Ontario corn and soybean prices have come under pressure as farmers continue to be aggressive sellers. Weather conditions have been optimal for harvest and off-farm movement. Supplies of corn and soybeans in the elevator system are burdensome and the market is functioning to encourage export demand.
The domestic soybean crush has moved into high gear as crush margins are near historic highs. Ethanol margins are struggling, resulting in lower corn use. Cattle on feed inventories are increasing and domestic feed use will make a seasonal high during January and February.
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Feedlot margins look positive for next spring. Farmers have wrapped up winter wheat planting. Our straw poll survey suggests winter wheat acres will be up 10 per cent over year-ago levels. The Ontario wheat market is suffering from a lack of domestic demand and strong competition in the export market.
Quick look
Soybeans: At this stage in the market, Chinese demand is the wild card.
Corn: The Ontario domestic corn market will have to trade at a sharp premium to world values to slow exports in the latter half of the crop year.
Wheat: The Ontario wheat market has softened and the global market is sensitive to trade developments.
The U.S. corn and soybean harvests are moving into the final stages. Low water levels on the Mississippi River have slowed movement of corn and soybeans to Gulf terminals. U.S. corn and wheat exports have been disappointing throughout the fall. U.S. soybean exports are modest at best.
At the same time, strong competition from South America has tempered demand for U.S. corn and soybeans. Brazilian soybeans and the first corn crop are being planted under favourable conditions.
At the end of October, Brazilian farmers had planted 40 per cent of the soybeans and 70 per cent of the first corn crop. Argentina has received timely rains but remains on the drier side. As of Oct. 30, Argentine farmers had planted nearly 25 per cent of the corn crop but minimal progress has occurred on soybeans. Private forecasters continue to cut Argentina’s wheat production.
The east coast of Australia continues to receive excessive rainfall, which downgraded wheat quality. However, this will likely be Australia’s third bumper crop in a row.
The Bank of Canada increased its key lending rate by 50 basis points to 3.76 per cent on Oct. 26. Canadian short-term lending rates are discount to their U.S. counterparts, which will limit any strength in the resource-based currency. U.S. third quarter GDP came in at 2.6 per cent annual rate whereas Canadian economic growth for the same period will likely finish around 0.4 per cent.
Europe is basically in a recession, while China continues to struggle with COVID lockdowns and the collapsing real estate market. We are bullish on crude oil due to historically low U.S. stocks. The Canadian dollar is expected to trade sideways for the remainder of 2022.
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Soybeans
Ontario soybean prices have been slowly trending lower since making a seasonal high in late August. Given recent harvest reports, we feel comfortable with Statistics Canada’s crop estimate of 4.1 million tonnes, which is the same as last year’s output but up from the five-year average of 3.9 million tonnes.
Soybean exports are down 50 per cent from year-ago levels, while the domestic crush pace is running at a similar pace as last year. This is a bearish fundamental situation. More importantly, we estimated that Ontario farmers would deliver three million tonnes of soybeans into the commercial system from Sept. 1 through Dec. 31. Prices are still relatively high from a historical perspective, which is encouraging farmers to sell stocks.
North American soybeans are discount to South American origin. U.S. soybeans are quoted at US$595/tonne f.o.b. the Gulf while Brazilian soybeans are offered at $610/tonne f.o.b. Paranagua. A nominal value for Ontario soybeans is $575/tonne f.o.b. St. Lawrence port. Given current ocean freight spreads, Ontario soybeans are competitive with U.S. origin into Europe, North Africa and the Middle East.
Chinese demand over the next six month is uncertain. At the time of writing this article, nearly 200 million people were in some form of lockdown and vegetable oil demand is uncertain. Meal prices are under pressure as well, setting the tone for Chinese crush margins.
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In North America, crush margins are strong. At the same time, U.S. export sales are running about six per cent above year-ago levels. The competitive window for North American exports continues for two months. Then Brazilian new crop offers will dominate the world market. Remember, the commercial trader is always working two or three months forward, whereas farmers are often focused on the upcoming two- or three-week window.
What to do: This week, we are advising farmers to increase sales by 10 per cent, bringing total sales for the 2022 production to 50 per cent. The March 2023 soybean futures are trading at a 20 cent/bushel premium to the nearby November contract. The market is telling farmers to sell now for March delivery.
