Large global soybean supplies continue to weigh on prices

Late March USDA report expected to be bearish for corn, soybeans

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Ontario wheat, corn and soybean prices have been somewhat immune to the meltdown in the world financial and commodity markets.

Ontario corn and soybean prices are relatively unchanged from last month while wheat prices are down approximately 20 cents/bushel on average. The March Canadian dollar dropped to 72.67 U.S cents on March 9, the lowest level since May of 2017. Weakness in the Canadian dollar has been supportive for local grain and oilseed prices.

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Quick look

Soybeans: Canadian soybean exports are down overall, but up to Europe.
Corn: U.S. is exporting more ethanol to Canada, but ethanol plant prices for Ontario corn are relatively unchanged.
Wheat: Russian and Ukraine are expected to produce more wheat in 2020 than in 2019.

The domestic corn and wheat fundamentals are relatively snug for the 2019/20 crop year. Wheat prices are expected to trend lower through the spring and summer as we approach new crop. The soft red winter wheat futures have significant downside potential moving forward. The local corn market is functioning to encourage acreage this spring.

The world soybean market is contending with a burdensome supply situation, which will eventually weigh on Ontario domestic prices. This environment confirms our recommendations to be 80 per cent sold on old crop and 20 per cent sold on new crop corn, soybeans and wheat.

The next major report will be the USDA seeding intentions on March 31. Traders view this as the most important report of the year. Pre-report estimates are bearish for corn and soybeans and neutral for wheat. At this stage, we’re anticipating normal weather and precipitation for North America for April and May, which should result in timely seeding progress.

The U.S. Federal Reserve and the Bank of Canada lowered their benchmark lending rate by half a percentage point during the first week of March. This was viewed as a pre-emptive strike against slower economic growth due to the coronavirus outbreak.

This was largely anticipated by the financial industry and there is potential for further rate cuts over the next month. Russia and OPEC failed to agree on additional production cuts and it now appears that a price war is escalating between Russia and Saudi Arabia. This will result in lower ethanol prices and spillover into the corn market. It will be difficult for the Canadian dollar to sustain any strength with crude oil under pressure.

Soybeans

Canadian soybean crop-year-to date exports to Jan. 31 were 2.317 million tonnes, down from 3.305 million tonnes last year. The Canadian September 2019 through January 2020 soybean crush was 747,156 tonnes, down from 913,691 tonnes for the same period last year. Canadian soybeans are experiencing a year-over-year decrease in demand although imports from the U.S. are also down from year-ago levels. The 2019/20 carryout stocks are expected to finish around 400,000 tonnes, down from the 2018/19 ending stocks of 700,000 tonnes. The domestic fundamentals are rather price neutral from current levels.

Canadian crop year-to-date exports to Europe to Jan. 31 were 1.4 million tonnes, up from a meager 125,300 tonnes last year. We’re expecting stronger competition from Brazilian beans into European destinations for the remainder of the crop year. The Brazilian real has been trading near historical lows against the U.S. dollar, which has offset the decline in the world market.

Brazilian farmers are facing the historical high soybean prices, which has enhanced farmer selling. U.S. soybeans are not competitive with Brazilian origin until new crop positions so we don’t expect major exports from the U.S. to China in the short term. We estimate the Brazilian soybean harvest to be nearly 50 per cent complete. The Argentine harvest will begin later in March.

Early indications suggest that Ontario farmers will plant three million acres of soybeans, down from 3.1 million in 2019. Using a five-year average yield production has potential to reach 3.8 million tonnes, up marginally from the 2019 output of 3.7 million tonnes. We mentioned in the previous issue that the USDA is projecting a year-over-year increase in U.S. acreage. U.S. 2020 soybean production has potential to reach 114 million tonnes, up from the 2019 output of 97 million tonnes.

What to do: Given the fundamental projections and the potential for slower Canadian exports to Europe, we feel it’s prudent to be 80 per cent sold on old crop soybeans and 20 per cent sold on new crop.

