World grain and oilseed markets have incorporated a risk premium due to the Russian invasion of Ukraine.
Ontario corn, soybean and wheat prices have made fresh historical highs during the first couple weeks of March. This rally comes on the heels of an extremely tight fundamental structure for Ontario grains and oilseeds. Ending stocks are expected to drop to bin bottom levels.
Quick look
Soybeans: Decreased sunflower oil output from Russia and the Ukraine are driving higher soy oil demand and prices.
Corn: A prolonged Russian Ukraine invasion will likely undervalue new crop corn prices, but this will be dependent on U.S. production.
Wheat: Due to the uncertainty in the market, growers are advised against selling any new crop.
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Soybean bids from domestic crushers are trading at a sharp premium to export values in an effort to secure supplies. Domestic ethanol processors appear to have their nearby demand covered. However, export demand from European buyers have enhanced bids for Ontario corn.
Heading into spring, Ontario has received normal precipitation but temperatures are two to five degrees below normal.
Wheat is the commodity most affected by the Russian invasion of Ukraine because these two countries account for 30 per cent of world wheat trade. When excluding China, they produce 14 to 17 per cent of global production.
There has been a surge in short term wheat demand because companies can claim “force majeure.” In this environment, the market usually makes an extreme high followed by an overcorrection to the downside.
As of March 5, the Argentine corn harvest was approximately five per cent complete. Harvest of early maturing soybeans will begin in the latter half of March. Brazilian soybeans are 44 per cent harvested as of March 5. Harvest of Brazil’s first crop corn is in the final stages. Planting progress of the second corn crop known as the safrinha was 65 per cent complete as of March 2.
The USDA Grains and Oilseeds Outlook had U.S. corn acres down 1.1 per cent from last year while soybean area is projected to be up one per cent.
The June Canadian dollar continues to trade in a range of 78 U.S. cents with resistance at 79 U.S. cents. The Bank of Canada increased its benchmark lending rate by 25 basis points on March 1, which was largely anticipated. The U.S. Federal Reserve was to follow suit at its meeting March 16.
There has been a flight to safety among world investors since the beginning of the Russian invasion, which has resulted in U.S. dollar appreciation against all other currencies. Inflation is expected to skyrocket over the next two months as Russian sanctions drive up the cost of resources and commodities in general.
Fertilizer prices are expected to jump sharply from current elevated levels and this will influence planting decisions for farmers who didn’t confirm ownership earlier. Crude oil prices have climbed to 14-year highs.
Soybeans
Russia and Ukraine combine for 75 to 80 per cent of the world sunflower oil exports and 60 per cent of world sunflower oil output. This portion of sunflower exports composes approximately 12 per cent for the total world vegetable oil trade. Exports from the Black Sea have come to a standstill.
This tighter export supply comes after Indonesia imposed export curbs for palm oil on Jan. 27. Demand for vegetable oils is rather inelastic so a small change in supply has a large influence on the price. Increased biofuel demand has also contributed to the historically high vegetable oil prices. Needless to say, the lucrative domestic crush margins have been driven by the oil component rather than the meal portion.
Ontario farmers are expected to plant 3.1 million acres of soybeans this spring. Using a traditional abandonment rate and a five-year average yield of 49 bushels per acre, production has potential to reach 4.1 million tonnes. This is unchanged from last year but up from the five-year average output of 3.9 million tonnes. Basis levels will be under pressure at harvest if production materializes as expected.
South American weather is having less influence on the soybean market and production estimates are becoming more certain. Argentine soybean output is expected to finish in the range of 40 to 41 million tonnes, down from last year’s crop of 46.5 million tonnes.
Brazilian soybean estimates range from 124 to 127 million tonnes, down from the year-ago production of 138 million tonnes. The market appears to confirm these production numbers. Chinese purchases of U.S. old and new crop soybeans have been surprisingly large.
The 2021-22 soybean carryout will be lower than earlier projections. Export sales are higher than expected and the domestic crush will remain at higher levels given the healthy crush margins. The USDA is projecting U.S. soybean production to reach 122 million tonnes, up from the 2021 crop size of 121 million tonnes. The U.S. can’t afford adverse weather during the growing season, otherwise prices could move even higher.
What to do: We’ve advised Ontario farmers to be 90 per cent sold on old crop and 10 to 15 per cent sold on new crop. That’s enough for now. Let’s wait until U.S. production is more certain before finalizing old crop sales and adding new crop recommendations.
