Ontario corn, soybean and wheat prices trended higher throughout November and export demand for Ontario crops is at a seasonal high. World markets have set the domestic price structure.
When the lakes freeze over, basis levels in the elevator system tend to soften. In addition to export demand, corn prices have been supported by historically high margins for ethanol processing. Domestic crush margins for soybeans have improved with meal values up US$30-US$40/tonne over the past month.
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Critical growing season ahead for soybeans
This year’s smaller soybean acreage puts the onus on yields, if last year’s supply is to be maintained. The most critical yield-determining month for U.S. soybeans is August.
Soybeans: Anticipated high fertilizer prices will likely result in increased soybean acres for 2022, and will pressure old crop values come June.
Corn: Three pillars of demand — ethanol, feed and export — are peaking.
Wheat: Prices are being pushed up by each COVID wave, when all major importers, merchants, end users and consumers tend to stock up on supplies.
Milling wheat stocks in Ontario are expected to drop to historical lows for the second year in a row. It appears that soft red winter wheat acres will be lower than earlier projected due to adverse rains during October. Ontario farmers have been active sellers of corn and soybeans over the past month, which has saturated the commercial pipeline.
U.S. farmers have wrapped up corn and soybean harvests. As of Nov. 29, Argentine farmers had seeded 35 per cent of the corn crop and 34 per cent of the intended soybean acres. Brazilian soybean planting was estimated at 85 per cent complete as of Nov. 28.
At the time of writing this article, drier conditions were in the two-week forecast for Argentina and Southern Brazil. The corn and soybean futures markets have incorporated no South American weather premium at this time.
China has been actively buying U.S. soybeans but total sales are down from year-ago levels. Brazil’s soybean harvest is expected to occur 10-14 days earlier than normal. The U.S. export window to China will close sooner this year and pressure North American soybean prices.
The world wheat market is contending with dry conditions in the U.S. southern plains and Ukraine. Adverse rains in Eastern Australia have lowered milling quality supplies when ending stocks from major world wheat exporters are at 14-year lows.
Since mid-October, the Canadian dollar and other major currencies have depreciated against the U.S. greenback. The U.S. Federal Reserve is expected to accelerate its tapering of asset purchases in the new year and three interest rate hikes are expected in 2022. This hawkish tone appears to be contributing to U.S. dollar strength.
There has also been a flight to safety with the new strain of COVID-19 from South Africa known as Omicron. This new strain comes on the heels of fresh lockdowns in Germany and Austria and other regions of Europe. Negative federal fiscal policy is also contributing to Canadian dollar weakness. There is no sign that inflationary pressures will abate in the short term.
Ocean freight is a bit softer. Panamax freight is hovering at seven-month lows on major trade routes. A weak Canadian dollar and inflation is supportive for Ontario grain and oilseed prices.
Soybeans
Ontario export offers are competitive with U.S. offers out of the Gulf. Canadian crop year-to-date soybean exports for the week ending Nov. 21 were 1.5 million tonnes, down marginally from 1.7 million tonnes last year. Export demand will underpin domestic prices through January.
From February forward, Brazilian soybeans will dominate export offers on the world market. We’re going to see a slowdown in offshore movement for Ontario soybeans in the latter half of the crop year, barring adverse conditions in Brazil. Domestic soymeal prices have rallied, enhancing the crush margin structure.
Higher values for soymeal have attracted imports from the U.S. This is tempering the upside for soybean prices in Ontario and keeping elevator bids equal to world values.
U.S. soybean sales commitments for the 2021-22 crop year are down 32 per cent from year-ago levels. Sales to China are down about 34 per cent from last year. This is a concern. The U.S. domestic crush pace has been exceeding year-ago levels but not enough to offset the slower export movement.
There is potential for U.S. soybeans to trade into Ontario in the spring. The market in the northern U.S. Midwest will function to encourage demand through lower prices.
For new crop, the market is focusing on fertilizer prices. Farmers use less fertilizer on soybeans compared to corn so we may see an increase in North American soybean acres. New crop Ontario soybean prices are trading at a discount to old crop. This tells the farmer not to hold old crop soybeans into the new crop year.
What to do: This week, we’re advising Ontario farmers to increase soybean sales from 50 per cent to 60 per cent. Brazilian soybeans are more competitive than North American origin from February forward. The U.S. crush pace will exceed year-ago levels, increasing U.S. soymeal exports to Canada.
During the spring, soybeans in the northern midwest states will trade at a discount to Ontario soybeans. There will be a tendency for U.S. beans to trade into Ontario. We’re expecting a year-over-year increase in U.S. soybean acres this spring. Larger new crop supplies will pressure old crop values come June.
