July USDA report neutral for corn and soybeans but bullish for wheat

Ontario row crops are on pace for average yields if weather cooperates

Corn in Ontario is starting to tassel and generally looks healthy including this field near London.

The bulk of the Ontario growing region received 50 to as much as 100 millimetres of precipitation during the first half of July. The corn and soybean crops have been rejuvenated after a rather dry spring. We’re now projecting average type yields for the row crops. 

Quick look
Soybeans: The Ontario soybean crop is rated about 65 per cent good to excellent.
Corn: The U.S. corn crop is estimated at 385 million tonnes, and could exceed the 2016 record. 
Wheat: A crop of 2.5 million tonnes is still expected, but quality is uncertain. 

Elevator bids for corn and soybeans have been quite volatile over the past month as traders come to terms with production expectations. Recent rains have delayed the Ontario winter wheat harvest. Winter wheat harvest progress was approximately 30 per cent complete as of July 15. 

The quality is holding up fairly well so far; however, there are reports of sprouting. Fusarium doesn’t appear to be a major problem because it was rather dry during the flowering stage. Nearby elevator bids for winter wheat are down about $1/bushel since late June. 

As of July 11, the U.S. corn crop was rated 65 per cent good to excellent compared to 69 per cent during the same time last year. The U.S. soybean crop was rated 59 per cent good to excellent as of July 11. This is down from 68 per cent good to excellent rating on July 12, 2020. The U.S. winter wheat harvest was 59 per cent complete as of July 11. This compares to the five-year average of 65 per cent complete. 

The USDA July WASDE report was considered neutral for corn and soybeans but bullish for wheat. Brazil’s Safrinha corn harvest was approximately 20 per cent complete as of July 10. The French wheat harvest was estimated to be about 15 per cent complete as of July 10. Last year, the crop was over 65 per cent complete at this time. 

The Ukraine and Russian wheat harvests are in the early stages. Black Sea wheat offers dropped about US$15/tonne in early July. The Canadian and U.S. wheat markets are rationing demand by trading above world values in an effort to curb exports. 

The main typhoon season in China is in August and September. At this stage, Chinese crops are in good shape with normal precipitation. 

The Canadian dollar was trading around 80.25 US cents at the time of writing this article, down from the June 1 high of just over 83 cents. We view monetary policy from the Bank of Canada as more hawkish compared to the U.S. Federal Reserve. After a sluggish second quarter, Canadian third quarter GDP has potential to reach more than eight per cent on an annualized basis while U.S. growth is projected to come in around seven per cent. These two factors should cause the Canadian dollar to appreciate against the U.S. greenback over the next month. 

Soybeans

There is no change in our yield forecast for Ontario soybeans. The Ontario crop is expected to reach 3.8 million tonnes, down marginally from the 2020 output of 3.9 million tonnes. We’re rating the Ontario soybean crop about 65 per cent good to excellent, similar to last year at this time. 

There may have been a minor weather premium in the market earlier in June but this has eroded with recent rains. Export demand has slowed during the summer months with Brazil and Argentina dominating the world market. 

Domestic crushers are also taking their downtime for maintenance and upgrades. There is a strong seasonal tendency for the market to grind lower into August. Sometimes the soybean market can incorporate a risk premium during the main flowering and pod setting stage. 

The Western Canadian canola crop has experienced significant yield drag due to extensive heat and limited precipitation over the past 30 days. The soyoil futures and vegetable oil complex appear to be driving the crush margin structure for the time being. 

The world soymeal market appears to be contending with larger supplies into the fall period. Domestic U.S. and Canadian feed demand tends to make a seasonal low in August and September due to lower livestock numbers. Canola appears to have divorced from the soybean market for the time being. 

The U.S. soybean crop is expected to come in around 120 million tonnes, according to the USDA. This is up from the 2020 output of 112.5 million tonnes. At this stage, the USDA is still expecting trend type yields. It appears better conditions in parts of the Midwest are offsetting the dry regions of the Northern Plains. 

The USDA WASDE report had Brazilian production at 137 million tonnes, up approximately nine million tonnes from last year. Argentine production was estimated at 46.5 million tonnes, down just over two million tonnes from year-ago levels. The year-over-year increase in production from the big three will more than offset the increase in import demand. Don’t get overly bullish at the roof. 

What to do: We’ve advised producers to be 100 per cent sold on old crop soybeans and 20 per cent sold on new crop. We’ll wait until the harvest is underway to increase sales. There is still a fair amount of growing season left and we’re monitoring Chinese conditions. 

