Grain prices show decline with little reason to reverse direction

Corn, soybeans and wheat all have negative forecasts entering the growing season

Central Canada has received average to above-average precipitation over the past 30 days providing sufficient moisture for planting and early crop development. The macro situation for Ontario grain prices is somewhat bearish moving forward. Grain and oilseed futures continue to grind lower due to favourable harvest conditions in South America.

Much of U.S. received above-normal precipitation over the past month but optimal weather forecasts for North America have enhanced confidence amongst traders that the crops will seeded in a timely fashion. The winter wheat crops in Russia, Ukraine and Europe are developing under ideal conditions; Northern European moisture reserves have been replenished enhancing crop prospects in France and Germany. Kansas is experiencing greenhouse conditions. The only region of concern is Western Canada. Most of the prairies have received less than 40 per cent of normal precipitation over the past 60 days. Exports of Ontario soybeans and corn will have stiff competition from other major exporters for the remainder of the crop year.

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The Canadian dollar has been consolidating, balancing a number of variables. Neutral monetary policy from the Bank of Canada along with stronger crude oil futures has limited the downside. On the flip side, negative fiscal policy from the federal government continues to limit any strength in the Canadian dollar. Investor confidence in Canada continues to erode to fresh lows due to looming regulations on oil tankers and carbon emissions.

A trade deal between the U.S. and China will not alter the major trend in commodity prices because the world will be awash with soybeans, corn and wheat for 2019-20. However, two rounds of face-to-face negotiations are planned for the week of April 29 in Beijing and May 6 in Washington. A proposed signing ceremony is now scheduled for late May or early June.

Quick look:

Soybeans: U.S. soybean prices aren’t competitive with bean prices in Brazil.
Corn: Argentinian corn harvest yields look better than expected.
Wheat: All major exporting countries are expected to have an increasing wheat production this year.

Soybeans

The function of the soybean market is to encourage demand through lower prices. We currently see Brazilian soybeans offered into China at a US$16/tonne discount to U.S. origin out of the Gulf and US$13/tonne out of the Pacific Northwest. Argentine soybeans are US$30/tonne discount into China compared to U.S. origin. The recent Chinese purchases of U.S. soybeans have been part of the goodwill endeavor from China but U.S. beans are not competitive. China has covered the bulk of their requirements for May through July.

Adverse storms have plagued much of the Midwest through March and April; however, we expect the U.S. soybean crop to be seeded in a timely fashion given the current weather forecast. U.S. farmer selling generally slows during May and then picks up in June and July. U.S. producers have large stocks to sell before new crop comes on stream, which will limit any rallies in the market.

The Argentine soybean crop is approximately 25 per cent harvested and yields are coming in better than anticipated. The USDA estimated the crop size at 55 million tonnes, up from 37.8 million tonnes last year. Private trade estimates range from 55 to 58 million tonnes so we could see upward adjustments. Brazil’s crop was estimated at 117 million tonnes, down from 122 million tonnes last year. The Brazilian soybean harvest is in the final stages.

What to do: We’ve advised producers to sell 90 per cent of old crop soybeans and 20 per cent to 30 per cent of new crop. We could see Ontario soybean prices drop by $30/tonne to $40/tonne between now and harvest should average type yields materialize in the U.S. Ontario soybean exports will slow down during the summer period. Ontario domestic crush margins are expected to deteriorate because of the weaker meal prices. Soymeal prices have held value throughout the crop year but this will be a significant shift for 2019-20. Argentina will dominate the world meal market instead of the U.S and Argentina beans are cheap. U.S. and Ontario soymeal prices are also expected to drop $30/ tonne to $40/ tonne.

Corn

Ontario corn prices are expected to trend lower over the next month as the South American harvest progresses. Secondly, the corn market has held a risk premium due to the uncertainty in U.S. seeding progress. This risk premium will erode given the monthly forecast. The U.S. crop will be seeded in line with the five-year average and there is sufficient moisture for early crop development.

The Argentina corn harvest was approximately 30 per cent complete as of April 22 and yields are better than expected. The USDA had the Argentine corn crop at 47 million tonnes, up one million tonnes from last month’s estimate and up 15 million tonnes from last year. However, private trade estimates are in the range of 48 to 50 million tonnes. The USDA had the Brazilian crop at 96 million tonnes but private trade estimates are in the range of 97 to 100 million tonnes. (Last year’s crop was 82 million tonnes) Brazil’s second Safrinha crop harvest will begin the first half of May. Temperatures have been optimal during pollination.

North American corn exports have slowed down to a trickle. Brazilian soybeans are offered at $17/tonne discount to U.S. corn out of the Gulf. Fresh export business out of the U.S. will be minimal throughout the summer. It is also important to remember that U.S. and Ontario cattle on feed inventories drop to seasonal lows from July through September. Domestic feed demand is quite sluggish during the summer months. The U.S. farmer also has a fair amount of corn to sell prior to new crop coming on.

What to do: We’ve advised farmers to be 80 per cent sold on old crop and 20 per cent sold on new crop. The U.S. crop is usually killed off once or twice during the summer. It is either too cold, too hot, too wet or too dry. This has been known to cause a temporary rally in early June or mid July. Our strategy is to sell our final increment of the 2018 crop and add onto new crop sales on this summer weather rally.

Wheat

The wheat market is in a transition stage between old and new crop fundamentals. Major importers are buying limited volume in the short term because there is a large inverse between old and new crop prices. All major exporters will experience a year-over-year increase in production this year.

Russian wheat production is expected to reach 80 million tonnes this year, up from last year’s output of 72 million tonnes. While exports have slowed down in the short term, sellers are being more aggressive for new crop positions. The harvest will come on stream in July and current conditions have the crop in decent shape with no areas of concern. Ukraine wheat production is projected to come in at 26 million tonnes, up marginally from the 2018 output of 25.1 million tonnes. Timely rains have occurred over the past week in the southern region of Ukraine but additional precipitation is needed to achieve the crop forecast.

European production will likely reach 145 million tonnes this year, up from the 2018 crop size of 138 million tonnes. Northern Europe experienced above normal precipitation during March but April is on the dryer side. Timely rains are needed. In the short term, European wheat offers are quite aggressive as traders move old crop stocks.

The U.S. winter wheat was rated 60 per cent good to excellent. Farmers in Kansas are expecting record yields. U.S. farmers sell about 50 per cent of their winter wheat in the summer months so there are large old and new crop stocks overhanging the market.

We mentioned in the previous issue that U.S. soft red winter wheat fundamentals are expected to be historically tight for 2019-20. Despite the lower U.S. soft red production, the Russian and European wheat harvests will weigh on the Chicago market during the summer months. Therefore, the North American soft red winter basis is expected to strengthen for new crop positions to limit offshore movement. The U.S. market will need to attract imports from Ontario during the winter of 2019-20.

What to do: In my previous report, we advised producers to sell an additional 15 per cent to 20 per cent of the 2018 crop bringing total sales to 85 per cent to 90 per cent. We’re not advising new crop sales because quality can be a concern. Secondly, we feel the risk reward favours waiting for new crop wheat sales. There’s a fair amount of time before the crop is in the bin. The soft red winter wheat fundamentals are contrary to the world wheat situation.

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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