst to come out and say that this move won’t last forever. Good export demand has helped but the bank doubts that this slight uptick will offset the record yields in America. Add in that more support for Chinese soybean acres increasing and little expectation that La Nina will have any legitimate effect on the South American crop, SocGen is expecting soybean prices to fall back below $9 / bushel on the Chicago board before the end of 2016 (yes in the next 2 months).

Keeping this global perspective in mind, Malaysian palm oil futures are trading at their highest levels since March 2013, soybean oil futures are trading at their highest levels since 2014, but canola is only trading at its highest since late June (albeit not above the highs reached that month, as previously mentioned). On the bullish side of fundamentals, Malaysian palm oil stocks are down 41% year-over-year and a slow rebound in production, a bunch of canola remains uncombined in Western Canada, less soybean acres are getting seeded in Argentina, and we may see some weather premium priced into the South American crop.

Switching gears in wheat, the Russian Ruble has rallied 19% against the U.S. Dollar in 2016, creating lower expectations that they’ll reach 30 million tonnes of wheat exports. Other than the ruble, Egypt is also being blamed as the G.A.S.C.’s wheat procurement program is about 13.5% behind last year’s, with only 2.04 million tonnes bought thus far. This included one of their biggest purchases in the past 2 years, purchasing 420,000 MT of Romanian and Russian goods at an average delivered price of $193 USD / MT.

Staying in Black Sea, the Ukrainian Ministry of Agriculture is expecting winter wheat acres to fall for the 2nd straight year to 15.2 million acres, down about 8% from the 16.6 million seeded last fall. The decline is attributed to unthankful weather with a dry September and then rains in October, and, when you add in at least 5-10% winterkill, total harvested acreage for 2017 could come in around 13.8 – 14.6 million acres.

Ultimately, North American wheat values are still overpriced to compete with the likes of Black Sea winter wheat of 12% protein, but the lower levels are creating more opportunities for North American product to ship into African and Southeast Asian markets. Sure, better farming practices have supported the likes of Russia and Ukraine become production kings, but their Wheat King titles are a bit artificial since it’s not the same type of quality that we’re shipping out of Western Canada or Northern U.S. states.

That in mind, American wheat exports are expected to jump about 26% year-over-year to 26.5 million tonnes, according to the U.S.D.A.. This would bump them up to being responsible for 15% of global wheat exports, up from 12% and the highest in the past 3 years, but still a significant difference from the 29% it owned a decade ago and more than 50% in the 1970s. For Canadian product this year, quality is more up in the air than even seen in 2014, with lots of wheat still uncombined.

Intuitively, blending and drying are likely to become more popular this winter, meaning flow-through of grain from country to port could be slower (not including the dependency on railroads). The Western Grain Elevator Association is already calling for most hard red spring wheat to be sold as #2 quality because of vomitoxin issues (C.W.R.S. is sold to Japan and the U.S. at 1.1ppm, and to the E.U. at 1.25ppm). Similarly, DON and HVK levels will be the issues challenging durum exports, which the W.G.E.A. says most of Canadian supply will be sold as #3, or a #1 by US standards (1.75ppm vomi is max tolerance for European durum imports).

Overall, we’ve yet to see said blending and drying really be executed by many grain buyers and my guess is that the demand out there isn’t justifying it and/or they’re not getting too emotional / are content with the pipeline of grain they do have coming in. That being said, we’ve see strong trading this week on the FarmLead Marketplace for canola, lentils, corn, and soybeans, as producers are doing a good job of managing price risk and selling into strength. The opportunities today also validate are calls from back in late August to hold onto oilseeds and higher quality cereals for better prices in 4Q2017.

However, while we haven’t seen the highs in June for any crops, there’s a lot of people looking for those levels. We’re starting to see a little more volume in the complex as recent data suggests fresh speculative money has entered the market, mirroring what we saw back in 2Q2016 spring when every hedge fund manager and their mother got a little more active in grain and oilseeds. Managed money is looking for profitable opportunities and corn and soybeans are the most liquid / easiest ag markets to get in and out of quickly.

This in mind and much like the market fell abruptly in June, prices for the likes of corn and soybeans feel a little artificially high, and that trickles into other markets like canola and wheat. With the U.S. election right around the corner, volatility is omnipresent and I’m not discounting the chance of a lot more upside, but I do manage risk and understand the likelihood of that happening drops with every cent per bushel move higher. A more festive way to look at things is that with every incremental move higher, the market is scared to justify the next incremental move with no new dynamics to work with — you don’t trick-or-treat at the same house twice if you know they just have the same old candy!