Global grain supply chains hit with Minor COVID-19 snags

Commodities continue to move well in the United States and Canada

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World grain and oilseed markets are digesting the March 31 United States Department of Agriculture Prospective Plantings report while balancing demand implications of the COVID-19 pandemic.

Quick look

Soybeans: If demand continues, soybean carry-out should be lower in 2020.
Corn: Market encouraging demand through lower prices.
Wheat: Ontairo milling wheat supplies continue to be very tight.

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U.S. farmers intend to increase 2020 corn acres by eight per cent while soybean acres are expected to be up 10 per cent. Earlier in March, there was a surge in demand for all grains and oilseeds due to the COVID-19 pandemic; however, it appears that commercial buying interest has subsided for the time being.

Ontario elevator bid prices for corn, wheat and soybeans were down 10 to 35 cents per bushel compared to two weeks earlier.

Crude oil prices have experienced a minor bounce off the historical lows; however, ethanol plants have either closed or significantly cut back on production due to negative margins.

The COVID-19 pandemic continues to strain logistical and supply lines in South America and Europe. The Argentinean government has ordered port workers and grain inspectors to stay on the job despite a decree ordering all other people to stay at home until mid-April.

In Europe, some port operations are functioning normally while others are running at limited capacity. Logistics are strained with the additional measures to curb the spread of COVID-19. There have also been disruptions in Brazil with certain ports curbing grain exports.

The U.S. has maintained a reputation as a reliable supplier. In Canada, the COVID-19 environment is not a minor issue but appears to be manageable compared to the adverse weather or rail blockades earlier in winter. Shipping on the Great Lakes is functioning well and the extensive vessel lineup on the West Coast is being alleviated.

The market focus is turning to weather and crop development. Private trade forecasters have trimmed South American soybean and corn production estimates due to drier conditions.

Northern Hemisphere winter wheat crops are coming out of dormancy in fairly good shape, although timely rains are needed in certain regions of the U.S. southern plains and in Russia. Traders remember how the markets behaved last spring when extensive precipitation in the Midwest slowed seeding progress, which has resulted in a defensive tone.

Soybeans

U.S. farmers intend to plant 83.5 million acres of soybeans this year, up 10 per cent from the 2019 seeded area of 76.1 million acres.

Using an average yield of 50 bushels per acre, the U.S. 2020 soybean production has potential to reach 112 million tonnes, up from the 2019 output of 97 million tonnes. On the outset, this looks rather bearish. However, if the 2020-21 demand is similar to 2019-20, the carry-out will drop sharply. Early estimates have the 2020-21 soybean carry-out at nearly 7.1 million tonnes, compared to 2019-20 ending stocks of 11.6 million tonnes. The fundamental outlook is somewhat friendly for new crop.

Drier conditions in South America have caused traders to lower their Brazilian and Argentine production estimates. We’re now expecting Brazilian production to finish near 124 million tonnes, down from earlier estimates of 125 to 126 million tonnes but this is still up from last year’s output of 117 million tonnes.

The Brazilian soybean harvest is in the final stages. Argentine harvest progress was nearly 10 per cent complete as of April 2; production is now projected to finish near 50 million tonnes, down from earlier estimates of 53 to 54 million tonnes and down from the 2019 crop size of 55.3 million tonnes. At the time of writing this article, Brazilian soybeans were a 30 cents per bushel discount to U.S. soybeans delivered China.

Ontario soybean prices have moved in line with the CBOT soybean futures during the past couple weeks. Now that the Brazilian harvest is nearing completion, the market will focus on North American planting progress. We’re looking for the soybean futures to incorporate a risk premium through the planting period. Day-to-day announcements regarding export movement in Brazil and Argentina will also influence price direction.

What to do: We’ve advised producers to be 80 per cent sold on old crop and 20 per cent sold on new crop. We’re planning to make our final sales recommendation during May or June once the North American production is more certain.

Corn

The USDA Prospective Plantings report had corn acres at 97 million acres, up eight per cent or 6.3 million acres from the 2019 seeded area of 89.7 million acres. Using a trend yield of 173 bushels per acre, the 2020 production has potential to finish near 389 million tonnes, up from the 2019 output of 348 million tonnes.

