The Ontario corn and soybean harvests are in the final stages. Yield reports continue to confirm Statistics Canada’s production estimates. Farmers have been aggressive sellers off the combine. At the same time, offshore exports are increasing for corn and soybeans as prices remain competitive on the world market.
The domestic soybean crush has improved now that crushers have access to plentiful supplies. Ethanol demand for corn is sluggish due to softer energy values. Compared to earlier in October, elevator bids prices are relatively unchanged for row crops.
Quick look
Soybeans: The price structure between Brazilian and U.S. soybeans has changed, giving Ontario some advantages.
Corn: Three main changes to the corn fundamental structure are making our outlook bullish.
Wheat: Forecasting an outlook is difficult due to geopolitical factors.
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Ontario wheat prices have been extremely volatile. Domestic millers appear to be well covered for their nearby requirements. U.S. miller bids are not quite high enough to attract Ontario soft red winter. Other traditional buyers of Ontario wheat have sufficient coverage in the short term. Basis levels for wheat feel sluggish.
The USDA’s October World Agriculture Supply and Demand Estimates (WASDE) were considered supportive to bullish for corn and wheat markets as U.S. ending stocks were taken down for both crops. The report was considered neutral to bullish for soybeans as the carryout was left unchanged from September’s data.
Water levels continue to decline on the Mississippi River, resulting in higher barge rates and pressuring prices in the Midwest. U.S. offers out of the Gulf for corn, soybeans and wheat are premium to other major exporters. Brazilian planting is occurring in a timely fashion. Argentina remains on the dry side due to La Nina, which cools the Pacific Ocean surface. Russia’s finance minister was optimistic that the agreement for the Black Sea grain export corridor could be extended beyond the current expiry of Nov. 20. The U.S. Southern Plains are in a drought, which will likely result in lower planted acreage.
The U.S. greenback continues to strengthen while the Canadian dollar continues to trend lower. U.S. inflation for September came in at 8.2 per cent. We expect the Bank of Canada and the U.S. Federal Reserve to continue increasing rates until their key lending rates equal the consumer price index.
Total U.S. crude oil stocks (including reserves) have dropped to historical lows. Barring a major recession, the crude oil market could make fresh historical highs over the winter. We could see a consumer run on gas and diesel. All feedlots and farms are encouraged to have three to four months of fuel storage on farm. U.S. media are not talking about this due to the upcoming mid-term elections. These low stocks come on the heels of an OPEC Plus production cut of two million barrels per day.
Soybeans
Throughout September and October, Ontario elevator soybean bids were averaging $18.75-$18.90/bu. At the same time, domestic crusher bids were in the range of 19-$19.50/bu. Export demand has set the floor price for Ontario soybeans.
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We mentioned in my previous article that Ontario farmers would deliver three million tonnes of soybeans in the commercial system from Sept. 1 through Dec. 31. Domestic crusher demand is only about 200,000 tonnes per month. The crusher premium over the local elevator has been minimal throughout the harvest period given the larger volume of farmer selling.
In that previous article, f.o.b. values for Brazilian and U.S. soybeans were equal. The price structure has changed. At the time of writing this article, Brazilian soybeans were quoted at US$608/tonne f.o.b. Paranagua while U.S. soybeans were valued at $595/tonne f.o.b. the Gulf. The U.S. soybean discount to Brazilian soybeans will keep the soybean futures well supported.
Chinese buying has recently switched from Brazilian origin to U.S. soybeans. A nominal value for Ontario soybeans would be US$570/tonne f.o.b. the Gulf. Ontario soybeans have a competitive advantage over U.S. soybeans to European destinations. Ontario and U.S. soybeans are competitive into North African markets.
The USDA lowered its U.S. yield projection on the October WASDE report. U.S. soybean production is now expected to finish near 117.4 million tonnes, down from the September estimate of 119.2 million tonnes and down from the 2021 output of 121.5 million tonnes. The lower production caused the USDA to trim the export pace while it increased the domestic crush.
The U.S. soybean carryout forecast is now 5.4 million tonnes, down from the 2021-22 ending stocks of 7.5 million tonnes. Keep in mind that U.S. soybean export sales are running seven per cent above year-ago levels.
At the end of October, Brazilian farmers will have about 20 per cent of the soybean crop planted while Argentinean producers will be in the early stages. Conditions are favourable in Brazil but Argentina remains on the drier side. This will likely have a larger influence on meal prices as Argentina is the world’s largest soymeal exporter.
What to do: This week, we are advising farmers to sell an additional 20 per cent of their 2022 production, bringing total sales to 40 per cent. March soybean futures are trading at an 18 cent/bu. premium to the nearby November contract. The market is telling farmers to sell now for February delivery. The Brazilian harvest moves into high gear during March.
