Corn basis under pressure with strong harvest yields

Soy prices continue to be buoyed by global factors

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The Ontario corn and soybean harvests are well underway and yield reports confirm earlier crop estimates from the trade. We’re not hearing of any major fusarium or disease issues.

Quick look

Soybeans: Soybeans appear competitive in European markets for the rest of the year.
Corn: Ontario yield coming in better than expected.
Wheat: Increased wheat yield in Ontario should be used by growing U.S. demand.

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Adverse weather delayed harvest progress in certain areas and the two-week forecast calls for intermittent showers with seasonal type temperatures. Harvest progress is expected to continue in a timely manner with no significant delays. Winter wheat seeding will likely wrap up by the middle of the month and acreage is expected to be similar to last year.

In early October, Ontario soybean prices were similar to two weeks ago but elevator corn bids are down approximately 40 cents per bushel. Soft red winter wheat and hard red winter wheat bids are up 20 cents per bushel.

In the previous issue, we advised producers to sell their second 20 per cent increment of both corn and soybeans bringing sales to 40 per cent of their 2020 production. Corn and soybean futures are relatively unchanged from two weeks ago as the markets digest the United States Department of Agriculture Sept. 1 stocks report.

U.S. export sales for corn and soybeans continue to come in above expectations. The Chicago and Kansas wheat futures are factoring in a tight fundamental structure for the U.S. soft red winter and hard red winter wheat crops. The winter wheat futures continue to hold a risk premium due to drier seeding conditions in Ukraine, Russia, and certain regions of Europe.

Outside factors are having a mixed influence on the grain and oilseed markets. Crude oil values are under pressure with the summer driving season coming to an end. World economies are in the recuperation phase and the recovery has occurred quicker than anticipated.

However, rising COVID cases in Canada, Europe and the U.S. have financial markets on the defensive. Bank of Canada monetary policy remains dovish while fiscal policy remains negative, which has the Canadian dollar relatively unchanged from late September.

Soybeans

The Ontario soybean harvest is progressing under favourable conditions. We continue to project a crop size in the range of 3.8 million tonnes to 4.1 million tonnes, compared to the previous Statistics Canada estimate of 3.7 million tonnes and the five-year average output of 3.8 million tonnes. The Ontario domestic market is easily absorbing the harvest pressure given the increase in soymeal values over the past month.

For November and December, Ontario soybeans appear to be competitive on the world market to European destinations.

Soybean futures have been trading above $10 per bushel over the past few weeks. The last time the futures were at this level was in 2018, prior to the U.S. trade war with China.

Three factors are driving the world soybean market. First, the USDA estimated Sept. 1 soybean stocks at 14.2 million tonnes, which was down from the average pre-report estimate of 15.6 million tonnes.

We’ll see some fine tuning to the U.S. production but the carryout for 2020-21 has potential to come in around 10.8 million bushels, which will be the lowest U.S. carryout since 2016-17 crop year when the ending stocks finished around 8.2 million tonnes. The fundamentals for the U.S. are tightening, not loosening.

Secondly, the market will be sensitive to South American production. September was one of the driest months on record for Brazil. Regular rains are needed in Brazil throughout the growing period, otherwise yields suffer.

Brazil will likely import nearly one million tonnes of soybeans from Uruguay as their carryout drops below 0.5 million tonnes this crop year.

Finally, Chinese demand is coming in larger than anticipated and China will continue to be an active buyer of U.S. origin until new crop Brazilian beans are readily available in late February or March. The underlying factor is soymeal demand as China rebuilds its hog herd.

What to do: In conclusion, we’ve advised Ontario farmers to be 40 per cent sold on their 2020 production. We expect the soybean futures to experience a minor rally later in fall after the U.S. harvest is complete. The market will also incorporate a risk premium due to the uncertainty in Brazilian production.

Corn

The Ontario corn harvest is progressing under optimal conditions. Yield reports are coming in better than expected and we’re forecasting a crop size in the range of eight to 8.3 million tonnes, compared to the 2019 output of 8.6 million tonnes.

The domestic corn market has transitioned from old crop to new crop prices so elevator corn bids are down about 30 to 40 cents per bushel from two weeks ago.

