Temperatures in Ontario have been two to three degrees Celsius below normal over the past 30 days. Precipitation has been quite variable with the bulk of the central and northern regions receiving 40 per cent to 80 per cent of normal rainfall.
Soybeans: The Ontario soybean crop is expected to have lower protein due to cooler weather.
Corn: Weather during Ontario corn pollination was favourable for crop yield and quality.
Eastern counties such as Lanark and the Ottawa area are on the drier side while Essex County received over 150 per cent of normal rainfall. The corn and soybean crops are two to three weeks behind normal development. Temperatures will likely stay slightly below normal given current forecasts. While the futures markets have been under pressure, Ontario basis levels have held value or strengthened due to the uncertainty in production. The winter wheat harvest has wrapped up and soft red winter milling supplies are quite snug.
Corn and soybean futures appear to be trending lower despite lower yield estimates coming from industry crop tours. U.S. soybean prices are competitive on the world market while corn values are sharply discounted to South American origin. The longer term forecast for the Midwest calls for below normal temperatures and below normal precipitation. Moving forward, there is still a fair amount of uncertainty in production.
Outside influences are a lead weight overhanging the grain and oilseed markets. Escalating trade tensions between China and the U.S. along with global recessionary fears have major importers on edge. Buyers are making purchases on a hand-to-mouth basis. They’ve been rewarded for being patient. Rising government deficits amongst all G7 countries and limited power from central banks has investors searching for safe haven assets. Milton Freidman stated: “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.“ The Canadian dollar has been holding value around 75.50 U.S. cents but remains vulnerable to further weakness, especially if polls show left wing parities dominating the election.
The average protein level on the Ontario soybean crop is expected to come in below average due to the cooler temperatures. At the time of writing this article, we estimate that 60 per cent of the Ontario crop is in the pod-setting stage. Summing up comments from our contacts, we’re rating the crop 35 per cent good to excellent, 45 per cent fair and 20 per cent poor to very poor. We haven’t changed our yield estimate and continue to project a crop size of 3.6 million tonnes, down from the 2018 output of 4.2 million tonnes. Domestic crush margins remain under pressure due to weaker meal values. Ontario old crop soybean prices are trading at a premium to new crop which reflects the tight ending stocks for the 2018/19 crop year. We continue to see Western Canadian soybeans trade into Ontario. Ontario export business has been rather quiet.
U.S. soybeans out of the Gulf are more competitive than Argentinian and Brazilian origin to non-Chinese destinations. This has been slightly supportive for the futures market and U.S. export business has picked up over the past couple weeks. When a market experiences a sharp increase in demand, this confirms the price structure and the overall trend. The Pro Farmer crop tour estimated U.S. soybean yields at 46 bushels per acre, down from the USDA estimate of 48.5 bushels per acre. Using this lower yield, production has potential to finish near 95.2 million tonnes, down from the USDA estimate of 100.1 million tonnes. This change in production won’t have a significant effect on the fundamental structure so traders are paying too much attention. U.S. farmers are holding a large volume of old crop soybeans and new crop supplies will weigh on the market. Traders are anxious to get sales on the books so rallies are viewed as selling opportunities. We continue to project further downside through the fall period.
What to do: We’ve advised producers to be 30 per cent to 40 per cent sold on their 2019 production. Producers want to be selling when the U.S. farmer is on the sidelines. Our strategy moving forward is to wait for a seasonal rally in early winter. Last year, this is when Brazil soybeans held the highest premium over U.S. origin which seemed to lift the overall complex to a certain extent.
Ontario weather was quite favourable through the corn pollination phase and the crop appears to be maintaining recent condition ratings. As of Aug. 26, we’ve rated the Ontario corn crop 38 per cent good to excellent, unchanged from two weeks ago. We’ve increased the fair category to 40 per cent, up from 30 per cent earlier in August; approximately 21 per cent of the corn crop was rated poor to very poor down from 31 per cent. Our yield estimate remains at 148 bushels per acre resulting in a crop size of 8.1 million tonnes, down from the 2018 crop of 8.8 million tonnes.
The U.S. Pro Farmer tour estimated the average corn yield at 163.3 bushels per acre which resulted in a crop size of 339 million tonnes. This compares to the USDA number of 169.5 bushels per acre and production at 353 million tonnes. The lower yield projections have failed to move the market because traders are concerned about demand.
There are three factors to consider regarding demand. First, the U.S. Environmental Agency granted waivers to 31 refineries earlier in August. A small refinery can be granted an exemption from ethanol usage if it can prove economic hardship while complying with the renewable volume obligations. There have been 81 waivers granted under the Trump administration. Last week Poet, one of the largest ethanol producers, stated it would idle a 92-million gallon plant in Cloverdale Indiana after cutting back on production at other plants. Secondly, we believe there could be 250 million bushels of hard red winter wheat moving into feed channels, displacing corn. Finally, U.S. corn out of the Gulf is a premium to South American origin resulting in lower export demand. If we add up all these changes, demand could be 20 to 30 million tonnes lower than earlier projections.
What to do: Ontario old crop corn prices have dropped nearly 0.50/bushel since early August; however, prices for immediate delivery are still at premium to new crop. The market is telling producers to liquidate old crop stocks. For new crop, we’ve advised producers to be 30 per cent sold. Our next sales recommendation will likely occur during winter when cattle on feed numbers are at seasonal highs. We’re anticipating larger South American soybean acres at the expense of corn. U.S. corn exports will likely increase during November and December. Once demand improves, we expect a minor rally in the corn market.
The Ontario winter wheat crop has wrapped up. We continue to project total winter wheat production at 1.5 million tonnes, down from 2.1 million tonnes last year. It appears that 500,000 to 600,000 tonnes of soft red winter wheat will move into the local feed market. The most common down-grading factor is fusarium. This leaves approximately be one million tonnes available for local mills and exports to the U.S. In Ontario, soft red winter is equivalent or premium to hard red spring wheat. The market structure confirms our ideas that milling wheat stocks of soft red winter are extremely tight, not only in Canada but also in the U.S. At the time of writing this article, Chicago December wheat was only 35 cents per bushel discount to the Minneapolis December contract.
The function of the Ontario soft red market was to ration demand through higher prices. This would curtail usage and entice millers to substitute other wheats for soft red winter. We can say the market has accomplished this function. We’re seeing more Western Canadian hard red spring wheat trade into the Ontario market. Secondly, soft red winter exports have come to a standstill by trading at a premium to world values.
The Northern Hemisphere wheat harvest is completed with the exception of North American spring wheat. The U.S. spring wheat harvest is 38 per cent as of Aug. 25 while the Western Canadian harvest is in the early stages. There is a very strong seasonal tendency for the wheat complex to rally after the spring wheat harvests are completed. The world harvest pressure eases and the wheat complex has breathing room to move higher.
What to do: We’ve advised producers to be 30 per cent sold on their 2019 production. Our strategy is to make our next recommendation during October. We’ve received some inquiries from producers with feed quality wheat. At this stage, we’ve advised farmers to sell all their feed wheat into the feed market. The feed complex has been held up due to the tight corn situation from 2018/19. Once the corn harvest gets underway, the feed complex will soften.
We believe it’s prudent to sell feed wheat now when feed prices are high. It’s easier to sell low quality wheat in a strong market. Buyers become extremely picky when the corn harvest is underway and farmers are begging end users to take their high fusarium corn. Producers shouldn’t risk further quality deterioration, otherwise you can’t give it away. Trust me, I started my career as a grain buyer so I’ve lived this experience.