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Drier South American conditions supporting soybean prices

Russia planning tariffs on grains as of February

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Statistics Canada’s final crop survey confirmed above-average yields for Ontario corn and soybeans; however, winter wheat yields came in similar to the five-year average.

Quick look

Soybeans: Ontario 2020 production was higher than the five-year average.
Corn: Corn production in Ontario is up .3 million tonnes over the five-year average.
Wheat: Canadian non-durum wheat stocks expected to be under five-year average.

Spring wheat yields were nearly eight bushels per acre below the five-year average finishing at 47.3 bushels per acre.

Demand for Ontario corn and soybeans remains firm due to the year-over-year increase in domestic use and export movement. Ontario soybean prices are up about 20 cents per bushel from earlier in December while corn prices are relatively unchanged. Ontario winter and spring wheat prices are up 10 to 20 cents from the first week of December largely due to stronger exports.

Drier conditions in South America continue to be supportive for the corn and soybean futures. At the time of writing this article, Argentina had received 50 per cent of normal precipitation during December. Argentine farmers have planted approximately 50 per cent of the corn crop and the early-seeded corn will be in the pollination phase during January.

Brazil’s first crop corn is in the pollination phase. Argentine soybeans are about 70 per cent planted and Brazilian farmers are in the final stages of planting the soybean crop.

U.S. soybean stocks are expected to drop to historically low levels at the end of the 2020-21 crop year; therefore, the soybean market is functioning to ration demand.

U.S. corn stocks are expected to finish slightly below the five-year average and the market cannot afford a crop problem in South America.

Russia will implement tariffs on corn, wheat and barley of 25 euros per tonne starting Feb. 15, in an effort to control domestic food inflation. Once exports of all grains reach 17.5 million tonnes under this tariff structure, the export tariff will be increased to 50 per cent of the f.o.b. value and no less than 100 euros per tonne.

Ukraine is expected to follow suit at some point in the future. China continues to contend with food shortage issues.

The March Canadian dollar traded up to 78.85 cents U.S. on Dec. 15, the highest level since April of 2016. All major G10 currencies have appreciated against the U.S. greenback over the past month. Currency traders are factoring in prospects for more centrist and left-wing policies from the administration of U.S. President-elect Joe Biden, which include the most aggressive environmental protections in U.S. history.

Crude oil futures have been percolating higher. U.S. inflation is slightly higher than the Canadian consumer price index, which may be contributing to the stronger exchange rate.

U.S. fiscal policy appears to be more negative than the Canadian situation in the short term.

Soybeans

Ontario farmers harvested 3.9 million tonnes of soybeans according to Statistics Canada, up from 3.7 million tonnes last year and up from the five-year average of 3.8 million tonnes.

For the week ending Dec. 13, Canadian crop year-to-date soybean exports were 2.5 million tonnes, up from 1.9 million tonnes last year; Canadian crop year-to-date domestic use was 746,600 tonnes, up about 50,000 tonnes from the 2019-20 crop year.

We’re looking for a year-over-year decline in Ontario soybean stocks for the 2020-21 crop year. Ontario basis levels tend to weaken when the Great Lakes freeze over and the stronger Canadian dollar may contribute to basis deterioration. However, overall price direction will be largely based on macro market conditions.

The soybean futures market is functioning to ration demand through higher prices. U.S. soybean stocks are expected to drop to 175 million bushels at the end of the 2020-21 crop year, down from the 2019-20 ending supplies of 523 million bushels. This is largely a demand-based rally.

The U.S. domestic crush is exceeding expectations. The recent port strike in Argentina is resulting in greater demand for U.S. meal. Chinese buying interest continues to be the main factor underpinning the soybean market. Chinese recently moved for Brazilian new-crop beans for March-April shipment, instead of U.S. beans.

The U.S. export program is expected to slow in the latter half of the crop year. At this stage of the South American growing season, the USDA is projecting a minor increase in Argentinian and Brazilian soybean production. However, timely rains are needed to sustain yield potential. Traders have deviated away from the USDA estimates and are anticipating decreases to Argentine and Brazilian production on upcoming WASDE reports.

What to do: We’ve advised Ontario farmers to be 80 per cent sold on their 2020 production and 20 per cent sold on their expected 2021 output.

Argentine and Brazilian weather will be critical moving forward and the futures market is incorporating a risk premium due to the uncertainty in production.

Secondly, we need to see additional Chinese demand step forward for U.S. soybeans, otherwise the market could falter.

Longer term, the soybean market needs to encourage U.S. acreage.

