Ontario grain and oilseed markets continue to digest uncertainty in world production and trade due to the Russian invasion of Ukraine.
The longer the conflict continues, the less likely that Ukraine corn and sunflower planting and will occur under normal conditions. The ability to harvest Ukraine winter wheat this summer is also questionable. Ontario farmers have sold the bulk of their crops and stocks will drop to historically low levels at the end of the 2021/22 crop year. At the beginning of January, old crop soybean prices were trading at a $10 per bushel premium to corn prices; moving into the planting period, the soybean premium over corn has increased to nearly $12/bu.
Quick look
Soybeans: Ontario soybean acres expected to jump by 200,000 to 300,000 acres.
Corn: Demand is strong for Ontario corn exports to Europe.
Wheat: Ontario winter wheat production expected to be down by 800,000 tonnes.
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The market appears to be encouraging farmers to plant soybeans rather than corn. Fertilizer prices continue to percolate higher although most farmers have their inputs purchased by now. Ontario farmers report average moisture conditions heading into the planting season. However, the Windsor region has received only 40 to 60 per cent of normal precipitation over the past 30 days.
When the Russian invasion started, wheat prices experienced a surge in demand as companies claimed “force majeure” on purchase contracts with Ukraine and Russian origin. This nearby demand has now been saturated and Chicago futures are off $2/bu. from the historical highs.
In addition to the uncertainty in Ukraine and Russia, the Chinese winter wheat crop could be the worst in history, according to their agriculture minister. This comes on the heels of China’s food shortage in 2020.
Brazil’s soybean harvest was approximately 70 per cent complete as of March 20. Brazil’s Safrinha corn crop is 95 per cent planted. The Argentine soybean harvest will begin over the next couple weeks while the corn harvest is approximately six per cent complete. Argentinian inflation is running near 50 per cent year-over-year, which will influence farmer selling. Traders are concerned about potential export restrictions from countries that are struggling with higher inflation.
The June Canadian dollar reached more than 79.40 US cents during the third week of March. The Bank of Canada and the U.S. Federal Reserve both increased their benchmark lending rates by 25 basis points at their March meetings.
The financial industry is bracing for a sharp increase in interest rates over the next 12 months. Globalization over the past two decades was deflationary. Sanctions, COVID-19 lockdowns, trade barriers and geo-political tensions do the reverse. Policies from central banks have little influence on these factors. Inflation is set to skyrocket in G7 countries.
Soybeans
Soybean bids from domestic crushers reached fresh historical highs in March. Favourable crush margins have enhanced the processing pace. For the week ending March 13, Canadian crop year-to-date domestic processing was 1.1 million tonnes, up 100,000 tonnes from the same time last year.
Canadian exports have slowed as the domestic market rations demand. Canadian crop year-to-date soybean exports for the week ending March 13 were 2.5 million tonnes, down from 3.4 million tonnes last year. Domestic crusher bids will remain premium to world values for the remainder of the crop year. Ontario farmers are expected to increase soybean planted area by 200,000 to 300,000 acres.
Brazilian soybean offers out of the main port of Paranagua discount to U.S. prices out of the Gulf for April and May. The price structure changes for new crop positions. China continues to be an active buyer of U.S. soybeans for October forward, which is supporting North American prices. Argentinean soybeans are the highest priced beans in the short term.
The trade feels fairly comfortable with South American soybean production estimates at this time. Brazilian output is expected to finish near 127 million tonnes, down from 138 million tonnes last year. Argentine soybean production will likely come in near 43.5 million tonnes, down from the year-ago crop size of 46.5 million tonnes.
Lower South American production will bring more demand for U.S soybeans for new crop positions. Traders are projecting U.S. soybean production to reach 121-124 million tonnes this year, up from the 2021 output of 120 million tonnes. The soybean market will remain firm until U.S. production is more certain. We’ll see extreme volatility if adverse weather develops in the Midwest this summer.
What to do: We’ve advised Ontario farmers to be 90 per cent sold on old crop and 10 to 15 per cent on new crop. That’s enough for now. The market is vulnerable to a weather rally in summer.
