The corn and soybean futures markets have incorporated a risk premium due to the uncertainty in production. Trades are comparing this year to 1998 when there was a widespread North American drought.
As of June 24, southern Ontario received 60 to 85 per cent of normal precipitation over the previous 30 days. Isolated pockets received less than 40 per cent of normal precipitation. The 10-14 day forecast calls for 15 to 40 mm across the main growing region. Ontario farmers have reported yield drag on winter wheat due to drier conditions. Rains are needed to sustain yield potential for corn and soybeans.
Quick look
Soybeans: The biofuels mandate set by the U.S. last month may result in a lower U.S. crush pace for the 2023/24 crop year.
Corn: Analysts have estimated the U.S. crop estimate in the range of 370-375 million tonnes, which is lower than the USDA estimate.
Wheat: Despite a drag on yield due to dry weather, Ontario’s wheat crop will be larger than the five-year average.
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Ontario soybean stocks are expected to drop to historical lows at the end of the 2022/23 crop year. The domestic soybean market is functioning to attract imports. Despite the US$1/bu rally in the corn futures, old crop elevator bids in Ontario were only 10 cents/bu higher due to the large corn stocks in commercial positions.
The 14-day forecast for the Midwest calls for normal to above-normal precipitation along with above-average temperatures. However, the U.S. corn crop in Illinois, parts of Iowa and Missouri will be under stress heading into the key pollination stage.
Early in August, soybeans will be in the critical pod-filling stage and we’re expecting minor yield drag due to longer-term current weather forecasts. There is a significant weather premium in the corn and soybean futures markets. The managed money funds have been active buyers of corn and soybeans. The U.S. have been reluctant sellers. Commercial buying has been minimal as end users wait to see how the crop develops. Brazil’s Safrinha corn harvest is projected to be 40 per cent complete as of July 1. Brazilian farmers have been active sellers at the lower prices due to record yields. The wheat complex is balancing northern hemisphere harvest pressure and geopolitical trade distortion. The drought-stricken hard red winter crop has been downgraded due to adverse rains.
U.S. and Canadian consumer spending has been stronger than expected during the first half of 2023. The Bank of Canada and the U.S. Federal Reserve will continue to increase their lending rates for the remainder of 2023. Canadian fiscal policy is negative for the resource-based currency. We’re forecasting minor Canadian dollar appreciation against the U.S. greenback in June and July. There is a strong seasonal pattern for the Canadian dollar to deteriorate against the U.S. dollar in the fall. At this stage, there is no major factor to alter the seasonal trading pattern.
Soybeans
Given current conditions and weather forecasts, we’ve lowered our Ontario soybean yield projection from 49 bu/acre to 45 bu/acre. Ontario soybean production is now expected to finish near 3.6 million tonnes, down from our earlier estimate of 3.8 million tonnes. The five-year average output is around four million tonnes. The lower production estimate comes on the heels of historically low Ontario carryout from the 2022/23 crop year.
At the time of writing this article, Brazilian soybeans were quoted at US$500/tonne f.o.b. Paranagua. U.S. soybeans were valued at US$575/tonne f.o.b. the Gulf. U.S. ending stocks will also drop near historical lows at the end of the 2022/23 campaign, therefore, the U.S. market is rationing demand by trading above Brazilian origin.
The soybean market will be extremely volatile through July and the first half of August as traders assess yield potential. At this stage, we continue to forecast an average U.S. yield of 49.0 bu/acre and crop in the range of 115-116 million tonnes. This compares to the June USDA forecast of 122.7 million tonnes and a five-year average output of 113 million tonnes. The Brazilian crop harvested earlier in January was 156 million tonnes, up 26 million tonnes from last year.
The U.S. government released its biofuels mandate earlier in June. This was considered negative for biofuel industry as the mandates were lower than expected. The U.S. crush pace may be lower than expected for the 2023/24 crop year which is bullish for meal prices. Ontario soybean crush margins may be enhanced this fall due to the policy south of the border.
The managed money was long a meager 2,238 contracts on May 30. The commitments of traders report showed the managed money net long 83,413 as of June 20. U.S. and Canadian producers have been limited sellers through the soybean rally because stocks are tight. As it looks now, famers in Canada and the U.S. will be aggressive sellers during harvest.
What to do: We have advised producers to be 100 per cent sold on old-crop soybeans and 20 per cent sold on expected new-crop production. Use this latest rally to catch up on sales. During the drought of 1988, canola futures traded limit down during harvest. Producers were harvesting six bu/acre instead of the expected yield of 3 bu/acre so the crop was twice as big as expected. Keep this psychology in mind.
