Few prospects for soybean price to increase

Large U.S. stocks and good South American harvest likely mean decrease in U.S. acres

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Compared to two weeks ago, Ontario corn and soybean prices are marginally higher.

Iowa, Nebraska and Missouri have experienced severe flooding. Seeding in the Midwest may be delayed which usually results in lower yields. The corn and soybean futures markets are strengthening on the potential for lower yields.

In the previous issue, we advised producers to hold back on wheat sales because the Chicago and Kansas wheat futures market had potential to experience a short covering rally. Our expectations were correct. Ontario wheat prices are 30 to 50 cents a bushel higher compared to earlier in March. We’re now entering the critical time period when the focus turns to seeded acreage.

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There’s been little progress on the trade front between the U.S. and China, while Canada continues to reap repercussions of this tense relationship.

It appears that U.S. President Donald Trump is trying to change China’s communist ideology and turn the country into a free market environment. The U.S. continues to press China for industrial policy reforms and an effective enforcement mechanism.

Trump stated the U.S. tariffs on Chinese imports will not be lifted until he can confirm China is abiding by the agreement. China has offered to buy US$1.2 trillion of U.S. energy, agriculture and aircraft products but Trump stated he’s looking for China to double or triple this number.

At the same time, China President Xi Jinping doesn’t understand the Canadian executive and legislative branches are separate from the judicial arm. China is expected to put more strain on trade with Canada until Huawei’s chief financial officer Meng Wanzhou is released.

The U.S. Federal Reserve kept its interest rate in the range of 2.25 per cent to 2.5 per cent at its recent meeting and stated no interest rate hikes were in the cards for 2019. This policy change from the U.S. Federal Reserve was welcomed by Bank of Canada. Chair Stephen Poloz has been caught in a conundrum with Canadian gross domestic product registering at 0.4 per cent in the last quarter, which was followed by the left-leaning budget from the federal Liberal government. The deficit is now projected to reach C$19.8 billion. Federal policies have done little to enhance growth while stifling foreign investment. The weaker Canadian dollar has been supportive for Ontario grain and oilseed prices.

Quick look:

Soybeans: Ontario soybeans won’t likely trade into China in fall of 2019 as they did in fall of 2018.
Corn: Widespread Midwest flooding will be a wildcard for U.S. corn yields.
Wheat: Lower ending stocks mean less room for adverse weather in Europe and Russian wheat-producing areas.

Soybeans

Ontario soybean prices are expected to grind lower from now until harvest.

Traders project a year over year decrease in U.S. seeded area of one to four million acres; however, if average to trend-type yields materialize, the U.S. carry-out will remain at burdensome levels for the 2019-20 crop year, due to the lower export demand. Argentina was one of the largest customers for U.S. soybeans during this crop year. However, the year over year increase in Argentine production will cut off import demand. U.S. soymeal exports have been quite robust but will slow once the Argentine harvest moves into higher gear during April. Argentina is the world’s largest soymeal exporter.

U.S. domestic crush margins are expected to deteriorate because the domestic market has to absorb larger supplies of meal.

The Brazilian harvest is 67 per cent complete, in line with the five-year average. Brazilian soybean offers to China are 44 cents per bushel lower than U.S. origin out of the Gulf of Mexico. U.S. soybean exports have also slowed to non-Chinese destinations, partially due to rising transportation costs of moving soybeans into export position. This will eventually cause more U.S. soybeans to trade into Ontario. U.S. farmers have a large volume of soybeans to sell between now and harvest.

What to do: We’ve advised producers to be 80 per cent to 90 per cent sold on old crop soybeans and 20 per cent to 30 per cent sold on new crop. Ontario farmers are expected to increase soybean acres at the expense of corn. New crop prices have been relatively flat throughout the winter so take advantage of this price structure.

During the fall of 2018, Ontario soybeans traded into China but don’t count on Chinese demand this fall.

Corn

Flooding in certain regions of Iowa, Nebraska and Missouri have caused the corn futures to incorporate a risk premium due to production uncertainty. An official with the U.S. National Oceanic and Atmospheric Administration stated that flooding could be more widespread in upcoming weeks.

It appears that seeding in parts of the Midwest could be two to four weeks behind normal. We could see the unplanted or abandonment rate come in larger than anticipated.