Corn
Elevator bids in Ontario continue to hover near historical highs for both old and new crop positions. Domestic ethanol margins have come under pressure and local processors appear to be well covered into new crop positions. However, feed grain prices in Europe have jumped sharply on the heels of the Ukraine and Russian export restrictions. This has resulted in stronger export demand for Ontario corn into European destinations.
At the time of writing, U.S. corn out of the Gulf was quoted at US$370/tonne, while Brazilian corn was US$371/tonne f.o.b. Paranagua. Argentinian corn was quoted at US$340/tonne for smaller cargoes. In Hamburg, corn was quoted at US$430/tonne delivered.
In Europe, feed prices move in line with wheat because of the large wheat use in compound feed rations. We’re looking for a surge in Ontario corn exports upon lakes opening because export values are competitive on the world market.
The Ontario corn market is also in an acreage battle with soybeans. High fertilizer costs and the favourable returns per acre make soybeans more attractive. Ontario new crop corn prices are functioning to encourage acreage in the short term. Ontario stocks will be historically tight at the end of the 2021/22 crop. The market cannot afford a year-over-year decline in Ontario production.
Brazil’s Safrinha corn crop conditions are favourable. Recent rains and optimal weather forecasts have sustained yield potential. The trade continues to forecast Brazilian output in the range of 114-116 million tonnes. The trade feels comfortable with the USDA estimate of 53 million tonnes for Argentine output. This is up from 51.5 million tonnes last year. Keep in mind, if Brazil’s crop turns out as expected, the exportable surplus will offset Ukraine shortfall on the world market.
What to do: We’ve advised farmers to be 85 per cent sold on their 2021 production and 10 per cent sold on expected new crop. The USDA was to release its planting intentions report on March 31. This is considered the most important report of the year.
Regardless of acreage, we’re looking for the corn market to incorporate a risk premium during April and the first half of May. Once the Brazilian crop is finished pollinating and the U.S. crop is well established, the corn market will trend lower. We’ll use this rally to finish old crop sales and add onto new crop recommendations.
Wheat
The wheat market continues to experience unprecedented volatility. There are concerns regarding the Ukraine harvest potential as the Russian invasion drags on. Secondly, exports from the Ukraine and Russia are uncertain for the 2022/23 crop year.
The world has become accustomed to large exports from the Black Sea region, which is usually the lowest priced wheat on the world market. In recent years, Russian wheat has also traded into Central and South America, which is traditionally a backyard for North American origin. The quality of Russian wheat was improving every year and becoming a staple for certain millers that had always used U.S. or Canadian wheat in the past. The removal of these two players is significant to world market.
Ontario farmers planted 930,000 acres of winter wheat last fall, down from previous year’s area of 1.12 million acres. Using a traditional abandonment rate and five-year average yield, Ontario winter wheat production is expected to finish at 1.9 million tonnes, down from the 2021 output of 2.7 million tonnes.
Ontario wheat stocks will be down to bin bottom levels this summer so the market will be very sensitive to weather. Basis levels for Ontario soft red winter wheat will be very firm next winter given the year-over-year decline in production. Farmers do not want to be selling wheat during the harvest period.
U.S. farmers planted 7.1 million acres of soft red winter wheat. Using a traditional abandonment rate and a five-year average yield, U.S. soft red production is forecasted to reach 10.7 million tonnes, up one million tonnes from last year. U.S. basis levels are expected to weaken during the harvest period given the year-over-year increase in production.
The U.S. Southern Plains has experienced below average precipitation. Usually seasonal rain occurs in April; however, current weather forecasts call for the first half of April to experience limited rainfall. We expect to see some yield drag on the U.S. hard red winter crop.
North Dakota and Western Canada have recovered from last year’s drought-like conditions. France and Germany are in good shape but the next month will be critical for yield development.
What to do: We’ve advised producers to be 85 per cent sold on old crop wheat. We’re not making any recommendations for new crop positions. We expect the futures volatility to continue and Ontario elevator bids will experience significant basis swings given the lower production. The Ontario wheat market needs to ration demand and trade above world values given the year-over-year decline in production. The next two months are critical for Northern Hemisphere winter wheat.
