Corn markets seeing potential risk premiums with market uncertainty

Excess precipitation limits corn and soybean seeding in key areas of North America

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The Ontario cropping region has received 150 per cent of normal precipitation over the past 30 days. Certain pockets like the region from Toronto to Ottawa has received greater than 200 per cent of normal precipitation.

About 15 per cent of the Ontario corn and soybeans have been planted as of May 21.

The United States Midwest and Northern Plains are contending with similar conditions. As of May 19, approximately 49 per cent of the U.S. corn crop was seeded, which compares to the previous week’s progress of 30 per cent.

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Last year, the U.S. corn crop was 78 per cent seeded. The five-year average progress at this time is 80 per cent complete. About 19 per cent of U.S. soybeans were in the ground on May 19, which compares to the previous week of nine per cent. Last year, 53 per cent of soybeans were seeded and the five-year average yield progress as of May 19 is 47 per cent complete.

The two-week forecast calls for above normal precipitation and below normal temperatures across most of the U.S. Midwest and southern Ontario.

The corn market is incorporating a risk premium due to the uncertainty in production. Soybean prices have also strengthened on production concerns but not to the same extent because of the lack of export demand. Given the burdensome fundamentals and lack of export demand, there is more of a cushion for soybeans.

Ontario soft red winter prices have rallied about 40 cents per bushel due to quality and production uncertainty in the U.S. and Canada soft red winter wheat crops.

Trade talks between the U.S. and China have come to a halt with no scheduled date to resume negotiations. Both sides have escalated tariffs over the past two weeks.

U.S. President Donald Trump’s administration is planning further aid for U.S. farmers. Grain merchants have downplayed any media reports of a trade deal so this recent behaviour by both sides is not a surprise to the market.

The Chinese region of Manchuria continues to experience below normal precipitation. Timely rains are needed or there could be yield deterioration. There’s been a sharp rally in the Chinese Dalian soybean and corn futures over the past month.

Quick look

Soybeans: U.S. farmers will start to factor the upcoming aid package into their selling decisions.
Corn: Ontario corn prices are up 30 to 40 cents due to tight stocks in the province.
Wheat: The European wheat harvest is expected to be up in yield over last year.

Soybeans

Ontario old crop soybean prices are hovering around $10.40/bushel, relatively unchanged from two weeks ago. Lackluster producer selling has been supportive for the market.

U.S. and Ontario farmers are going to hold onto their remaining supplies until the upcoming crop is more certain. U.S. farmers will also consider the aid package when making future sales.

A later-seeded crop usually results in lower yields so the fundamental structure of the world soybean crop has potential to change considerably over the next month.

The 2019 U.S. soybean crop was projected to finish at 113 million tonnes on the May U.S. Department of Agriculture’s World Agricultural Supply and Demand Estimates report. This compares to 123 million tonnes last year. Despite the year-over-year increase in acreage, the USDA was using a normal weather trendline yield of 49.5 bushels per acre, down from the 2018 yield of 51.6 bushels per acre.

There are three main factors to consider moving forward. First, it’s important to realize that the U.S. final planting dates are later for soybeans and are about 10 days later compared to corn. This would result in larger than expected soybean acres if conditions turn dry after May 31.

Secondly, the forecast for the next 30 days calls for above normal precipitation and below normal temperatures. There is potential that a portion of U.S. soybean acres will not get planted.

Finally, yields will be variable across the U.S., which will make it difficult to forecast the actual crop size.

The Argentine soybean harvest is approximately 80 per cent complete as of May 19. Argentine soybeans are the most competitive soybeans on the world market on a FOB basis. We’ve seen a sharp rally in Brazilian soybean basis levels over the past month due to strong export demand. For July and August, U.S. soybeans out of the Pacific Northwest are competitive with Argentine soybeans to Southeast Asia. The soybean futures market is at levels where export demand is supportive for the summer timeframe.

What to do: We’ve recommended that Ontario farmers be 90 per cent sold on old crop and 20 per cent to 30 per cent on new crop. Given current conditions, there is no need to be anxious to make additional sales. The uncertainty in North American production and stronger Brazil basis offers, means we could see further upside in the soybean market.