Corn

The 2019 Ontario corn crop is about 90 per cent harvested. While the total crop was estimated at 8.6 million tonnes, there are about 7.8 million tonnes available at this stage of the crop year. The domestic market continues to ration demand by trading at a premium to world levels. Crop-year-to-date exports for the week ending March 1 are unchanged from last month at 12,500 tonnes, down from 872,700 tonnes last year. We’ve seen a surge in U.S. ethanol exports into Canada over the past month. Despite the increase in ethanol imports, Ontario bids from ethanol producers are up about 30 cents/bushel from last month. Domestic feed prices are holding value because cattle on feed inventories are at seasonal highs. We’re projecting an increase in Ontario corn acreage this spring.

Ontario corn acres are expected to be up 4.5 per cent over last year. Using a five-year average yield, production has potential to come in at 9.4 million tonnes. We mentioned in the previous issue that industry estimates have U.S. corn acres up four to six per cent over last year. U.S. corn is competitive on the world market until Brazil’s second crop comes on the market in July. Despite the lower U.S. offers, we’re not seeing a significant increase in export business. U.S. old and new crop prices are expected to come under pressure after the USDA March 31 Prospective Plantings report.

What to do: This year, more than in the past, the psychology of farmer marketing will play an important role in price direction over the next couple months. When corn fundamentals are tight, the market rations demand in the first half of the crop year. In the latter half of the year, the market tends to decline and farmer selling generally increases. Grain merchants are always surprised how much crop comes on the market when prices start to deteriorate. This psychology reinforces our recommendation to be 80 per cent sold on old crop and 20 per cent sold on new crop. Elevator bids are around $5.18/bushel for old crop and $4.67/bushel for new crop. As we approach July, old crop values will be discounted to new crop. The market is telling the farmer to sell now and not hold stocks into new crop positions.

Wheat

Earlier in winter, the world wheat market incorporated a risk premium due to the uncertainty in European, Russian and U.S. production. The major winter wheat growing regions of the world have come through without significant winterkill.

The Russian and Ukraine winter wheat regions experienced 150 per cent to 200 per cent of normal precipitation during February, which alleviated concerns about the dryer fall and early winter period. Black Sea wheat values are reflecting a sharp inverse between old and new crop prices. We mentioned in the previous issue that Russian wheat production has potential to reach 83 to 88 million tonnes, up from 73 million tonnes last year. Ukraine production for 2020 is unchanged from last month from 30 to 32 million tonnes, up from 29 million tonnes last year.

The U.S. hard red winter wheat crop will come out of dormancy over the next month. There are some dryer pockets but seasonal rains sweep across the Southern Plains during April. At this stage, there is no reason to believe these rains will not occur. We continue to project a U.S. hard red winter wheat crop of 22 million tonnes, very similar to last year’s crop size. Northern Europe is saturated while Italy, Southern France and Spain are on the dryer side. There are no crop concerns in France or Germany. We continue to project a minor year-over-year increase in Canadian non-durum wheat acreage while U.S. spring wheat acres are expected to be similar to last year.

The main factor driving Ontario winter wheat prices was the tight supply situation in both Canada and the U.S. for soft red winter wheat. The crops on both sides of the border suffered due to adverse rains in the spring, which resulted in lower harvested area. Looking forward, the market is not getting more bullish but rather bearish. U.S. softer red winter wheat production is expected to finish in the range of 7.5 to 7.8 million tonnes, up from 6.5 million tonnes last year. Ontario production is expected to come in near 2.0 million tonnes, up from the 2019 output of 1.4 million tonnes.

What to do: We’ve advised producers to be 80 per cent sold on their 2019 winter wheat production and 20 per cent sold on new crop. Similar to the soybean market, old crop values are premium to new crop. This tells farmers to sell now rather than hold onto stocks.

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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