Above normal precipitation over the past few weeks has slowed harvest progress in Ontario. The region north of Toronto received 20 to 40 millimetres of precipitation during the first half of October while the southern region received 70 to as much as 110 mm.
As of Oct. 19, Ontario farmers had harvested approximately 35 per cent of the corn crop and 75 per cent of the soybean crop. Corn has seen yield drag in some areas due to tar spot. Fusarium is common in certain regions.
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Soybeans: The U.S. soybean carryout is now expected to finish near nine million tonnes, up from 2020-21 ending stocks of seven million tonnes.
Corn: The key influence on the price structure will be U.S. exports to China.
Wheat: Ontario cash wheat prices are relatively unchanged, and Canadian and U.S. domestic millers appear to have the bulk of their requirements covered through December.
Soybean yields are coming in as expected, confirming our production estimate. Ontario soybean prices have been under pressure due to heavy farmer selling. Elevator corn bids in Ontario are relatively unchanged from last month due to delayed harvest. Ontario wheat prices are being underpinned by strong export demand.
The October USDA World Agriculture Supply and Demand Estimates (WASDE) report was considered bearish for corn and soybeans.
A year-over-year increase in U.S. ending stocks was projected for corn and soybeans. U.S. sales commitments for corn are above year-ago levels but soybean commitments are down 46 per cent from last year.
Brazilian farmers have made rapid planting progress in soybeans in the key state of Mato Grosso. This is important because it will allow the second corn crop to be planted and harvested in a timely manner. Combined ending wheat stocks for all major exporters will drop to the lowest level since 2007-08. In addition to an export tax, Russia may limit total exports come February 2022. The wheat market is functioning to encourage production.
China, Europe, India and other countries are contending with a major energy crisis resulting in stronger crude oil prices. The Canadian dollar has been lagging the strength in crude oil but will likely be more sensitive to energy values as oil demand increases.
Bond yields are ratcheting higher and inflation is becoming a major concern. Ocean freight rates are at or near record highs. Copper and other metals, which are leading indicators, are also trading near historical highs. These two factors indicate inflation is not temporary. The Canadian dollar is expected to percolate higher. We’re looking for $100-$120 crude oil in the first quarter of 2022. Energy policy from industrialized nations will be a major factor influencing corn and soybean prices during the 2021-22 crop year.
Soybeans
Ontario soybean prices are down nearly $1 per bushel from last month for both old and new crop positions. Exports and the domestic crush pace are lagging year-ago levels. Tight old crop stocks kept the Ontario soybean market elevated relative to world values. The domestic market is now in line with export offers out of the U.S. Gulf, which enhance offshore movement. However, soybeans just south of the border are sufficient discount to trade into Ontario. This will hinder upside potential in the near future.
There has been a major change in the crush margin structure. In the past, meal prices were the main product value driving the crush margin. However, vegetable oil prices are at or near record highs due to the biodiesel component. Therefore, meal prices have become the secondary component. This is limiting domestic demand in the short term.
The USDA WASDE report was considered bearish for soybeans. The USDA increased seeded and harvested acreage. It now looks like the average U.S. yield will finish at 51.5 bu./acre, up from the earlier estimate of 50.6 bu./acre and up from the 2020 yield of 51 bu./acre. U.S. soybean production is now forecasted to reach 121 million tonnes, up from the 2020 output of 115 million tonnes and up from the five-year average of 114 million tonnes.
The U.S. harvest is progressing without major issues. Total U.S. export sales commitments as of Oct. 7 were down 39 per cent from year-ago levels. China and U.S. tensions are on the rise. It appears that China will only buy what it absolutely needs until South American supplies are available.
The U.S. soybean carryout is now expected to finish near nine million tonnes, up from 2020-21 ending stocks of seven million tonnes. This is considered a comfortable fundamental. There is no weather problem in Brazil but Argentina is on the drier side. At this stage, weather is benign for South America.
What to do: We’ve advised Ontario farmers to be 40 per cent sold on their 2021 production. This week, we’re advising producers to sell an additional 10 per cent, bringing total sales to 50 per cent. We’re in the height of seasonal strong demand. If there are no weather issues in South America, the soybean market will falter.
Corn
We’ve trimmed our Ontario corn crop production estimate from last month due to lower than expected yield reports. We’re now projecting the corn crop to come in near 9.3 million tonnes, down 0.3 million tonnes from last month but still up from the 2020 crop size of 8.9 million tonnes.
