Ending stocks drop driving long-term wheat market optimism

The Huawei executive trial could influence the Canadian soybean market

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Ontario wheat, corn and soybean prices are relatively unchanged from early January.

Ontario soft red winter wheat stocks will be historically tight at the end of the 2019-20 crop year, which has been supportive for domestic wheat prices.

Quick look

Soybeans: Ontario soybean prices supported by lower imports from the U.S.
Corn: Strong northern U.S. basis should support Ontario prices.

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Wheat: Many wheat growing areas have decreased acreage.

The Canadian soybean market is in a precarious situation as the hearing for Huawei’s chief financial officer Meng Wanzhou began on Jan. 20. She was arrested in Canada based on an extradition request by the United States. The market is currently factoring in a worst-case scenario. Traders do not expect China will buy Canadian soybeans during the 2019-20 crop year.

Ontario corn prices are relatively unchanged from earlier in January. Available supplies are down from last year due to the year-over-year increase in unharvested area. Stronger cash prices south of the border have been supportive for Ontario corn values.

The United States Department of Agriculture’s World Agricultural Supply and Demand Estimates report was viewed as neutral to bullish for the world wheat market; traders considered the government report neutral for world corn and soybean prices.

Timely rains are needed in Brazil and Argentina and world markets are holding value until the upcoming crops are more certain.

The March Canadian dollar has been hovering around 76.60 U.S. cents down from the Dec. 31 high of 77.23 U.S. cents. Currency traders anticipate a Bank of Canada interest rate cut during the second quarter of 2020; however monetary policy is considered neutral.

Equity markets continue to trade near historical highs due to easing trade tensions and a minor recovery in world economic growth. The flip side, fiscal policy remains negative because the federal government deficit will come in larger than anticipated for 2019-20 and 2020-21. Deficits are viewed as future taxes.

Soybeans

The Ontario domestic crush pace and total Canadian soybean exports are down from last year. However, Ontario soybean prices have been supported by lower imports from the U.S.

According to Agriculture Canada, total Canadian soybean imports are projected at only 400,000 tonnes for 2019-20, down from 1.1 million tonnes during 2018-19. Basis levels remain firm on both sides of the border as farmers contend with similar issues.

Colder temperatures and regular snowstorms have slowed farmer selling in the short term. The Ontario soybean market has remained strong in an effort to pull stocks from farmers’ hands. There are also ideas the harvested acreage may be lower than earlier anticipated.

The USDA final crop production estimate was a non-event for the soybean market. U.S. harvested area was taken down by 600,000 acres but this was offset with a 0.5 bushel per acre rise in the average yield.

U.S. soybean production was estimated at 96.8 million tonnes, up from the December number of 96.6 million tonnes but down from the 2018 output of 120.5 million tonnes.

There were changes to the demand projection from the December report. U.S. ending stocks for the 2019-20 crop year are expected to finish near 12.9 million tonnes, down from 24.7 million tonnes last year.

The USDA didn’t change Brazil and Argentina soybean production estimates on the Jan. 10 report. Brazil production is expected to reach 123 million tonnes, while Argentine production was forecasted to come in at 53 million tonnes.

Brazil experienced drier conditions in late December. Recent rains have maintained crop prospects in most of the growing region. Southern Argentina remains on the drier side so if these conditions do not improve, we’ll likely see lower projection estimates on subsequent USDA reports.

What to do: In our previous article, we advised producers to be 70 per cent sold on their 2019 production and 10 per cent sold on the expected 2020 crop. We are planning to make our next sale just before the main South American harvest period.

Corn

In the previous issue, we mentioned the Ontario corn market was rationing demand by trading at a premium to world values. The late harvest in the northern U.S. states along with the year-over-year decline in yields has caused basis levels to be very strong in Michigan, Ohio and Indiana.

While Ontario corn exports are minimal, the market still needs to attract supplies from south of the border to satisfy domestic feed and ethanol demand. Similar to the soybean situation, extreme winter weather has slowed farmer selling.

The unharvested area may be larger than anticipated so available corn supplies in the short term are tight.

The USDA report was considered neutral for the corn market. Compared to the December report, U.S. harvested area was taken down by 300,000 acres while the average yield was increased by one bushel per acre.

U.S. corn production was estimated at 347.8 million tonnes, up from the December estimate of 347 million tonnes and down from the 2018 output of 364.3 million tonnes.

In an unprecedented move, the USDA decreased domestic feed demand for 2018-19 resulting in an increase in ending stocks. Without going into detail, the 2019-20 ending stocks are now estimated to finish at 48 million tonnes, down from the earlier December estimate of 48.5 million tonnes and down from the 2018-19 ending stocks of 56.4 million tonnes. Brazilian corn production was unchanged from December at 101 million tonnes and Argentine production was also kept at 50 million tonnes.

U.S. corn export sales should improve over the next couple of weeks. Prices out of the Gulf of Mexico are competitive on the world market.

Argentinian and Brazilian corn offers are strong until new crop comes on stream.

What to do: We’ve advised producers to be 50 per cent sold of their 2019 production. We’re looking for a minor rally in the corn market over the next month. Once we move into March, the corn market will start to focus on upcoming acreage.

At this stage, we’re anticipating a four to six per cent increase in U.S. acreage. Once the South American crop is further developed, we’ll make our next sales recommendation.

Wheat

Wheat has been the sleeper market that woke up in 2019-20 due to lower production prospects for the 2020-21 crop year. The fundamental structure is changing for four major exporters.

First, U.S hard red winter wheat exports are coming in sharply higher than last year, which is resulting in a lower carryout projection. U.S. hard red winter wheat ending stocks for the 2019-20 crop year are expected to finish near 13.3 million tonnes, which is similar to the five-year average. Hard red winter wheat acreage was down three per cent from last year, coming in at 21.8 million acres.

If average yields materialize, one can make the argument that the 2020-21 ending stocks will finish near 10 million tonnes. The tighter carryout stocks warrant the market moving above five-year average prices.

The eastern half of the U.S. Midwest has been saturated lately and ideas are that the soft red winter crop size will be similar to last year.

French farmers only seeded 80 per cent of the intended winter wheat acres. German winter wheat acreage is expected to be down eight to 10 per cent as well. European total wheat production for 2019 was 65 million tonnes but we could see 2020 wheat output drop to the range of 55 to 58 million tonnes.

In Russia and Ukraine, the winter wheat went into dormancy under drier conditions. Since then, Ukraine has experienced normal precipitation but Russia’s southern district remains on the drier side. Traders are starting to factor in lower Russian winter wheat production and this is a major concern for the 2020-21 crop year.

Australia’s output for 2019-20 came in at 15.6 million tonnes, down from 17.2 million tonnes last year. Argentina’s wheat crop will finish near 19 million tonnes, down marginally from last year’s output of 19.5 million tonnes. The Southern Hemisphere wheat supply is not significant enough to pressure the market.

It might be early for these types of predictions, but western Canadian weather patterns occur in 18 year cycles. Those of you who have watched crop production for an extended time know that 2002 was a very dry year in Western Canada.

Earlier in December, we believed the wheat market would trend lower from January through April. However, with the tighter fundamentals for 2020-21, the world wheat market may experience a rally over the next month.

There are some serious issues with the upcoming wheat crop. Usually seasonal rains hover across Kansas in April so this is the main timeframe to watch for hard red winter wheat.

What to do: For Ontario, wheat stocks are very tight and the market cannot afford a crop problem in 2020. The Ontario wheat market will likely hold value or strengthen until the 2020 crop is more certain. We’re currently 70 per cent sold on the 2019 crop. Let’s see how some of these crops develop before making additional sales.

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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