Corn
At the time of writing this article, Brazilian corn was quoted at US$225/tonne f.o.b. Paranagua, down US$5/tonne from 14 days earlier. U.S. corn was quoted at US$270/tonne f.o.b. the Gulf, unchanged from two weeks ago. French corn was valued at US$267/tonne f.o.b. La Pallice, up US$10/tonne from the previous issue. Ontario corn was quoted at US$250/tonne f.o.b. St. Lawrence port, unchanged from two weeks earlier. Cash offers in the export market have divorced from the corn futures. Ontario corn is not competitive in Northern European destinations.
We continue to forecast an Ontario crop size of 9.1 million tonnes. This compares to last year’s output of 9.4 million tonnes and the five-year average of nine million tonnes. In the U.S., Illinois has 11 million acres of corn which is 12 per cent of the total crop. Iowa has 13.1 million acres which is 14 per cent. Conditions have deteriorated in these two states while other minor regions are in good shape. Analysts now have the U.S. crop estimate in the range of 370-375 million tonnes. This is down from the USDA forecast of 388 million tonnes but above the five-year average of 365 million tonnes.
On May 23, the managed money was net short 97,649 contracts of corn. On June 20, the managed money was net long 66,061 contracts of corn. The managed money has bought nearly 164,000 contracts of corn during this period. The market was too low too early in the growing season. Currently, the corn futures market has factored in a worst-case scenario for corn yields. The cash markets haven’t moved significantly over the past month. This is a signal that the futures market may be overvalued.
Ontario corn is overvalued compared to French and Brazilian origin which is curbing exports late in the crop year. The Ontario corn market experiences seasonal low domestic demand late in the final quarter of the crop year. This will limit upside in the nearby cash market. Farmers are aggressive sellers at harvest which will limit rallies in new-crop positions.
What to do: We’ve advised Ontario farmers to be 100 per cent sold on their 2022 production and 20 per cent sold on new crop.
Wheat
The Ontario winter wheat crop has experienced yield drag over the past 30 days. We continue to project an Ontario winter wheat crop of 2.5 million tonnes, up from last year’s output of 2.2 million tonnes and up from the five-year average of 2.1 million tonnes.
Earlier in spring, Ontario wheat was competitive with corn and was able to trade into feed channels. Wheat prices are now premium to corn limiting the volume trading into feed channels. We won’t see wheat trade into the local feed market unless there are adverse weather and quality downgrades during harvest.
The U.S. soft red winter and hard red winter harvests have been interrupted by intermittent rains. The quality of the U.S. winter wheat crop is uncertain. Yield reports confirm our production estimates.
U.S. soft red winter output is expected to come in near 12.5 million tonnes, up from the 2022 crop size of 10.2 million tonnes. The U.S. hard red winter wheat harvest is expected to finish near 14.2 million tonnes, down from the 2023 crop size of 14.4 million tonnes and down from the five-year average of 20 million tonnes (2017-2021 crops).
The European harvest will move into high gear in July. There are no problems with the French or German crops. Ukraine production will be down from last year. Data has been difficult to obtain and the exportable surplus is unknown. In Russia, the crop is now projected to finish near 85 million tonnes, up from the earlier estimate of 81 million tonnes but down from last year’s record of 100 million tonnes.
At the time of writing this article, French soft wheat was valued at US$265/tonne f.o.b. Rouen. U.S. No.2 Soft Red Winter was quoted at US$290/tonne. Russian wheat was offered at US$240/tonne f.o.b. the Black Sea. A nominal value for Ontario soft red winter f.o.b. St. Lawrence port was US$265/tonne.
An extension to the Black Sea Grain Initiative needs to be negotiated by July 18. Russia is once again causing traders to question the ability of ongoing available supplies from the Black Sea region. Russia’s invasion of Ukraine has taken a step off course with the Wagner mutiny. The instability of Russia and Ukraine could dampen the export potential of both countries longer term.
At the end of May, the managed money had a net short position on the Chicago wheat of 127,000 contracts. As of June 20, the managed money funds were still short over 100,000 contracts. They will probably continue to buy in their position over the next month so that they’re neutral at the end of July.
What to do: We’ve advised producers to be 100 per cent sold on old crop. We’re planning on making our next sale at the end of October.
The wheat futures are experiencing a counter-seasonal rally. This reflects the overall environment of the wheat complex. Geopolitical turmoil along with the smaller U.S. crop can spark fireworks in the wheat market. In a normal year, cash markets make seasonal lows at the end of July. There is fairly good upside potential moving forward in the wheat market.
