By the end of last month, Ontario farmers had wrapped up planting operations for corn and soybeans. Crops held up fairly well through the derecho storm on May 21, which extended from Sarnia through Ottawa. Localized areas had hail and some crops experienced leaf damage from extensive wind and rain.
Ontario crops received 60 to 85 per cent of normal precipitation during May while temperatures were zero to two degrees C above normal. The longer-term forecast calls for above normal precipitation during June and below normal precipitation during July. Temperatures are expected to be zero to two degrees above normal on average.
At this time, we’ve adopted Statistics Canada’s acreage estimates while factoring in average yields for Ontario wheat, corn and soybean crops.
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Quick look
Soybeans: Export demand remains strong and the U.S. domestic crush pace is running higher than anticipated.
Corn: The carryout in the U.S. has the potential to be historically tight.
Wheat: Ontario wheat will remain competitive on the world market. Russia is expected to remain active in the export market.
At the time of writing this article, U.S. farmers in the Midwest were in the final stages of planting corn and soybeans. However, progress in North Dakota, South Dakota and Minnesota was sharply behind the five-year average due to excessive moisture.
The North American soybean market has incorporated a risk premium due to uncertainty in U.S. acreage and stronger than expected domestic and export demand. Ontario and U.S. corn prices are relatively unchanged from early May.
China and Brazil have agreed to phytosanitary conditions that will allow the world’s second largest corn exporter to ship corn to one of the world’s major importers. Authorities have to sign off on the agreement but we could see Brazilian corn trade to China as early as August.
Brazil’s second corn crop harvest is in the early stages. Drier conditions have trimmed crop estimates for Brazil’s Safrinha production but there are no changes to Argentinean crop estimates. Ontario soft red winter prices remain near historical highs given the Russian/Ukraine war premium. The main U.S. growing season is ahead and there is a drier forecast for Iowa, Missouri and Illinois during July.
Earlier in May, we believed the Canadian dollar would weaken through the summer period. However, the resource-based currency has been strengthening on the heels of better U.S. economic data and gradual COVID-19 reopening of Shanghai.
There appears to be an enhanced risk sentiment.
Stronger equity markets, higher commodity prices and weaker bond yields all favour Canadian dollar strength against the U.S. greenback. We’re still banking that the U.S. will experience a recession in the latter half of 2022, which will limit the upside in the Canadian dollar. Energy prices are bound to move higher through the summer, spurring demand for ethanol and biodiesel. We’re looking for crude oil to trade over $150/ barrel, which will support grain and oilseed markets.
Soybeans
The Ontario soybean market is functioning to ration demand as stocks will drop to historical lows at the end of the crop year. Ontario soybean prices are above world values in an effort to curb exports. We expect to see Ontario crushers import U.S. soybeans late in the crop year, although crushers will have downtime for maintenance and upgrades during the summer.
At the time of writing this article, Brazilian soybeans f.o.b. Paranagua and U.S. soybeans ex the Gulf were equivalent value for August. Ontario soybean quotes f.o.b. St. Lawrence were about US$25/tonne premium over U.S. offers f.o.b. Gulf. We continue to project an Ontario soybean crop of 4.1 million tonnes, which is unchanged from the 2021 output but up from the Ontario five-year average of 3.9 million tonnes.
U.S. old crop fundamentals will be tighter than earlier anticipated. U.S. exports sales have exceeded the USDA’s export projection largely due to Chinese demand. The USDA was expecting Chinese demand to finish near 92 million tonnes for the 2021/22 crop year. However, it now looks like Chinese imports could reach 97 to 99 million tonnes, similar to last year.
At the time of writing this article, Shanghai was in the process of reopening and there is always a surge in demand when economies open after a COVID-19 shutdown. In addition to stronger soybean exports, the U.S. domestic crush pace is also running higher than expected. Diesel prices are at historical highs and crush margins remain profitable.
The USDA estimated U.S. soybean production to finish near 126.3 million tonnes on the May World Agricultural Supply and Demand Estimates (WASDE) report. North Dakota and Minnesota acreage is expected to come in lower than earlier projections. The U.S. soybean crop will likely finish near 120 million tonnes, down from the 2021 crop size of 121 million tonnes.
