Crop price fundamentals improve based on demand, especially from China

The American dollar has lost value, making U.S. soy and corn more competitive

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Ontario farmers had harvested approximately 50 per cent of the winter wheat as of July 26. We’re forecasting an average yield of 78 bushels per acre, down from the five-year average of 82 bushels per acre. Farmers in the western regions are reporting above average yields while early reports are below average in the eastern half of the province.

Quick look

Soybeans: Chinese demand and less competitive Brazilian beans have increased U.S. prices.

Related Articles

Corn: Stronger exports and ethanol demand should support Ontario elevator prices.
Wheat: Global harvest is keeping wheat at seasonal lows.

Temperatures over the past 30 days have been two to three degrees above normal. A large percentage of the Ontario growing region has received 60 per cent to 85 per cent of normal precipitation. Yield drag has been reported on the soybean and corn crops. We estimate that 80 per cent to 90 per cent of the corn would pollinate by the end of July while the soybean crop is moving into the critical pod setting stage.

Compared to mid July, Ontario corn, soybean and wheat prices are relatively unchanged. The corn market is balancing favorable U.S. crop conditions with improving domestic and export demand. Soybean prices incorporated a risk premium due to the uncertainty in production although timely rains are in the forecast for much of U.S. Midwest.

Steady Chinese buying interest has also contributed to a recent rally in the bean complex. The wheat complex continues to digest northern hemisphere harvest progress and improving crop prospects from Australia.

Over the past couple weeks, we’ve seen significant erosion in the U.S. dollar against major and minor currencies. The resourced-based Canadian dollar is also receiving support from stronger metal prices and steady crude oil values. Equity markets appear to be shrugging off rising COVID cases in the U.S. partially because a vaccine is expected by the end of 2020. China was the first country to be economically affected by the coronavirus and appears to be leading world economies out of the COVID recession. Improving exports should be supportive for the Canadian dollar.

Soybeans

Soybean crop comments are quite variable, which makes the yield hard to forecast. There will likely be some yield drag in eastern and southern regions because of dryer conditions. At this stage, we feel comfortable with a production estimate in the range of 3.4 million tonnes to 3.6 million tonnes, down from the 2019 output of 3.7 million tonnes but up from the five-year average of three million tonnes. The main point is the crop is not getting larger, which is supportive for the market.

U.S. soybean prices out of the Gulf are nearly 40 cents/bushel discount to Brazilian origin. It appears that strength in the Brazilian real along with limited farmer selling has caused Brazilian soybeans to trade at a premium to U.S origin. Argentine farmers are also holding back on sales at this time of year as they always do. Chinese demand for U.S. soybeans has been impressive as of late. Favorable crush margins due to rising product values, mainly meal in China has been the underlying factor driving soybean demand.

It appears that the hog industry is recovering and maybe soybean and soymeal stocks are lower than Chinese data sources indicate. Prices in China are functioning to encourage demand; however, Canada hasn’t been able to take advantage of this situation. In any case, a rising tide lifts all ships and we expect to see stronger Ontario soybean prices later in fall. Domestic crushers tend to take their downtime for maintenance and upgrades during the summer months. This lower domestic demand along with limited exports has kept the soybean market from showing any signs of life.

What to do: In our previous issue, we advised producers to sell their first increment of the 2020 production. Ontario elevator bids are hovering around $11.55/bushel for new crop positions. Earlier in spring, new crop prices were just over $11/bushel so this is a fairly good price for harvest delivery. We’ll be advising our next sale later in fall but producers have a good start on new crop sales. The soybean market tends to make a seasonal high in November.

Corn

Above normal temperatures during pollination have hindered yield potential for the Ontario corn crop. We’re now forecasting Ontario corn production to finish in the range of 8.6 to 8.9 million tonnes, which compares to last year’s output of 8.6 million tonnes and the five-year average of 8.7 million tonnes.

