Lower U.S. and European wheat forecasts support prices

U.S.-China trade uncertainty limits market movement

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Ontario temperatures averaged 3 C to 5 C below normal throughout May, while most of the growing region received 40 to 80 per cent of normal precipitation. Crop emergence was delayed due to cool temperatures.

Quick look

Soybeans: Cheap Manitoba soys mean movement from west to Ontario.
Corn: Ontario old crop corn pricing encouraged sales.
Wheat: Tight 2019 Ontario wheat market not likely to persist into 2020

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We’ve heard reports that corn and soybeans were in the ground for more than 40 days before adequate stands were noticeable. Seasonal type temperatures are in the forecast. However, timely rains are needed to enhance crop development.

The 30- to 60-day forecast calls for below-normal precipitation. It appears that July will be hot and dry.

We continue to rate the winter wheat crop 60 per cent good to excellent, although harvest will likely be one to two weeks behind normal.

Ontario elevator bids for corn, wheat and soybeans are relatively unchanged from mid-May.

Lower wheat production forecasts in Russia, Europe and the United States have been supportive for the wheat market.

U.S. corn and soybean crops are developing under favourable conditions. The forecast is for limited rainfall across the U.S. Midwest during the first half of June. Therefore, timely rains will be needed in late June and July.

The corn market appears to be incorporating a small risk premium as the speculative funds cover their near-record short position.

Soybean futures have traded in a narrow range over the past month. Rising tensions between the U.S. and China have offset the uncertainty in production.

All the negative news regarding the COVID-19 pandemic has been factored into the financial markets. Traders are not looking behind but rather ahead at future earnings potential. The Canadian dollar is trading near three-month highs as the equity and energy markets recover. The risk sentiment is elevated and there appears to be renewed optimism.

At the time of writing this article on June 1, the S&P/TSX composite Index was only 800 points lower than the closing price on June 2, 2019. This could be a literal V-shaped economic recovery.

Soybeans

The market outlook for Ontario soybeans is neutral for the time being. Demand is lagging year-ago levels. The Canadian crop year-to-date domestic crush to April 30 was 1.204 million tonnes, down from 1.423 million tonnes last year. Canadian crop year-to-date exports to March 31 were 2.401 million tonnes, down from previous year of 3.341 million tonnes.

Imports are also down from year-ago levels. However, domestic supplies appear to be sufficient to cover demand requirements for the remainder of the year. Farmer selling tends to increase in June and July.

Manitoba soybeans are the cheapest in the world, averaging $9.74 per bushel, whereas Ontario soybeans are hovering around $11.20 per bushel. The market is encouraging the flow of western Canadian beans into Ontario. Soybeans from south of the border are priced slightly higher than Ontario beans, stemming imports from the U.S.

At this time, we have no reason to change crop estimates. Ontario production for 2020 has potential to finish near 3.6 million tonnes, similar to the 2019 output, which was 3.7 million tonnes. The USDA estimated 2020 soybean production at 112 million tonnes, up from the 2019 crop size of 97 million tonnes.

On the world market, U.S. soybeans appear to be more competitive than South American origin but this hasn’t resulted in a surge of export demand. Apparently, the Chinese government has ordered state-run companies to halt purchases of U.S. soybeans, although there has been no formal announcement.

China continues to buy Brazilian soybeans despite the US$15 per tonne premium over U.S. origin.

Tensions are rising between Washington and Beijing over Hong Kong and lack of transparency during the early stages of the COVID-19 pandemic. On a side note, China’s view of Canada has not improved with the recent court ruling that the extradition hearing for Huawei executive Meng Wanzhou will proceed. Supply and demand projections are taking second place to political issues. Keep in mind there is a U.S. election this fall so don’t expect an easing of tensions.

What to do: We’ve advised farmers to be 80 per cent sold on old crop and 20 per cent sold on new crop. We don’t see a weather market developing in the short term given current forecasts. We’re planning on making our final sale for the 2019 crop during the summer once the upcoming production is more certain.