Corn
If we exclude China, the Ukraine and Russia combined for six per cent of the world corn production during the 2021-22 crop year. Total Ukrainian corn exports for the 2021-22 crop year were projected to reach 33.5 million tonnes, while Russian exports were only forecasted to come in at 4.5 million tonnes. Over the past couple years, these two countries were responsible for approximately 15 to 18 per cent of the world corn trade. The corn market has also incorporated a war risk premium but not as significant as for wheat.
On February 25, U.S. corn was offered at US$310 per tonne f.o.b. the U.S. Gulf. On March 3, U.S. corn offers were US$355 per tonne f.o.b. U.S. Gulf. Export values have moved in line with the corn futures but basis levels in the Midwest have come under pressure. The U.S. farmer has opened the floodgates and sold a large volume of corn on this rally.
Ontario corn prices are up nearly $1 per bushel or $40 per tonne from the onset of the Russian invasion. Elevator bids have moved in line with the European feed grains complex because this is the major destination for Ontario corn exports.
Total Brazilian corn production is expected to finish near 114 million tonnes, up from year-ago output of 87 million tonnes. Using this production estimate, Brazilian corn exports would reach 43 million tonnes, up from 21 million tonnes last year. The year-over-year increase in Brazilian production will likely offset the bulk of Ukraine exports that would occur in a normal year.
Crop year-to-date data had Ukraine exports around 17.5 million tonnes. The country had about 15.9 million tonnes to export before June 30 to reach the USDA estimate. The world can absorb about 16 to 18 million tonnes of additional demand quite easily. Needless to say, we believe the corn rally is overdone in the short term. If the Russian Ukraine invasion is prolonged, new crop corn prices are likely undervalued but it depends on U.S. production.
The USDA had corn production at 387 million tonnes at its outlook in late February. This is up from the 2021 production of 384 million tonnes. The exports for 2022-23 are uncertain but the trade isn’t expecting a significant increase in U.S. corn exports.
We’re expecting Ontario farmers to plant 2.2 million acres of corn this spring, up about 54,000 acres from last year. Using a traditional abandonment rate and five-year average yield, production has potential to finish near 9.2 million tonnes, down from the 2021 output of 9.5 million tonnes.
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. Let’s be patient to see how the Brazilian crop develops and confirmation of U.S. corn acres before making additional sales.
Wheat
When companies cannot fulfill contracts due to war or an “act of God,” they can claim force majeure. This causes the end user to buy from another origin and results in a surge of demand in the short term. Once this nearby demand is saturated, the market has potential to drop sharply. Eventually, the market overcorrects to the downside.
Keep this psychological behaviour in the back of your mind. I wouldn’t expect wheat prices to stay at historical highs for long. Export movement out of the Black Sea ports has been halted for the time being. Prior to the conflict, Russia had a floating export tax in place. An export quota to limit wheat exports to eight million tonnes was also in place from Feb. 15 to June 30.
Ukraine also had an agreement with companies to control exports. The market had factored in a slower export pace from the Black Sea region in the latter half of the crop year. The Ukraine and Russian winter wheat crops are in good shape. The key will be if the conflict is drawn out into new crop positions to influence new crop exports after July 1.
Russia and Ukraine produce hard red winter wheat similar to U.S. Southern Plains and Argentinean wheat. Argentina has an export quota. At the time of writing this article, we hadn’t seen an increase in U.S. export sales. U.S. wheat export commitments as of February 24 were 18.3 million tonnes, down 23 per cent from last year.
Turkey and Egypt are the main buyers of Russian wheat. In 2008, we did see some shipments of Ontario wheat to Egypt but Ontario wheat stock on farms as of December 31, 2021, were only 350,000 tonnes. There isn’t much wheat left in Ontario. Therefore, the domestic market needs to trade at a premium to export values.
The U.S. hard red winter wheat region is experiencing drought-like conditions. Seasonal rains occur in April. The longer-term forecasts only show major rain in the latter half of April. We expect to see some yield drag due to below normal precipitation in the first half of the month.
At this stage, Western Canada and North Dakota have recovered from last year’s drought with above normal precipitation over the winter. We’re looking for an increase in hard red spring acres in North America given the higher prices and fertilizer situation.
In Europe, France is on the dryer side after limited precipitation in January and February. The German crop is OK but the southern regions are also on the dryer side. Except for Canada, it doesn’t look like the Northern Hemisphere is on track for a bumper crop. The 2022-23 crop year could be the year that the world needs Ukraine and Russian origin to satisfy overall demand.
What to do: We’ve advised producers to be 85 per cent sold on old crop wheat. Don’t sell any new crop yet. It’s too early given all the uncertainty and the market for wheat always depends on quality. We’ve always said that wheat is one crop to store and sell in regular increments throughout the crop year. Avoid selling during the summer months and store all wheat production until late October or early November.