This lower crop estimate comes on the heels of an improving demand scenario. While China has been actively buying U.S. corn, Ontario corn has been moving offshore to Europe. Canadian crop year-to-date exports for the week ending July 19 were 456,300 tonnes. While this is down from 1.7 million tonnes last year, trade estimates have total corn exports reaching up to around 0.8 to one million tonnes and the bulk of this will be from Ontario. We’ll probably see another 300,000 to 500,000 tonnes ship out of Ontario over the next month.

Ontario ethanol production has come back on stream with local processors paying a 25 to 40 cent premium over elevator bids. Ontario is contending with a shrinking crop, stronger exports and improving ethanol usage, which should keep elevator bids well supported.

On the world market, we now see U.S. corn competitive with South American origin. Prices have been rising in the f.o.b. positions due to strong demand from China.

During the last week of July, Chinese Dalian corn futures reached up to a high of $8.36/bushel. Physical corn prices in Harbin – China’s top corn province hit 2,110 yuan (US$301.69/ tonne or $7.66/bushel). The Chinese government intends to sell rice and wheat from state reserves to bring down overall feed prices but this has done little to cool the corn market.

We’ll likely see Chinese buying support the corn market through the fall and we’re somewhat bullish on the corn market longer term. Usually, the North American corn market makes a seasonal low in late August or early September, prior to the main U.S. harvest. Cattle on feed inventories in Ontario and the U.S. are at seasonal lows in August and September and this results in lower demand and softer prices.

The corn market is expected to percolate higher after the U.S. harvest. For Ontario, we’re expecting a year-over-year increase in European demand due to their lower wheat and corn harvests, especially in Spain and France.

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We’re expecting the Ontario corn market to trade sideways through harvest and then slowly ratchet higher throughout the fall. Stronger world values will limit the downside over the next month. We’ll have to monitor the export demand to time our next sales recommendation. Cattle on feed inventories tend to make a seasonal high in early December.

Wheat

Ontario and world wheat prices are currently moving through a seasonal low. The U.S. winter wheat harvest is in the final stages while France and Germany are approximately 70 per cent complete. Russia and Ukraine are nearing the 50 per cent level.

The U.S. spring wheat harvest will be moving into high gear over the next month. In Canada and Russia, the bulk of the spring wheat harvests will occur in September. Beneficial rains have enhanced crop prospects in Australia although the harvest is still five months away.

Ontario winter wheat production is expected to finish around 2.2 million tonnes, up from the 2019 output of 1.4 million tonnes and up from the five-year average of 1.9 million tonnes.

Given the current weather forecast, we expect the winter wheat harvest to be finished by Aug. 15. At the current price levels, Ontario soft red winter wheat appears to be competitively priced into the U.S. and Mexico. This will limit the downside for the time being.

We’re not hearing of any major quality issues. Protein has been somewhat low in the western counties where yields were higher; however, protein will likely be higher in the eastern counties. Falling numbers are quite high and there are no major disease issues. The Ontario wheat crop is very good quality, which will enhance demand offshore and into U.S. markets. We mentioned in our previous issue that the U.S. was contending with tight fundamentals for soft red winter. U.S. prices need to trade at a premium to Canadian values over the winter to encourage imports.

The structure of the world wheat market for 2020/21 will be different than in 2019/20 for four main reasons. First, China has become a major importer of North American wheat.

Secondly, North Africa is contending with drought like conditions enhancing demand from all countries in this region.

Thirdly, Europe will be less competitive in the export market due to a year-over-year decline in production.

Finally, the world is still contending with the hangover effects of COVID. This has caused many countries and millers to re-evaluate their food security needs and it is also enhancing import demand as a whole. We’ve learned that the major importers or even major buyers of wheat are no longer comfortable with past stock levels. The market is extremely sensitive to changes in logistics and governments do not want to see empty shelves of bread or flour.

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We’re bullish on the wheat market moving forward so be patient with additional sales. Our next recommendation will likely occur in late October or early November.

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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