Corn

We continue to project an Ontario corn crop in the range of 8.7 to nine million tonnes. This compares to the 2020 crop size of 8.9 million tonnes. We’re rating the crop 68 per cent good to excellent, which is about the same as last year at this time. 

We’re projecting above average yields for the province. Ontario elevator corn bids have been holding around $8/bushel over the past month. This is largely due to historically tight ending stocks. For new crop, bids are $2/bu. Lower at around $6/bu. The inverse in the cash market tells farmers to liquidate all old crop stocks. Don’t hold old crop supplies into new crop positions. 

The USDA estimated the U.S. corn crop at 385 million tonnes, up from the June estimate of 381 million tonnes and up from the 2020 output of 360 million tonnes. This could be the highest production on record next to the 2016 crop, which was just under 385 million tonnes. 

The point is the market will function to encourage demand during the first half of the 2021/22 crop year. Supplies are increasing, not decreasing. 

Demand is also decreasing in the short term. U.S. values out of the Gulf are premium to Brazil and Argentina, which is slowing exports. We’re only going to see the Canadian and U.S. export pace improve in October. 

At the same time, wheat is moving into domestic feed rations. Wheat is discount to corn not only in North America but also Europe and Southeast Asia. The ethanol grind is running at higher levels but this is the only factor supporting corn at the current prices. 

The total Brazilian corn crop was estimated at 93 million tonnes, down nine million tonnes from last year. The Argentine crop was estimated at 48.5 million tonnes, down 2.5 million tonnes from year-ago levels. 

The Brazilian crop that will be harvested during spring and summer of 2023 was estimated at 118 million tonnes but keep in mind this crop isn’t seeded yet. Chinese import demand for 2021/22 was estimated at 26 million tonnes, unchanged from 2020/21. 

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We don’t like to sell more than 20 per cent prior to harvest. Last year, the market made seasonal lows in early August. This year, the market is coming off historical highs and this usually results in lower prices during October. Once the crop is more certain, we’ll advise producers to increase sales. 

Wheat

We continue to project an Ontario winter wheat crop of 2.5 million tonnes, up from the 2020 output of 2.3 million tonnes. Quality is uncertain at this stage. The Ontario and U.S. soft red winter wheat harvests are experiencing delays due to adverse rains. We expect grade spreads to widen between milling and feed quality. 

We’re currently seeing higher quality wheat trade into feed channels but this will change later in the crop year. Once new crop corn comes available, we’ll see soft red milling wheat quality trade at a sharp premium to feed quality and premium to corn. The domestic milling market will need to pay a premium to pull supplies away from feed channels. 

The U.S. wheat complex is in a unique situation. The USDA had U.S. hard red winter production at 21.9 million tonnes, up from the 2020 crop size of 17.9 million tonnes. However, due to increased winter wheat feed usage and a marginal year-over-year increase in exports, the ending stocks for 2021/22 were estimated at 10 million tonnes, down slightly from the 2020/21 carryout of 11.6 million tonnes. 

Much of the trade believes the ending stocks projections for both 2020/21 and 2021/22 are too high due to increased feed usage. Usually, hard red winter wheat prices make seasonal lows in summer. However, this year, we may see a counter seasonal behavior. 

The hard red winter wheat market will come under pressure once the U.S. corn harvest gets underway and wheat is priced out of the rations. Without going into detail, we’re looking for the U.S. 2021/22 soft red winter wheat carryout to come in near historical lows for the second year in a row.

Western Canada and North Dakota are suffering through one of the driest years since 1988. U.S. hard red spring wheat production was estimated at 8.3 million tonnes, down from the 2020 output of 14.4 million tonnes. 

Canadian hard red spring wheat production is estimated at 14 million tonnes, down from the 2020 crop size of 26 million tonnes. Both Canada and the U.S. hard red spring wheat ending stocks are expected to be historically tight at the end of the 2021/22 crop year. 

The French harvest is off to a slow start due to adverse rains. The EU wheat crop is expected to finish near 138 million tonnes, up 12 million tonnes from the 2020 production. Ukraine production is expected to reach 30 million tonnes, up from 25.5 million tonnes last year. Russia is on pace for an 85 million tonne crop, unchanged from last year. 

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We believe the tight supply of hard red spring wheat will lift North American soft red winter wheat prices. Ontario crop quality is uncertain. Be patient to make additional new crop sales.

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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