What to do: We’ve advised Ontario farmers to be 100 per cent sold on old crop soybeans and 10 to 15 per cent sold on new crop. We want to be 20 per cent sold going into harvest. We’re planning on adding to sales once the crop is more certain. We’re expecting the soybean complex to incorporate a weather premium in July. The U.S. cannot afford a crop problem or prices could easily gain another $3-$6/ bu.
Corn
On-farm stocks in Ontario as of March 31 were three million tonnes, down only 450,000 tonnes from last year. Ontario corn stocks in commercial position as of March 31 were 3.8 million tonnes, up from 2.8 million tonnes on March 31, 2021.
Farmers have been active sellers at the higher levels but stocks in the pipeline are sharply above year-ago levels. Basis levels will likely come under pressure during the summer. Earlier in May, the spread between old and new crop was an 80 cents/bu. inverse. This spread is now narrowing. By August, old crop prices will be discount to new crop.
It appears that Ontario farmers will carry out about 800,000 tonnes of corn. On farm stocks should be down to 200,000 to 300,000 tonnes given that prices are at historical highs. We’re estimating the Ontario corn crop at 9.7 million tonnes, up from the 2021 output of 9.5 million tonnes and up from the five-year average of 8.9 million tonnes. There’s a big crop coming in Ontario.
At the end of May, Brazilian corn was quoted at US$336/tonne f.o.b. Paranagua; U.S. corn was US$345/ tonne f.o.b. the Gulf; and French corn was quoted at US$353/tonne f.o.b. La Pallice. Ontario corn was quoted at US$335/tonne f.o.b. St. Lawrence. Ontario corn is competitive into Northern Europe. There’s little down- side in the market at this stage as export demand is surfacing.
The USDA estimated the Brazilian corn crop at 116 million tonnes on the May WASDE report, up from last year’s output of 87 million tonnes. Private trade estimates have the Brazilian crop in the range of 108 to 110 million tonnes. Traders are comfortable with the USDA number for Argentina, which was 53 million tonnes, up one million tonnes from last year.
There’s a fair amount of uncertainty with U.S. production. The USDA estimated the 2022 crop at 367 million tonnes, down from the 2021 output of 384 million tonnes. Acreage will likely be lower due to delays in North Dakota and Minnesota.
The weather forecast for much of the Midwest calls for below normal precipitation during July. The market won’t fall apart until the U.S. crop is through pollination or the weather forecast in early July turns more favourable. There is potential for a historically tight corn carryout in the U.S. so one has to watch out here.
What to do: We’ve advised Ontario farmers to be 100 per cent sold on old crop. For new crop, 10 per cent of expected production is enough for now. There are too many uncertain- ties with U.S. production.
Wheat
Ontario soft red winter wheat prices continue to trade near historical highs. Ontario flour millers have the bulk of their old crop demand covered but world values continue to percolate higher. We mentioned in the previous issue that Ontario wheat stocks will drop to bin-bottom levels at the end of the 2021/22 crop year. Therefore, the market needs to trade premium to world values to curb export movement. Ontario winter wheat production is expected to reach 1.85 million tonnes, down from 2.8 million tonnes last year.
At the time of writing this article, Ontario wheat was competitive on the world market. U.S. No.2 SRW was quoted at US$457/tonne f.o.b. the Gulf; French soft wheat was quoted at US$452/tonne f.o.b. Rouen and Ontario SRW was quoted at US$460/ tonne f.o.b. St. Lawrence.
The U.S. hard red and soft red winter wheat harvests will move into high gear in June. This will be followed by the main European harvest in July. The Western Canadian and U.S. hard red spring wheat will come off in September and October. U.S. farmers sell nearly 50 per cent of their winter wheat in the summer months and European farmers will also be more aggressive due to higher prices. It’s been drier in France and Germany but the crop has held up better than expected.
The Russian wheat crop is expected to come in around 80 to 85 million tonnes, up from the 2021 crop of 75.1 million tonnes. Russian prices are about US$40/tonne discount to French origin. The USDA is expecting Russia to export nearly 40 million tonnes of wheat in the 2022/23 crop year, up from 33 million tonnes during the 2021/22 campaign. The main point is that Russia will remain active in the export market. The Russian harvest will occur in the latter half of July.
What to do: We’ve advised Ontario farmers to be 100 per cent sold on old crop and 10 per cent sold on new crop. Wheat is one crop you need to store. Our next selling recommendation will likely be in October.