Basis levels have come under pressure with the large supply situation. Nearby elevator bids are around $5 per bushel, which is similar to year-ago levels. Ethanol processors are showing bids about 50 cents per bushel above elevator prices as processing is running about 80 per cent of normal capacity.

U.S. corn stocks as of Sept. 1 came in at 50.7 million tonnes, below the average pre-report estimate of 57 million tonnes and below the five-year average of 51.4 million tonnes. This was a shock to the trade and the market is still getting a better handle on the 2020 yields. The U.S. crop will not be as large as earlier anticipated, while export sales are exceeding earlier projections.

Cattle on feed inventories continue to run above year-ago levels and ethanol processing is improving. One can make the argument the U.S. carryout for the 2020-21 crop year will be closer to the five-year average of 51.4 million tonnes. Remember, in the August World Agricultural Supply and Demand Estimates report, the USDA had a projected carryout of more than 69 million tonnes.

Ontario corn exports are competitive into Europe and we expect a sharp year-over-year increase in offshore movement during the first half of the crop year. Brazilian corn prices are near record highs and stocks will be tight at the end of the crop year.

The corn market looks pretty solid over the winter period because of rising domestic demand. Cattle-on-feed inventories are at seasonal highs over the winter period and this is when the market needs to ration demand away from export channels.

Chinese export is expected to remain strong moving forward due to its lower domestic production and inventory building. Prices in China are still encouraging imports.

What to do: We’ve advised Ontario farmers to be 40 per cent sold on their 2020 production. We’re planning on making our next sale later in winter. If South America has a production problem, then the U.S. corn market will function to encourage acreage next spring. This will cause North American values to strengthen so we’ll need to monitor these conditions to plan our sales strategy. At these prices, 40 per cent sold is a good level.

Wheat

Ontario winter wheat prices have increased over the past couple weeks. The year-over-year increase in winter wheat production had the Ontario domestic market trading at a discount to world values in an effort to enhance exports.

We now find Ontario wheat prices in line with the export market but we’re still seeing good demand from U.S. buyers. Ontario winter wheat production is estimated at 2.3 million tonnes, up from 1.4 million tonnes last year.

U.S. soft red winter wheat fundamentals will remain historically tight for the second year in a row. The USDA estimated soft red winter production at 7.2 million tonnes. While this is up from the 2019 output of 6.5 million tonnes, the carry-in stocks are down sharply from the start of the 2019-20 crop year.

Total U.S. soft red winter wheat supplies at the start of 2020-21 crop year, (carry-in plus production excluding imports) are estimated at 10.7 million tonnes, down from the year-ago level of 10 million tonnes. The USDA is factoring in a sharp year-over-year increase in imports and this will dictate the price of soft red winter wheat in Ontario. The increase in U.S. demand will absorb all the year-over-year increase in Ontario.

Outside wheat markets are also supportive for Ontario prices. The USDA estimates hard red winter wheat production at 17.9 million tonnes, which was down from the earlier projection of 18.9 million tonnes and down from the five-year average of 22.6 million tonnes. Without going into detail, the U.S. hard red fundamentals will also be rather snug for the 2020-21 crop year. The domestic U.S market needs to trade at a premium to world values to curb exports.

The 2020 Russian and Ukraine crops were good. However, the focus in Russia and Ukraine is the upcoming production because winter wheat seeding conditions remain dry and the optimal window for seeding is closing. Traders are anticipating that Russia and Ukraine will regulate exports in the final quarter of the crop year, especially if the current crop that is being seeded is in poor condition.

Europe is also on the drier side and we’ll have a better idea of actual acreage over the next month.

Australian conditions remain excellent and production estimates range from 26 to 28 million tonnes, up from 15 million tonnes last year.

What to do: We’re advising Ontario farmers to sell their second 20 per cent increment, bringing total sales for the 2020 production to 40 per cent. We’ve seen a nice rally in the wheat market over the past month. The wheat market usually makes a seasonal high in late October so it’s prudent to increase sales at this time.

About the author

Markets Analyst

Jerry Klassen

Jerry Klassen is the manager of Canadian operations for Swiss-based grain trading house GAP SA Grains & Products.

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