Lower oil prices and declines in equities spill over into grain commodities

However, a softer loonie is helping enhance the competitiveness of Canadian grain and oilseed on global markets

Ontario farmers have harvested approximately 90 per cent of the soybeans and 75 per cent of the corn. Soybean yields have come in above expectations; some farmers reported record yields. Corn yields are quite variable and vomitoxin is a major problem in certain areas. The year-over-year increase in export demand continues to support Ontario corn and soybean prices.

The Canadian dollar continues to deteriorate, enhancing the competitiveness of Canadian grain and oilseed offers on the world market. Outside markets are somewhat negative for grain and oilseed prices. January crude oil futures are hovering around $53.50 per barrel, down approximately $23 from the October highs. Equity markets are under pressure as investors come to terms with slower U.S. and world economic growth. The speculative funds have been active sellers of wheat, corn and soybean futures over the past week.

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Commodity traders are anticipating an upcoming meeting between President Trump and President Xi at the G20 summit in Argentina. President Trump recently stated that China wants to make a deal. However, White House officials quickly commented that no deal was imminent. Ontario farmers should not expect any major breakthrough on trade talks in the near future that would alter their local prices.

Quick look

Soybeans: U.S. ending stocks for 2018 are expected to be double what they were in 2017.
Corn: Ethanol processors are showing a 60 to 70 cent per bushel premium over elevator prices.
Wheat: Australia’s wheat harvest is in full swing, with yields lower, but not enough to make a dent in world supplies.

Soybeans

What to do: In our previous issue, we advised producers to increase sales to 80 per cent. Farmers should be 80 per cent to 90 per cent sold on their 2018 production. The remaining 10 per cent of stocks can be viewed as gambling stocks, but we have no qualms being 100 per cent sold at this time. This week, we’re advising producers to sell their first 20 per cent increment of their expected soybean production for 2019. Ontario new crop soybean prices are averaging $11.40 per bushel and we feel this is a good starting point.

We’re estimating Ontario soybean production to come in near 4.2 million tonnes in the Dec. 6 Statistics Canada crop. Statistics Canada’s model-based survey had the Ontario crop size at 4.0 million tonnes back in August; the 2017 production was 3.8 million tonnes.

The November USDA WASDE report was negative for soybeans. A 2.5 million tonne downward revision was noted in U.S. production due to lower yields; exports were also lowered, resulting in an upward adjustment to the projected carryout. U.S. soybean ending stocks for 2018-19 are now forecasted to finish near 26 million tonnes, up from the 2017-18 ending stocks of 12.0 million tonnes. The U.S. soybean harvest was 91 per cent complete as of Nov. 18.

Brazilian farmers have planted approximately 82 per cent of their soybeans. Argentine farmers are in the early stages as excessive rains have delayed seeding progress. Currently, South American farmers couldn’t ask for better conditions. New crop Brazilian soybeans are expected to come on the market in mid-January. Chinese soybean stocks will drop to very low levels by the end of January; however, buyers are stretching out their stocks because of the sharp inverse in prices between old and new crop Brazilian soybeans. The USDA estimated Brazilian soybean production at 120 million tonnes, very similar to year-ago output. Argentinian soybean production was estimated at 55.5 million tonnes, up from 37.8 million tonnes last year. We want to be selling old crop soybeans ahead of the South American harvest.

Corn

What to do: This week, we’re advising producers to sell 25 per cent of their 2018 production, bringing total sales to 35 per cent to 40 per cent. Domestic feed demand makes a seasonal high in December and we want to be selling into this strength. Farmers are also contending with high vomitoxin or mouldy corn in some cases. This will saturate nearby feed demand.

Ethanol processors continue to show a 60 cent per bushel or even 70 cent per bushel premium over average elevator bids. Cash bids from ethanol producers are showing a minimal carrying charge between delivery months; in some cases, the cash market is inverted whereby the price for immediate delivery is higher than deferred delivery. This market structure is telling farmers to sell now.

Ontario corn exports are running ahead of last year. However, European feed grain prices are under pressure. European farmers have been steady sellers now that their harvest is also wrapped up. We also see Ukraine corn moving into European destinations adding stronger competition for Canadian origin. Once the lakes freeze over, corn basis levels have potential to soften.

The U.S. harvest was 90 per cent complete as of Nov. 18 and there are no production problems in South America. Argentinean farmers have made little progress over the past two weeks, but drier conditions are in the forecast. Without going into detail, the USDA WASDE report was considered bearish for the corn market due to the incorporation of Chinese data from their National Bureau of Statistics. Combined Argentinian and Brazilian production is expected to be up nearly 25 million tonnes over last year. Ukraine production was also revised upward and is expected to finish nine million tonnes above year-ago production. Earlier, we were expecting stronger Ontario and U.S. prices, as the world would have to come to the U.S. in the latter half of the crop year. This may not be the case given these revised numbers from major exporters.

Wheat

What to do: In the Nov. 5 issue, we advised farmers to sell 20 per cent of their wheat crop for deferred delivery. The cash market was showing a significant carrying charge and to capture this carry, farmers needed to sell now for delivery in March or April or even into new crop positions. We now see a change in the market structure. For example, soft red winter wheat elevator bids for nearby delivery are $6.16 per bushel, and for July delivery, bids are around $6.24. There is a minimal carrying charge between old and new crop prices. The Ontario cash market is telling farmers to sell now for immediate delivery. This week, we are advising farmers to sell an additional 20 per cent of their 2018 wheat crop bringing total sales to 40 per cent.

World prices are slightly lower during our reporting week for hard red winter wheat and it appears the futures market is functioning to encourage demand. December and January are very slow months for export business. Secondly, there are no production issues that will occur at this time. The Argentine harvest is approximately 20 per cent complete. There are quality issues due to adverse rains but drier conditions over the next week should allow farmers to make additional progress. Argentinean farmers have sold about 50 per cent of the crop.

Australia’s harvest is also in full swing. While the crop size will be down about four million tonnes from last year, this is not a huge dent from a world perspective. News broke on Nov. 19 that Beijing would investigate Australian barley exports to China under “anti-dumping” rules that forbid selling at artificially low prices. Feed barley prices in Australia dropped about $10 per tonne. Apparently, this is in retaliation for the U.S. pledging to help Australia redevelop a strategically located naval base on Manus Island. The Australian wheat market has experienced a defensive tone because of the tense relations with China. China buys approximately one million tonnes of wheat from Australia each year.

Russia’s wheat exports continue to exceed year-ago levels and the agriculture ministry increased its export projection last week. There are now ideas that that the Russian crop size may be larger than earlier projections. Russian winter wheat seeding is in the final stages and Ukraine farmers are finished planting. Conditions are on the drier side in Southern Russia but nothing of major concern so far.

U.S. wheat export sales picked up last week but total hard red winter sales commitments are lagging year-ago levels. The U.S. winter wheat seeding is 90 per cent complete and the crop is off to a great start due to timely rains. In Europe, French farmers have seeded about 93 per cent of the winter wheat crop. We’ve seen some alleviation of the drought-like conditions in Europe although the southeast regions remain on the drier side.

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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