The function of the corn market is to encourage demand through lower prices. Ethanol usage for 2019-20 and 2020-21 will be down from earlier projections due to the lower energy prices.

We’re projecting a year-over-year increase in domestic feed use and exports; however, the carry-out has potential to finish near 76 million tonnes, up from the 2019-20 ending stocks projection of 48 million tonnes. The corn market is bearish from current levels especially for new crop. We expect December corn futures to eventually dip to the $3.20 area during the fall period.

The Ontario corn market has been functioning to ration demand throughout spring and winter. The tighter domestic fundamentals have caused local bids to remain above export bid prices. Ontario ethanol use will also be down from earlier projections, which is contributing to the softer tone in the short term.

However, the local market is still functioning to encourage acreage for the 2020-21 crop year. We’re expecting Ontario 2020 acreage to come in at 2.4 million, up 200,000 acres from last year. Using a five-year average yield of 159 bushels per acre, Ontario 2020 production has potential to reach 9.4 million tonnes, up from the 2019 output of 8.6 million tonnes. Barring adverse weather, the market structure will change in June from a rationing demand scenario to an encouraging demand environment. This will likely result in lower prices as the market will need to encourage export business during the fall period.

What to do: We’ve advised producers to be 80 per cent sold on old crop corn and 20 per cent sold on new crop. Lower ethanol use in the short term will weigh on the market and overhanging old crop prices is the burdensome supply environment for new crop.

The Ontario corn market has been an island on the world market and isolated from South American logistical issues. Moving forward, the Ontario corn market will be more correlated with U.S. prices. Ontario will have an exportable surplus for new crop so the world market will have more of an influence on domestic prices later in summer.

Wheat

Milling wheat supplies in Ontario are historically tight, which has limited the downside and the volatility over the past month.

Flour millers have increased capacity to fill domestic demand in the short term, which has underpinned the local market. Ontario wheat prices will remain elevated above world values, tempering export potential. Therefore, world wheat developments will determine price direction in the short term as the Ontario market continues to trade at a premium to world values.

The Statistics Canada fall survey had Ontario winter wheat acres at 1.162 million. Using a traditional abandonment rate and a five-year average yield, production has potential to finish near 2.5 million tonnes, compared to the 2019 winter wheat crop of 1.4 million tonnes. We’ll likely see about 90,000 acres of spring wheat in Ontario resulting in a crop size of 135,000 tonnes, down from 151,000 tonnes in 2019. This puts the Ontario supply situation into perspective. Once we move into new crop positions, the market will function to encourage demand and we expect to see a resumption of exports to the U.S.

The USDA estimated soft red winter wheat acres at 5.69 million acres, which is relatively unchanged from 2019. However, we’ll likely see a traditional abandonment rate. Barring adverse weather, we’re projecting U.S. soft red winter wheat production to finish near 8.1 million tonnes, up from 6.5 million tonnes last year. The year-over-year increase in North American soft red winter wheat supplies will cause Ontario prices to come under pressure.

On the world market, Russia has limited grain exports to seven million tonnes from April through June. Although this is in line with their regular export potential, the government will also sell 83 per cent of the grain from domestic stocks to curb inflationary pressures. This is viewed as a supportive signal for the wheat complex. The U.S. hard red winter wheat crop is in good shape and seasonal rains are expected to flow across the southern plains during April.

In Europe, logistics and port operations are the main concerns in the short term.

More importantly, all importing countries are re-evaluating food security issues given the COVID-19 pandemic. There is potential to see increased demand over the next month, especially from Southeast Asia and the Middle East, as countries and millers increase their stockpiles.

What to do: We’ve advised producers to be 80 per cent sold on old crop and 20 per cent sold on new crop. At this stage, there are no concerns with the upcoming wheat crop among major exporters in the Northern Hemisphere. On the flip side, an increase in demand could surprise the trade if the COVID-19 pandemic continues into summer and logistical problems escalate in Europe or elsewhere.

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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