Last year, the soybean market rallied in February due to the Russian invasion of Ukraine. This year, this risk premium is factored into the market. Looking forward, we have 50 per cent of the crop remaining if Brazil experiences a drier growing season or if adverse conditions develop in North America next spring. Chinese demand is a wild card.
Corn
The Ontario corn harvest is in the final stages and producer selling has increased in line with the seasonal tendency. Prices have softened as commercial stocks begin to swell. Producers are expected to deliver 6.5 million tonnes of corn into the commercial system from Sept. 1 through Dec. 31.
During the same time frame, domestic and export demand is projected to reach 3.8 million tonnes. Domestic feed demand makes a seasonal high in late December and remains firm throughout the winter. Export demand will make a seasonal high in March or April, just prior to Brazil’s harvest of the second crop. Ethanol margins have struggled with high corn prices. We are looking for the crude oil market to make fresh highs in February and March. This will be a major factor lifting the corn market later in winter.
At the time of writing this article, U.S. corn f.o.b. the Gulf was quoted at $367/tonne while Brazilian corn was valued at $291/tonne f.o.b. Paranagua. French corn was offered at $350/tonne f.o.b. La Pallice. Ontario corn was quoted at $290/tonne f.o.b. St. Lawrence port. Ontario corn is competitive into all European ports for the next five-month period. This will keep Ontario elevator bids well supported. French corn output is expected to finish near 11 million tonnes, down from 15.5 million tonnes last year.
The U.S. Southern Plains experienced drought-like conditions throughout the fall. Domestic basis levels are at historical highs in the southwestern corn belt as cattle feeders in Oklahoma, Kansas and Texas are having to pay up to draw stocks. The U.S. corn market is functioning to ration demand as the interior market trades above world values.
On a positive note, cattle prices are at seven-year highs and margins look favourable through June 2023. Ontario cattle feeders are also in good shape. In the latter half of the crop year, the Ontario domestic corn market will have to trade at a sharp premium to world values to slow exports. The premium could be further enhanced if the U.S. experiences adverse weather next spring, prior to planting. The U.S. cannot afford a crop problem in 2023.
What to do: Farmers should be 20 per cent sold on 2022 production. The March May corn futures are trading at even money or the same price. This reflects a bullish bias by the commercial trader (also known as the smart money) for spring. Listen to the market. Secondly, this crude oil market has potential to get explosive (no pun intended) barring a major North American recession. We have advised feedlots and farmers to have three to four months of fuel storage on farm.
Wheat
The Ontario wheat market has softened over the past month due to a lack of domestic demand and strong competition in the export market. Domestic flour millers are well covered for their nearby requirements.
At the same time, there is strong competition in the export market. Ontario winter wheat production was estimated at 2.040 million tonnes. Producers are expected to deliver 1.6 million tonnes in the first five months of the crop year into the commercial system. Domestic demand is only about 500,000 tonnes so the additional volume needs to move offshore.
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At the time of writing this article, U.S. No.2 Soft Red Winter was quoted at $383/tonne f.o.b. the Gulf; French top-grade milling wheat was quoted at $345/tonne f.o.b. Rouen. A nominal value for Russian was $315/tonne f.o.b. Black Sea. Argentine wheat 12.5 protein was quoted at $400/tonne. There are no offers for Ukraine wheat given the uncertainty in the “safe export corridor.” A nominal value for Ontario soft red winter would be $300-$310/tonne f.o.b. St. Lawrence.
The wheat futures are digesting daily news regarding Russian and Ukraine wheat exports. It is hard to keep track of the developments, which include export quotas, export tariffs and safety allowances for grain exports. Media sources suggest the safe export corridor will not be extended because Russian demands are not being met by the international community. More importantly, Russian progress in the Ukraine invasion has stalled and recent events have not been favourable for Russia.
The market is extremely sensitive to trade developments due to the tighter fundamentals from other major exporters. Private estimates now have Argentine’s wheat crop around 13.5 million tonnes, down from the USDA estimate of 17.5 million tonnes and down from last year’s output of 22.5 million tonnes.
Australia’s east coast continues to receive excessive moisture, which will likely downgrade a large portion of the wheat crop to feed quality. The U.S. Southern Plains continues to experience drought conditions. Ending stocks for the 2022-23 crop year in the U.S., Canada, Argentine and Europe will drop to historical lows. The world market cannot afford a crop problem in the Northern Hemisphere next year.
What to do: We have advised Ontario farmers to be 30 per cent sold on their 2022 wheat production. We feel the factors mentioned above warrant patience on additional sales.