Corn
The Ontario corn crop will likely finish in the range of 9.8-10 million tonnes. This is up from 9.5 million tonnes last year and up from the five-year average of 8.9 million tonnes. From Sept. 1 through Dec. 31, Ontario farmers are expected to sell 6.3-6.5 million tonnes. Domestic and export demand is projected to reach 3.8 million tonnes, up from our earlier estimate of 3.3 million tonnes.
Ontario corn prices have been percolating higher over the past month despite burdensome supply in the commercial system. Ethanol demand is sluggish and domestic feed usage only increases in December. The main factor driving the market is export demand, which has been enhanced by the Canadian dollar. We have increased our Ontario corn export projection for the first half of the crop year by 500,000 tonnes from our previous projection.
At the time of writing this article on Oct. 17, U.S. corn was quoted at US$360/tonne f.o.b. the Gulf, up nearly $20/tonne from two weeks earlier. Brazilian corn was quoted at $302/tonne, up $5/tonne from early October. French corn was quoted at $360/tonne f.o.b. La Pallice. In Germany corn was up $10/tonne from 14 days earlier at $354/tonne. A nominal value for Ontario corn was $300/tonne f.o.b. St. Lawrence port.
There have been three main changes to the corn fundamentals since September. First, the USDA lowered the U.S. yield and production estimate. U.S. production is now forecasted to finish near 353 million tonnes, down from last year’s output of 382 million tonnes and down from the five-year average of 364 million tonnes.
The 2022-23 U.S. carryout is now expected to be 29.8 million tonnes, down from the five-year average ending stocks of 45.2 million tonnes. The U.S. market needs to ration demand by trading above world values, which is exactly what we see occurring. Our bias is that the U.S. carryout will eventually drop under one billion bushels and stocks will be historically tight.
Secondly, the French corn crop will likely finish around 11 million tonnes, down from earlier estimates of 11.7 million tonnes and down from the 2021 output of 15.5 million tonnes. Ontario corn needs to satisfy Northern European demand.
Finally, there is uncertainty over how much Ukraine corn will come to market over the winter. Brazil has a larger exportable surplus but it is easily being absorbed due to the U.S. shortfall. Trade flows have been altered from projections earlier in the crop year. On a side note, Argentine farmers have planted about 15 per cent of the corn and drought-like conditions are hampering progress.
What to do: This week, we advised farmers to be 20 per cent sold on their 2022 production. We are planning to make our next recommendation in November. We want to sell after harvest pressure has eased and just prior to lakes freeze over. We have a bullish bias on the corn market.
Wheat
The wheat market is in a unique situation. Domestically, Ontario and U.S. flour millers appear to be covered for their nearby requirements. At the same time, export buyers are buying on a hand to mouth basis and closely watching developments in the Black Sea region.
The wheat futures markets have been extremely volatile as traders digest fresh news. Cash values have not been as volatile. Ontario wheat is one of the most competitively priced on the world market.
At the time of writing this article, U.S. No.2 hard red winter was priced at $444/tonne f.o.b. the Gulf; U.S. No.2 soft red winter was $400/tonne f.o.b. the Gulf; French soft wheat was $360/tonne f.o.b. Rouen. A nominal value for Russian and Ukraine 12.5 protein wheat was $325/tonne f.o.b. the Black Sea. Ontario soft red winter was quoted at $325/tonne f.o.b. St Lawrence port.
Russia’s wheat crop is estimated at 100 million tonnes, which is a record. Exports from the Black Sea are down sharply from year-ago levels although prices are competitive on the world market. Recently, Russia’s finance minister expressed optimism that the Black Sea safety corridor would be extended beyond the current agreement, which comes to an end Nov. 20.
However, it appears that escalations in the Russian-Ukraine conflict could jeopardize hopes of the extension. In a normal year, Russian wheat would trade into Mexico, Central and South America and even southeast Asia. Russia’s exportable surplus is about 40 million tonnes. Given the situation in the Black Sea region, world buyers are waiting and will work down to the last kernel before extending coverage.
More importantly, developing countries and major importers such as Egypt are also struggling to pay for wheat. Prices are elevated, interest rates are increasing and many countries have a shortage of U.S. dollar reserves. The U.S. Dollar Index is at 20-year highs. Many countries cannot afford the wheat and they do not have the means to pay for it.
If the country’s currency has depreciated by 30 to 40 per cent against the U.S. greenback, it is a problem. Out of all the commodities, the U.S. dollar strength is a major problem for the wheat complex.
The U.S. hard red winter wheat and hard red spring fundamentals are similar to 2007-08. The U.S. Southern Plains is in a drought, which will likely result in lower planted acreage. Yield drag has occurred in Argentina due to drier conditions. In Australia, extensive rains have hindered quality expectations on the East Coast while yields in West Australia could be record.
What to do: This week, we are advising farmers to sell 20 per cent of their 2022 production, bringing total sales to 30 per cent. The wheat outlook is hard to forecast. It is prudent to increase sales.