The Ontario corn market is functioning to encourage demand. We’re looking for all three legs of demand to increase over the next couple months. Ontario corn prices are in line with French corn values to the destinations of Ireland and Spain. Values out of the U.S. Gulf are at a minor premium to f.o.b. lake offers for Ontario corn.
Domestic feed demand will also improve as cattle on feed numbers increase. Domestic feed demand tends to peak during the winter months. U.S. ethanol production surged to a 13-week high in early October to 1.03 million barrels per day. Ethanol margins are running at 95 cents to $1.20 per bu., which will keep ethanol processing at higher levels. Ontario ethanol production is also expected to sharply increase during the winter.
President Biden’s potential decrease in the biofuel blending mandate is a past concern with crude oil futures over $80 per barrel.
The USDA WASDE report was considered bearish for the corn market. U.S. corn production is expected to reach 381 million tonnes, up from the 2020 crop size of 358 million tonnes and up from the five-year average of 362 million tonnes. U.S. corn demand for 2021-22 is expected to finish slightly below 2020-21 due to lower exports and domestic feed usage.
U.S. ending stocks for the 2021-22 crop year are projected to finish near 38 million tonnes, up from the 2020-21 carryout of 31 million tonnes but down from the five-year average of 49 million tonnes.
The key influence on the price structure will be U.S. exports to China. Buying interest from Chinese buyers has been silent since spring. China is also contending with a year-over-year increase in production. The caveat is that China is contending with an energy crisis and has idle ethanol capacity.
If China ramps up ethanol production and buys more U.S. corn, we could see a major rally like last year. At this stage, the trade is forecasting minor year-over-year increases in South American corn output.
What to do: We’ve advised Ontario corn producers to be 30 per cent sold on their 2021 production. We’re looking for a minor rally moving into the winter as overall demand increases. The market will be sensitive to South American weather and we could see the futures incorporate a risk premium later in December.
Wheat
Compared to early October, Ontario cash wheat prices are relatively unchanged. Canadian and U.S. domestic millers appear to have the bulk of their requirements covered through December. However, there is considerable open demand from January forward.
The domestic market was trading at a slight premium to world values earlier in fall. The world market is the main factor driving Ontario elevator bids for soft red winter wheat. Farmers have sold a large portion of their feed wheat but there are still some homes available in the lower quality. We continue to forecast Ontario winter wheat production at 2.6 million tonnes, up from 2.3 million tonnes last year. We expect Ontario soft red winter wheat stocks to drop to historical low levels at the end of the 2021-22 crop year. The market will need to trade above world values to ration demand during the latter half of the crop year.
The October USDA WASDE report was considered bullish for the wheat market. Major exporters include Argentina, Australia, Canada, European Union, Russia and Ukraine. Ending stocks from these six players will drop to 33 million tonnes, which is down from 36 million tonnes last year and the lowest since 2007-08. In that crop year, we had Chicago and Kansas wheat reach more than $13/bu. during February.
Hard red spring stocks in Canada and the U.S. will drop to historical lows and will likely be even tighter than 2007-08. There is a very strong case for higher prices. It’s important to remember that a certain amount of wheat demand is inelastic, especially for spring wheat. The demand is there regardless of the price.
Major importers have been stepping forward more aggressively with tenders over the past month. They do not want to get into a position where they have to buy wheat at the highs. Food inflation is a problem. I must correct myself; it is a big problem. Lower income countries are faced with higher energy prices and also higher food prices. This usually causes countries to buy more than needed to pressure domestic prices.
Australia and Argentina will move into their main harvest period during late November and December. Both of these countries are expecting a year-over-year increase in wheat production. This will limit the upside as new crop supplies come on the market.
Later in February, there is a high probability that we will see Ukraine and Russia limit physical exports of wheat later in February and March. There is no significant harvest pressure until June when the U.S. winter wheat harvest occurs. The February through May period will be the critical time as it was in 2007-08.
What to do: We’ve advised Ontario farmers to be 40 per cent sold on milling wheat. Producers should be 50 per cent sold on feed or lower quality wheat. We’re looking for a major rally next spring. The wheat market cannot afford a crop problem in one of the major exporters next year. This will warrant a risk premium if adverse conditions develop in Russia, Europe or the U.S. Southern Plains.