Corn
Elevator corn bids in Ontario are $1.50/bu. higher than last year. The market continues to trend higher since making seasonal lows during the first week of September. Traders appear to be comfortable with production estimates in Canada and the U.S.
In North America, the focus is on demand. Ethanol margins are near historical highs, cattle on feed inventories are at seasonal highs and export demand is similar to year-ago levels. All three pillars of demand are peaking.
On the world market, the focus is South American production. The only concern is the Brazilian state of Rio Grande do Sul, which has suffered drier conditions. This may affect first crop corn production, which is only about 26 million tonnes. Brazil’s main corn production is the second crop, which is expected to reach 92 million tonnes. The second crop will be planted in February and harvested in June.
Total Brazilian corn production is expected to reach 118 million tonnes, up from the year-ago level of 86 million tonnes. The year-over-year increase in Brazilian output will cause corn exports to reach 43 million tonnes, up from the 2020-21 exports of 17.5 million tonnes.
Argentina received timely rains in November and corn production is expected to come in at 55 million tonnes, up from the 2020-21 production of 50.5 million tonnes. Argentine exports are projected to finish near 39 million tonnes this year, relatively unchanged from the previous campaign. Needless to say, U.S. and Ontario corn exports will drop or dry up during April 2022.
China has been absent from the U.S. corn market since May. Earlier in November, Chinese buyers stepped forward for approximately 500,000 tonnes of Ukraine corn instead of U.S. origin. U.S. corn export commitments are down about 10 per cent from year-ago levels but in line with the USDA estimate. This year-over-year decline isn’t surprising.
What to do: We’ve advised Ontario farmers to be 40 per cent sold on their 2021 production. There is no South American weather premium in the market at this time. The main pollination season for Argentina is ahead of us and Brazil’s main crop is two months away from planting. Let’s not be overly anxious on sales until South American production is more certain. If there is a problem, the market will be extremely sensitive to lower production estimates.
Crude oil prices will be volatile. The energy crisis is far from over, with the main winter season ahead of us. Ethanol production will come in higher than expected. Trust us on this one.
Wheat
If there is one market to be bullish on, it’s the wheat market. At the time of writing this article, old crop elevator bids for soft red winter wheat were hovering at $9.50/bu. and new crop bids were over $10/bu. Ontario and U.S. soft red winter wheat stocks will drop to historical low levels for the second year in a row. The old crop market is functioning to ration demand through higher prices while new crop market is functioning to encourage production.
Wheat has been one commodity that actually strengthens when there is a fresh COVID-19 wave. All major importers, merchants, end users and consumers tend to stock up on supplies. The psychology for inventory has moved from “just in time” to “just in case.” This is just in case of political problems, civil unrest, crop failures and of course any other unexpected event like a trade war.
Ontario wheat prices are moving in tandem with world values. The last Egyptian tender, which occurred in mid-November, had wheat offers from Black Sea and France around US$350/tonne f.o.b. This is up approximately US$25/tonne from the tender earlier in late October. We’ve mentioned in previous issues that Ontario prices need to maintain a premium over world values given the tight supplies.
Australian farmers continue to harvest their second largest crop on record but adverse rains continue to plague Queensland and New South Wales. The trade is still getting a better handle on the overall quality and volume of milling supplies. Prices have been percolating higher through harvest.
In the Southern Plains, dryness is expanding in the hard red winter wheat area. Only 44 per cent of the U.S. winter wheat crop was rated good to excellent as of Nov. 21. Approximately 22 per cent of the crop was poor to very poor heading into dormancy.
In the Ukraine, a large portion of the winter wheat region has received 25 to 50 per cent of usual precipitation through October and November. At the time of writing this article, the Russian crop has received normal precipitation. The export tax in Russia continues to creep higher as prices increase. There is potential for export constraints in Russia and Ukraine next spring. Food inflation is a major problem for these Eastern European countries.
At the time of writing, the Commitments of Traders report shows large speculators or non-commercial traders hold a fairly large short position. The market is at contract highs and these participants are short and losing a fair amount of money. The boss will eventually tap them on the shoulder and say “liquidate.” This significant “speculative” buying could cause a limit up move in the futures market.
What to do: We’ve advised Ontario farmers to be 50 per cent sold on their 2021 wheat production. That’s enough for now. New crop supplies from the U.S. will only be available in June. The size of the crop is uncertain. This is a long stretch. Ending stocks from major exporters will drop to historical low levels and the world is in a tense situation.