Corn

The corn market is balancing improved domestic and export demand on one side, and favourable crop development on the other. The ethanol grind appears to be improving on both sides of the border.

Although U.S. ethanol production is below year-ago levels, the main point is that this demand portion of the market is not getting worse but rather supporting the current price structure. U.S. export offers are more competitive than Argentinean origin.

Total U.S. export sales commitments are lagging year-ago levels but we expect to see an improvement in upcoming weeks. Cattle on feed inventories on both sides of the border are at seasonal highs. The slaughter pace is improving and domestic feed demand will decline during the summer months.

There is no change to production estimates at this time. Ontario corn production has potential to finish around 9.1 million tonnes, up from the 2019 crop size of 8.6 million tonnes; there is no reason to change the U.S. crop projection of 406 million tonnes, up from the 2019 crop size of 347 million tonnes.

The harvest of Brazil’s second corn crop will start in early June and be in high gear by mid-month. Brazil will be more active in the export market in late summer so there is no strong competition for U.S. corn at this time.

There is a strong seasonal tendency for corn prices to trend lower during June and July. This year, the market may have experienced a counter seasonal downward draft during the COVID-19 pandemic earlier in spring. Therefore, the corn market will likely trade in a sideways pattern over the next month.

What to do: We want to draw attention to the inverse in the Ontario cash market. Old crop prices are hovering around $4.50 per bushel while new crop prices are around $4.25 per bushel. The market is telling farmers to sell now and not store the crop.

We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. Given the current supply projections, the Ontario market needs to encourage exports during the fall period so export values will have to be in line with Brazil and U.S. origin. We have a bearish view on the Ontario cash corn market.

Wheat

The Northern Hemisphere wheat harvests are right around the corner. It’s very difficult for the wheat market to rally during the summer and we always encourage buyers to book their new crop requirements in late July. These are typically the lowest prices of the year regardless of the total wheat production because U.S. producers sell nearly 50 per cent of their winter wheat during the summer months. Russian and Ukraine farmers also sell a large volume at harvest due to limited storage. Keep this in mind.

The wheat futures markets have experienced a minor rally over the past couple weeks. This is largely due to downward revisions to the European and Russian wheat crops. EU wheat was estimated at 143 million tonnes by the USDA but private trade estimates now have the crop size closer to 126 million tonnes. Last year’s crop size was 155 million tonnes. Russia’s total wheat crop was estimated in the range of 77 to 80 million tonnes last month but traders now have production in the range of 73 to 75 million tonnes, similar to year-ago levels.

We’ve seen minor downward adjustment to the U.S. hard red winter wheat crop after the industry tour earlier in May. However, most traders are still using the USDA estimate of 20 million tonnes, down from 22.7 million last year. The U.S. soft red winter wheat crop is expected to come in at 8.1 million tonnes, up from the 2019 output of 6.5 million tonnes. Ontario winter wheat production is expected to finish near 2.5 million tonnes, similar to our earlier estimate and up from the 2019 production of 1.4 million tonnes.

The Russian export restrictions will be lifted July 1. Currently, Russian offers, based on f.o.b. the Black Sea, are at about a US$20 per tonne discount to U.S. origin wheat. U.S. export sales have been higher than anticipated over the past couple weeks, which has also contributed to the firmer tone in the futures. We expect U.S. offers to come in line with the Russian market later in summer.

What to do: Ontario wheat prices are reflecting a 30 cents per bushel inverse between old and new crop prices. Producers are encouraged to sell now instead of holding wheat into deferred positions. We’ve advised producers to be 100 per cent sold on their 2019 production and 20 per cent sold on new crop. During the 2019-20 crop year, the Ontario milling wheat market traded at a premium to world values due to the tighter supply situation. However, during the 2020-21 crop year, the function of the Ontario market will be to encourage exports through lower prices.

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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