Secondly, yields will likely come in below trend because the crop will move through pollination during the heat of summer.

Finally, harvest may occur under adverse conditions if fall weather isn’t co-operative. All and all, a late seeded U.S. corn crop makes the market nervous because there are many factors that can inhibit yields and production.

Late last week, Argentine corn was offered at US$165/tonne, f.o.b.; Ukraine corn is offered at US$170/tonne, f.o.b. the Black Sea and U.S. corn is offered at US$175/tonne, f.o.b. the Gulf.

Stiff competition from Ukraine has tempered Ontario corn exports into Europe.

Canadian crop year to date corn exports for the week ending March 17 were 936,200 tonnes, compared to 419,5000 tonnes last year. Most of the exports are from Ontario. The trade is factoring in a relatively tight Ontario corn carry-out for the 2018-19 crop year. Therefore, the domestic Ontario market needs to ration demand through higher prices to attract U.S. corn imports in the latter part of the crop year. However, a weaker Canadian dollar is making this more difficult for Ontario end users.

The corn market is going to be volatile over the next couple months until U.S. seeding is more than 50 per cent complete.

Traders are expecting the USDA prospective plantings report to show a year over year increase of two to four million acres. U.S. corn demand is rather inelastic, so the market will continue to be very sensitive to yield projections.

What to do: Farmers following our advice are in good shape to weather the upcoming uncertainty. We’ve advised producers to be 80 per cent sold on old crop and 20 per cent sold on new crop.

South American crop conditions remain favourable and there are no concerns for Brazil’s second-crop corn. U.S. offshore exports generally taper off later in May as Brazilian exports pick up. This tends to bloat the North American market and limit the upside for Ontario prices.

Wheat

Ontario wheat prices have strengthened in tandem with the Chicago, Kansas and Minneapolis wheat futures markets.

We’ve seen significant speculative fund short covering over the past couple weeks in Kansas and Chicago. At the same time, the commercials have been on the long side of Minneapolis.

The U.S. soft red winter wheat crop has been affected by the recent flooding and lower production estimates have contributed to the recent strength. The U.S. hard red winter wheat crop is in the process of coming out of dormancy and Kansas is like a greenhouse. Most of the Ontario wheat-growing region has received average precipitation over the past 30 days while temperatures have been 3 C – 5 C below normal.

A large portion of France, Germany and Italy received less than 50 per cent of normal precipitation during February. Limited snow and rainfall has occurred in March. At this stage, the French wheat crop is rated 85 per cent good to excellent but it’s too early to put any weight on crop condition reports.

The southern half of Ukraine and the southern district of Russia also received less than 50 per cent of normal precipitation during February, while isolated areas were below 25 per cent. Eastern Ukraine and southern Russia remain on the drier side.

Compared to two weeks ago, French soft wheat was offered at US$223/tonne, f.o.b. Rouen, up US$9/tonne; Russian Milling wheat with 12.5 per cent protein was offered at US$230/tonne, f.o.b. the Black Sea, up US$15/tonne; U.S. hard red winter wheat was offered at US$218/tonne, f.o.b. the Gulf, up US$4/tonne; U.S. soft red winter wheat was offered at US$207/tonne, fob the Gulf, up US$2/tonne. Despite the stronger futures, U.S. values are only marginally higher while greater gains have been noted in Europe and Russia.

Readers can see that the market in Europe and Russia is more sensitive to weather conditions given the year over year decline in ending stocks for the 2018-19 crop year. Russia is in a situation where they cannot afford adverse conditions this summer.

What to do: We’ve seen a minor rally in the wheat market so we’re advising producers to sell 10 per cent of their 2018 production bringing total sales to 70 per cent. April is a bearish month for wheat because Kansas receives seasonal rains.

During May and June, the wheat market will be sensitive to growing conditions in Europe, Ukraine and Russia. Given the tighter ending stocks in these three exporters, the market will incorporate a risk premium due to the uncertainty in production if below normal precipitation materializes.

The trend in weather is for drier conditions in these regions. We’ll save 30 per cent of the 2018 wheat crop for a potential summer rally, which is a reasonable risk-reward scenario given current prices.

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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