Corn

Statistics Canada’s final crop survey had Ontario corn production at 8.9 million tonnes, up from last year’s output of 8.6 million tonnes and up from the five-year average of 8.6 million tonnes.

The Ontario corn market appears to be holding value due to the seasonal strong domestic demand. As well, Canadian crop year-to-date exports for the week ending Dec. 13 were 263,800 tonnes, up from 12,500 tonnes last year.

Similar to soybeans, domestic corn basis levels tend to soften when the lakes system freezes over. A slowdown in export movement will also limit the upside in the local cash market. Ontario farmers tend to sell regular increments of corn throughout the crop year so we could see a buildup of supplies in the commercial system.

According to Canadian Grain Commission, corn supplies in the commercial system as of Dec. 13 were 169,900 tonnes, up from only 71,300 tonnes last year. Elevator companies and domestic processors appear to be well-covered for their nearby requirements.

Compared to South American and Black Sea origin, U.S. corn is most competitive on the world market, which will keep the futures market well supported in the short term.

U.S. domestic demand remains firm as cattle-on-feed inventories are nearing seasonal highs. Ethanol production is running slightly below year-ago levels but we expect to see stronger use over the winter with crude oil percolating higher.

It’s still very early to project Argentine and Brazilian corn production. At this stage, the Argentinian production is projected to come in at 49 million tonnes, down from 51 million tonnes last year.

Brazil’s total output is expected to finish near 110 million tonnes, up from 102 million tonnes last year. Keep in mind that Brazil’s second-crop corn, which comprises about 75 per cent of total production, will be planted in February.

The Russian tariffs are supportive for world values. Ukraine is expected to implement tariffs over the next couple months as well.

If South America (mainly Brazil) experiences adverse weather later in March and April, we could see significantly higher values later in spring.

Until the crop is more certain, the corn market will experience limited slippage.

What to do: We’ve advised Ontario farmers to be 60 per cent sold on their 2020 production and will be patient to make additional recommendations.

To reiterate from our previous issue, the corn market tends to incorporate a risk premium when Brazil’s safrinha corn crop moves through pollination later in May. The corn market will also function to encourage acreage this spring in the Northern Hemisphere. The May-July corn futures spread continues to trade at even money, which is a bullish signal.

Wheat

Ontario farmers harvested 2.3 million tonnes of winter wheat this year, up from the 2019 output of 1.4 million tonnes and marginally higher than the five-year average of 2.2 million tonnes.

In the short term, it appears that domestic millers are well covered for their nearby requirements.

Ontario exports will also slow down from January through March. Wheat for feed has been limited because the crop was mostly milling quality. Therefore, basis levels are expected to weaken over the next month.

Since October, the March Chicago wheat futures have traded in a range with support at the $5.80 per bushel area and resistance at the $6.35 level. The fundamentals need to experience a significant change for the market to move higher. There are three major factors that could cause a rally during the spring timeframe.

The Argentine and Australian wheat harvests are moving into the final stages. Harvest selling pressure from the Southern Hemisphere wheat crops tends to ease later in February. Secondly, drought area in the U.S. Southern Plains has expanded over the past month. We don’t see a change in conditions in the longer-term forecast. Precipitation during the fall period and yields the following spring are not highly correlated. However, the longer the drought like conditions continue, the more serious this becomes.

The wheat market will incorporate a risk premium due to the uncertainty in production if the drier conditions materialize. Keep in mind that the U.S. hard red winter wheat ending stocks will drop sharply below the five-year average at the end of the 2020-21 crop year.

U.S. soft red winter stocks are expected to be historically tight on June 30.

Thirdly, the Russian export tariffs are bullish for world wheat values. Ideas are that Ukraine will also implement tariffs in the near future. This basically takes the largest world wheat export region out of the market.

In Europe, the main problem is logistics and moving grain into port position. France and Germany will also have rather tight stocks at the end of the 2020-21 crop year.

Winter wheat acreage is expected to be up 10 to 12 per cent from last year.

Canadian crop year-to-date exports for the week ending Dec. 13 were 7.4 million tonnes, up from 6.1 million tonnes last year.

Canadian non durum wheat stocks will also finish under the five-year average for the 2020-21 crop year. Keep in mind we’re factoring in a significant year-over-year decrease in acreage this spring in Canada and the U.S.

What to do: We’ve advised Ontario farmers to be 60 per cent sold on their 2020 wheat production. We haven’t changed our strategy. The wheat market will continue to consolidate through January, but we expect a rally when the Northern Hemisphere wheat crop comes out of dormancy.

In any case, we don’t expect much slippage through winter when the wheat market tends to be very quiet.

Strength in the corn market will underpin wheat values due to the feed component.

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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