Corn

Ontario corn prices have rallied 30 cents to 40 cents per bushel over the past two weeks. Elevator bids for old crop positions are hovering around $5/bushel and new crop bids are at the same level. Ethanol plants are reflecting a sharp premium over the local elevator at $5.70 for old crop and only $5.20/bushel for new crop. Ethanol plants are trying to enhance farmer selling; however, old crop stocks are tight due to the strong year-over-year increase in offshore movement.

We’ve factored in lower seeded acreage for the Ontario corn crop and a lower yield potential. Ontario corn production for 2019 is now estimated at seven million tonnes, compared to last year’s crop size of 8.8 million tonnes. The Ontario corn market will function to ration demand in the 2019-20 crop year by trading at a premium to world values. The market will also trade high enough to encourage more wheat use in domestic feed channels.

U.S. corn acres could eventually finish in the range of 88 to 89 million, which is down three to four million from the USDA March planting intentions survey.

At this stage, we’re thinking that yields will finish in the range of 160 to 165 bushels per acre, down from the USDA trendline yield estimate of 176 bushels per acre.

What to do: We’re looking for production to come in near 335 million tonnes, down from the current USDA estimate of 382 million tonnes and last year’s output of 366 million tonnes. U.S. corn demand is relatively inelastic due to steady domestic feed and ethanol consumption.

Without going into details, the 2019-20 carryout has potential to finish near 39 million tonnes, down from the current USDA estimate of 63 million tonnes and down from the five-year average carryout of 46 million tonnes. This will keep the corn market well supported at current levels.

The Argentine corn harvest was near 40 per cent complete as of May 19 and the Brazil’s second crop corn harvest is about 25 per cent complete.

Yields are coming in better than anticipated. The Argentine corn crop is estimated at 49 million tonnes, up from 32 million tonnes last year. Brazil’s total corn crop is estimated at 100 million tonnes, up from 82 million tonnes last year.

U.S. FOB Gulf offers are at about an $8 per tonne premium to Brazil FOB offers. Export demand out of the U.S. will come in below earlier estimates for the June-through-December period.

Wheat

Ontario winter wheat conditions are unchanged from earlier in May. We estimate that 33 per cent of the crop is in good condition, 33 per cent of the crop is rated fair and 34 per cent of the crop is poor to very poor.

The quality of the Ontario crop is uncertain due to the excessive precipitation. At this stage, we’re forecasting the total Ontario winter wheat crop to finish at 2.1 million tonnes, similar to last year’s output of 2.1 million tonnes. The five-year average for Ontario winter wheat is two million tonnes. Protein is expected to finish below average.

The U.S. winter wheat crop was rated 66 per cent good to excellent as of May 19. The hard red winter wheat crop is experiencing greenhouse conditions. However, in Michigan, the winter wheat crop was rated 27 per cent poor to very poor; in Illinois, the winter wheat crop was 22 per cent poor to very poor. The Northern States are experiencing conditions similar to Ontario.

The U.S. soft red winter wheat fundamentals are snug. Keep in mind we are forecasting U.S. soft red winter production at seven million tonnes, down from 7.7 million tonnes last year and down from the five-year-average production of 11 million tonnes. The carryout has potential to be sharply below the five-year average.

Next winter, the U.S. and Ontario soft red winter wheat market will divorce from the world wheat complex. This may be contributing to the strong Chicago wheat premium over Kansas.

In Russia, the winter wheat crop is in excellent shape and 50 per cent of the spring wheat has been seeded under optimal conditions. Total wheat production is Russia is estimated at 80 million tonnes, up from the 2018 output of 72 million tonnes.

In Europe, production is estimated at 144 million tonnes, up from 137 million tonnes last year. The German wheat crop will be up 20 per cent after last year’s drought.

As of May 19, Canadian spring wheat was 55 per cent seeded while 70 per cent of the U.S. spring wheat was in the ground.

Strength in the corn market has supported the wheat complex. However, the U.S. winter wheat harvest will begin in a couple weeks. This will be followed by the Russian and European harvests.

What to do: U.S. farmers normally sell 50 per cent of the winter wheat during summer. This rally in the wheat market is an opportunity to catch up on old crop sales. Prices in Ontario for soft red winter are at the highest levels since Feb. 26. Don’t expect much more upside with the Northern Hemisphere harvests around the corner.

About the author

Markets Analyst

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

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