Market risk in South America erodes, causing limited market upside

Ontario crop exports should increase as Great Lakes shipping opens

The Ontario growing region has received less than 40 per cent of normal precipitation over the past 30 days. 

Farmers are heading into the spring period with drier conditions and timely rains are needed for the winter wheat crop. 

Quick look

Soybeans: Markets soon to switch to watching North American planting progress.
Corn: Ethanol margin increase helps sustain Ontario demand.
Wheat: Lack of U.S., local demand means Ontario wheat price drop.

Ontario corn and soybean exports have slowed over the past month, which has weighed on domestic values. Wheat prices are under pressure as all major exporting countries experience favourable crop conditions. 

The acceleration of the Brazilian soybean harvest has weighed on U.S. and Ontario soybean markets. Brazilian farmers had harvested approximately 60 per cent of the soybeans as of March 20, down marginally from the five-year average. Trade estimates suggest that 52 per cent of Brazil’s first corn crop is in the bin. 

Approximately 72 per cent of the second crop corn is planted and early conditions are favourable. Argentine farmers have harvested about five per cent of the corn crop but there has been limited progress on soybeans. 

South American soybeans are discount to U.S. origin for nearby positions, limiting the upside for the soybean market. However, U.S. corn out of the Gulf remains competitive on the world market. The USDA will release its seeding intentions report on March 31. Over the next couple of months, the markets will be focused on Ontario and U.S. planting progress.  

The Canadian dollar continues to strengthen against the U.S. greenback. Shorter-term bond yields have been supportive of the resource-based currency. The Bank of Canada is expected to taper its asset purchases over the next month; there is potential for the Canadian Central Bank to increase its benchmark lending rate by the end of the year. 

U.S. Federal Reserve monetary policy remains dovish. U.S. fiscal policy is inflationary and proposed Biden tax hikes are negative for the U.S. dollar. Crude oil prices are expected to percolate higher as the U.S. and world economies move into full expansionary phases. While this will underpin the Canadian dollar, the stronger energy prices will also be supportive for grain and oilseed prices. 

Soybeans

Canadian soybean exports during the month of January were 375,000 tonnes; February soybean exports were 134,000 tonnes and March exports will likely finish under 100,000 tonnes. 

Offshore demand for Ontario soybeans is slowing due to the ongoing South American harvest progress. Soymeal futures reached a high of US$462/ton on Jan. 15 but during mid March were hovering around the US$400/ton area. The North American soymeal market has softened as Brazilian and Argentinean offers pressure on the world market. Offshore meal movement has slowed while the U.S. and Canadian crush pace remains at higher levels. 

Brazilian farmers have made significant harvest progress over the past couple of weeks and the concerns over the export backlog are slowly being alleviated. The USDA increased Brazilian soybean output to 134 million tonnes on the March estimate, up from 133 million tonnes in February and up from last year’s crop of 128.5 million tonnes. 

The Argentinian crop harvest is in the early stages. The crop is estimated to range from 46 to 48 million tonnes, which compares to 49 million tonnes last year. The main point is that we probably won’t see further downward revisions in crop estimates. 

Earlier in winter, the soybean and soymeal futures market had incorporated risk premium due to the uncertainty in South American production; however, this risk premium is now eroding. U.S. farmers are expected to seed another seven million acres of soybeans this spring. Using a trend yield, production would have the potential to finish near 127.4 million tonnes, up from the 2020 crop size of 112.6 million tonnes. The year-over-year increase in new crop production will be a drag on old crop prices moving forward. 

What to do: We’ve advised Ontario farmers to be 100 per cent sold on old crop and 20 per cent sold on expected new crop production. The highs for old crop are likely in place because Brazil is dominating the export market. We don’t anticipate any seeding delays in North America and recent precipitation has alleviated any dryness concerns. 

Corn

Similar to the soybeans, Ontario corn exports have also slowed while the lakes have been frozen over. However, the improvement in ethanol margins has been sufficient to sustain the domestic price structure. Cattle on feed inventories are also at seasonal highs. 

The Argentinian corn harvest is in the early stages. In Brazil, the main exportable surplus comes from the second crop, which will only be harvested in June. Therefore, offers of U.S. corn out of the Gulf of Mexico continue to be most competitive on the world market. We’re looking for the USDA to raise its export projection on the April World Supply and Demand Estimates (WASDE). This will cause the 2020/21 ending stocks to drop sharply below the five-year average. According to the USDA Outlook, U.S. farmers were expected to increase corn acres by 1.2 million. We’re expecting a year-over-year increase of two to three million acres. 

This will be a bearish new crop. Chinese corn acres are also expected to be up one million over last year. If China has a decent crop, we’ll see lower import demand in the 2021/22 crop year. 

The corn market is expected to hold value until North American planting is wrapped up. The tighter 2020/21 stocks projection will limit the downside in the short term. After May, we’ll see a significant transition in the export market from U.S. origin to Brazil. 

We expect hard red winter wheat trade into feed rations in the Southern Plains during the summer months. Corn futures will come under pressure from June onwards because of slower exports and the substitution effect of wheat feeding. Unless we see a drought occur in the Midwest, softer demand will result in lower prices in the summer months. This weaker demand will be followed by U.S. harvest pressure. 

What to do: We’ve advised farmers to be 80 per cent sold on their 2020 production. We’ll be patient to make our next sales recommendation. This week, we’re advising producers to sell their first 20 per cent increment of the 2021 production. New crop prices are near $6/bushel and we believe this is a good opportunity given the potential increase in production. If trendline yields materialize in the U.S., the corn market will function to encourage demand at harvest. It’s prudent to start new crop sales at the current levels. 

Wheat

At the time of writing this article, Ontario soft red winter wheat prices were hovering at $7.60/bushel, down 40 cents/bushel from the February high. 

Domestic flour millers appear to have their nearby requirements covered. 

Secondly, U.S. demand has been lower than anticipated while Ontario wheat has experienced sharper competition in the export market. 

On the flip side, the Ontario wheat premium over corn has narrowed and will continue to do so moving forward. There is potential for wheat to move into feed channels during the summer, which will limit the downside in Ontario domestic wheat prices.

At this stage of the crop year, the focus is on new crop production. The U.S. Southern Plains have experienced above-normal precipitation throughout March and seasonal rains tend to occur in April. 

Ontario winter wheat production is projected to reach 2.5 million tonnes, up from 2.3 million tonnes last year. U.S. hard red winter wheat output has potential to finish the year at 20.1 million tonnes, up from the 2020 crop of 17.9 million tonnes. U.S. soft red is projected to finish near 7.2 million tonnes, unchanged from year-ago levels. 

In Europe, we’re projecting EU production to reach 150 million tonnes, up from 136 million tonnes last year. Russian and Ukraine output will also experience minor year-over-year increases. Russian winter wheat seedings were up one million acres from last year. The major exporters have increased winter wheat production and there will be no shortage of wheat in the upcoming crop year. 

What to do: We’ve advised producers to be 80 per cent sold on their 2020 production. Ontario is dry. We’ll be patient to make our final recommendation for 2020 and our first sale for 2021. The wheat complex is bearish but Ontario needs timely rains for average yields to materialize.

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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