Over the past two weeks, Ontario corn and soybean prices have dropped 15 to 20 cents per bushel for both old and new crop positions. Soft and hard red winter wheat prices are down 35 to 50 cents per bushel.
Grain and oilseed futures are functioning to encourage demand through lower prices. Wheat futures are under extreme pressure with the market adjusting to a sharp year-over-year increase in production from major exporters including Europe, Russia and Ukraine.
China has Canada in the penalty box in regards to additional soybean purchases. The arrest of Huawei chief financial officer Meng Wanzhou has become a personal issue for Chinese President Xi Jinping.
World soybean markets are softer due to the South American harvest pressure and record large stocks in the United States. Chinese demand is saturated in the short term.
Early Ontario crop estimates suggest that soybean acres will be up 10 per cent over year-ago levels at the expense of corn.
A soybean trader was playing hockey, fell on the ice and went into a coma. He awakes in March 20, 2040 and the first words are “Has the U.S and China signed a trade agreement?” The doctor answers “the U.S. trade representative says they’re very close; a deal is imminent.” The U.S. and China remain far apart on key issues such as market access, intellectual property rights and the enforcement of negotiated terms. U.S. President Donald Trump and President Xi were expected to meet in late March to sign an agreement but it now looks like this meeting will be delayed.
The Canadian dollar has deteriorated by two per cent since early March. Canadian fourth quarter gross domestic product came in lower than anticipated. Slower world growth will hinder expansion for the Canadian resource-based economy and the Bank of Canada is not expected to increase interest rates in the first half of 2019.
Crude oil prices are expected to trade sideways over the next month. Canadian oil production tends to decline during the spring thaw and the Western Canada Select discount to West Texas Intermediate has been hovering around US$12 per barrel.
Soybeans: Chinese demand is saturated with U.S. purchases and a healthy South American harvest.
Corn: Ontario continues to export much more corn than a year ago, likely meaning tight stocks this year.
Wheat: Significant wheat year end stocks are weighing down markets.
The United States Department of Agriculture’s World Agricultural Supply Demand Estimates report was considered neutral to bearish for the soybean complex. Brazilian soybean production was estimated at 116.50 million tonnes, down 0.5 million tonnes from last month and down marginally from 120.8 million tonnes last year.
The Brazilian soybean harvest was 60 per cent complete as of March 11, up from 48 complete last year.
Argentine production was unchanged from last month at 55 million tonnes, which is up from 37.8 million tonnes last year. The Argentine harvest will begin in late March and move into full swing in April.
Over the past couple weeks, China has bought about two million tonnes of U.S. soybeans for June and July delivery. These U.S. sales were part of the 10 million tonnes of Chinese goodwill purchases agreed to back in February. Despite this recent business, the market remains under pressure. Talk in the trade is that China has overbooked their supply for March and April so their demand is saturated. Brazilian offers have become more aggressive into other origins with the Chinese purchases of U.S. beans for the summer months. This world environment has resulted in lower export demand for Ontario soybeans from April through July.
The U.S. carryout for 2018-19 is expected to come in at 24.5 million, up from 12 million tonnes last year. The soybean market needs to discourage U.S. acreage. However, at this stage only a marginal year-over-year decline is expected. U.S. farmers were hoping for a Chinese agreement before spring seeding.
What to do: The current market situation confirms our recommendation to be 80 per cent to 90 per cent sold on old crop soybeans and 20 per cent to 30 per cent sold on new crop.
South American and Ukrainian corn is more competitive on the world market compared to U.S. origin out of the Gulf of Mexico or Pacific Northwest. U.S. transportation costs have risen due to adverse conditions on the river system. Therefore, the domestic market is absorbing the bulk of farmer selling in the short-term. U.S. export sales have been disappointing and the USDA lowered its export projection on last week’s WASDE report. For 2018-19, U.S. corn ending stocks are projected to finish near 46.6 million tonnes, up from the February estimate of 44 million tonnes. Traders are factoring a year-over-year acreage increase of 2.5 to 3.5 million acres, which will cause 2019-20 ending stocks to swell to 55 to 57 million tonnes.
There were no major changes to South American corn production. Combined Brazil and Argentine production will finish 26 to 28 million tonnes above year-ago levels. The seeding of Brazil’s safrinha second crop corn is in the final stages while conditions in Argentina remain favourable.
Canadian corn exports for the week ending March 7 were 905,000 tonnes, up from 419,000 tonnes last year. The year-over-year increase in exports along with steady domestic demand will cause Ontario stocks to become relatively tight at the end of the 2018-19 crop year.
Strong competition from Ukraine will temper European demand for Ontario corn in the short term. We’re seeing the domestic market function to ration demand by trading at a premium to world values. The Ontario domestic market will attract larger imports from south of the border in the latter half of the crop year.
What to do: Given the stronger Ontario prices relative to the U.S. and other major exporters, we’re advising producers to sell 20 per cent of their 2018 production bringing total sales to 80 per cent. We want to remind producers that we’re 20 per cent sold on new crop.
As of March 8, French soft wheat was offered at US$214/tonne Free On Board (FOB) Rouen for April shipment, down US$5/tonne from last week. Russian Milling wheat with 12.5 per cent protein was down US$2/tonne at US$225 FOB the Black Sea. U.S. hard red winter with 12.5 per cent protein was offered at US$214/tonne FOB the U.S. Gulf, down US$7/tonne from seven days earlier. U.S. soft red winter was offered at US$202/tonne, also US$7/tonne below week-ago levels.
While producers often focus on the nearby situation, importers are focusing two to four months in advance. Last week, Saudi Arabia tendered for 625,000 tonnes and the bulk of the business will likely be European origin. Major exporters are scrambling to move old crop stocks before new crop supplies come in the market. Demand is limited approaching the end of the crop year.
The U.S. hard red winter wheat harvest will be in high gear during June and the U.S. farmer has sold very little new crop wheat.
Kansas has received above-normal precipitation during the winter and seasonal rains occur in April. U.S. hard red winter wheat is projected to rise two to three million tonnes above year-ago levels.
In Europe, production is expected to be up 10 to 12 million tonnes compared to 2018, while Russian output is expected to grow by six to eight million tonnes.
Canadian spring wheat acres are expected to be up 15 per cent, which could add three million tonnes to production compared to last year’s output.
There is still a fair amount of time between now and when the crop is in the bin; however, the futures market is factoring in favourable yields in the Northern Hemisphere. There is no risk premium in the market and the downside may be overdone for the time being. The futures are basically trading harvest conditions.
What to do: We’re 60 per cent sold on the 2018 crop. Let’s see if we can ride out some of this recent weakness. The managed money has a record short position in Kansas wheat so the market is prone to experience a short covering rally at some point.