In the last commentary, we introduced a broad range of issues influencing the price structure of corn, soybeans and wheat. This week, we’ll follow up with recent developments and provide an idea of price direction moving forward.
Market factors this week include:
- It’s soybean harvest in South America with Brazilian crop expect up slightly from expectations, but Argentinian soybean yields down about 15 per cent from earlier estimates.
- Corn yields are also down in South America which is helping U.S. corn exports and therefore price.
- Russian wheat is highly competitive in the marketplace. Price will be affected going forward by weather in the northern hemisphere, including the effect of lack of snow in central North America.
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Soybeans
The Brazilian soybean harvest is approximately 50 per cent complete while the Argentine harvest will move into full swing in mid-April. Private trade estimates for the Brazilian crop range from 114 million tonnes to 117 million tonnes compared to the March USDA forecast of 113 million tonnes. The Argentine crop is expected to finish around 40 million tonnes, down from the USDA projection of 47 million tonnes.
The market has factored in the lower production in Argentina and the focus is now turning to harvest progress. The increase in Brazil is offsetting the decrease in Argentina. Brazilian export basis levels are softening as the commercial system struggles to move the larger crop.
Earlier in the March, the South American market incorporated a risk premium due to the uncertainty in production. This allowed the U.S. to increase their export sales volume. It is important to note that U.S. outstanding or unshipped sales of 9.6 million tonnes are record large for this time of year. We now see the Brazilian market functioning to encourage demand and will trade at a discount to U.S. offers.
At the same time, the stronger meal market allowed U.S. and Canadian processors to lock in favorable margins for the remainder of the year. The U.S. daily crush pace during February was a record large and we expect this aggressive crush pace to continue. The USDA will release their prospective plantings report on March 29. Pre-report trade estimates range from 90.0 to 92 million acres, which compares to the 2017 seeded area of 90.1 million acres.
In conclusion, soybean prices in Ontario are expected to trend lower over the next couple weeks. The market will function to encourage demand due to the ongoing South American harvest and expected year-over-year increase in U.S. seeded acreage. While the futures grind lower, the domestic basis should remain firm due to the weaker Canadian dollar and steady crush pace. On the latest commitment of traders report, the fund length was second highest on record while the commercial short position was also quite large. When the commercials are heavily short, this means they are long on soybeans in the cash trade and the market needs to go down so they can liquidate their holdings.
Corn
Ontario corn prices are expected to percolate higher over the next couple weeks. The corn market is contending with lower Brazilian and Argentine production which has shifted export demand to U.S. origin.
Argentine production estimates continue to come in near 30 million tonnes, down from the USDA projection of 36 million tonnes. In Brazil, the focus is on second crop corn production in the Safrinha region which was seeded later than normal due to excessive rains. This crop is now in the vegetative stage but will be vulnerable to the warmer temperatures during the pollination stage during May and June.
Current estimates are near 94 million tonnes for the total Brazilian corn crop but we may see this number shaved by three to four million tonnes (the Brazilian second crop corn is two-thirds of production while the first crop is one-third; therefore, the critical period for South American corn is over the next couple of months).
Given the lower production estimates and stronger basis levels from South America, we’ve seen a surge in U.S. export sales tightening the fundamental structure. The USDA will release their planting intentions survey on March 29. Pre-report estimates range from 89 to 90.5 million acres, compared to 90.2 million acres last year.
The fund length on the latest commitment of traders report was second largest on record. Their buying power is limited and the market is vulnerable for a setback. Ontario corn prices are expected to soften over the next week but we feel the market will incorporate a risk premium due to the potential year-over-year decline in U.S. corn acres. These lower acres coming on the heels of a tightening balance sheet for 2017/18 due to the larger than expected export program. U.S. corn demand is inelastic; a small change in supply can result in a large change in price. Look for volatility to increase but our bias is friendly to the corn market.
Wheat
During February and March, the wheat complex incorporated a risk premium due to drought like conditions in the U.S. Southern Plains and below normal temperatures across Europe. We now find this risk premium eroding due to favorable precipitation in Kansas and seasonal temperatures in France and Germany.
Russian milling wheat FOB the Black Sea is trading at a sharp discount to U.S. hard red winter out of the Gulf thereby making Russian origin more competitive into traditional U.S. markets like Mexico. Similarly, French soft wheat on the Atlantic Coast is offered at a steep discount to U.S. soft red winter wheat.
The U.S. wheat markets rationed demand earlier in March spurring on export business from other major exporters. Over the next two weeks, we expect further downward pressure on Ontario winter wheat prices because of the slower offshore demand for North American winter wheat. The commercials are heavily short wheat futures so they have accumulated large stocks during the recent rally. Theoretically, the futures market should weaken so the commercial line companies can sell their large cash wheat holdings.
Looking forward, April and May are crucial months for winter wheat development. If adverse conditions materialize in the U.S. Southern Plains, the fundamentals become historically tight for the U.S. hard red winter wheat because of the year-over-year decrease in seeded area. The wheat complex will be extremely sensitive to U.S. weather forecasts. Russia is also vulnerable to sub continental weather during May and June, similar to Western Canada.
Despite the recent drop in the wheat market, don’t be overly bearish on wheat prices at this time. There are too many uncertainties regarding Northern Hemisphere wheat production. We believe the wheat markets have limited downside until the crop is more certain.
