Ontario corn prices are relatively unchanged from last month. All three pillars of corn demand are at seasonal highs. Ontario corn exports are running ahead of year-ago levels while strong energy prices support the year-over-year increase in ethanol production.
Cattle on feed inventories tend to peak during the winter. Ontario soybean crushers continue to show strong bids to attract farmer selling. Old crop elevator bids are nearing $18 per bushel and this is a demand-led rally for meal and oil. The Ontario soybean export pace will slow down later in spring as South American supplies enter the market.
Soft red winter wheat bids are unchanged from last month. Domestic millers have the bulk of their nearby demand covered but the export market remains firm.
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Critical growing season ahead for soybeans
This year’s smaller soybean acreage puts the onus on yields, if last year’s supply is to be maintained. The most critical yield-determining month for U.S. soybeans is August.
Quick look
Soybeans: Market dynamics signal that farmers should not store soybeans until spring.
Corn: Feed demand from the western provinces will hold prices for now.
Wheat: Farmers should be 70 per cent sold as prices are expected to drop further.
World corn and soybean markets are dependent on South American production. The Brazilian soybean harvest was approximately five per cent complete as of Jan. 23 and the second crop corn planting is in the early stages. Brazil’s first crop corn has experienced yield drag due to drier conditions.
As of Jan. 23, Argentina had planted 93 per cent of the soybeans and 95 per cent of the intended corn acres. The country has recently received timely rains.
The wheat market is incorporating a risk premium for two main reasons. Tensions between Russia and Ukraine may hinder wheat exports later in spring from the world’s largest exporters. Secondly, drier conditions continue to plague the U.S. hard red winter wheat crop. The wheat market will be very sensitive to precipitation forecasts in March and April. Major importers have taken significant coverage so demand is scarce in the short term.
The Canadian consumer price index for December came in at 4.8 per cent on a year-over-year basis. However, U.S. inflation is at seven per cent on a 12-month basis. In the previous issue, we mentioned that the Bank of Canada is expected to increase its benchmark lending rate from 0.25 per cent to 1.5 per cent by the end of December 2022. It now looks like the lending rate may be closer to two per cent by the end of year. The U.S. Federal Reserve is poised to be more aggressive on monetary tightening and the Bank of Canada will remain two steps ahead of its U.S. counterparts.
Soybeans
Bids from Ontario soybean crushers reflect a significant premium over the elevator system. Crusher bids are also premium to bids just south of the border in an effort to attract imports. At the time of writing this article, end user bids for immediate delivery were near $18 per bu. while April bids were $18.05 per bu. The market is telling farmers to sell now for immediate delivery. The market is not rewarding farmers for storing soybeans into spring.
The Canadian crop year-to-date soybean crush for the week ending Jan. 16 was 980,000 tonnes, up from the year-ago pace of 854,000 tonnes. Crush margins have been strong due to favourable meal and oil prices.
Palm oil futures reached record highs during the third week of January. Indonesia plans to limit exports of palm oil in an effort to control inflation. Major importers of palm oil such as the Middle East, China and India will look to other sources such as sunflower and soybean oil.
We’ve seen a surge in soyoil prices over the past month. Meal values are also driving the crush margin structure. There are no main substitutes for soymeal. Soymeal prices in Canada high enough to attract imports from the U.S. domestic crush margins will come under pressure later in spring as South American supplies come on the world market.
The January USDA World Agriculture Supply and Demand Estimates (WASDE) report had Argentine soybean production at 46.5 million tonnes, down from three million tonnes from the December estimate. Full season soybeans will be pod setting and filling during February while double crop soybeans will flow.
February is the main pod-setting month for Brazilian soybeans. Needless to say, weather is most critical for South American production during February. This can cause extreme volatility for the market. This year, the main soybean harvest period in Brazil will occur during late February and March.
China has been buying old and new crop soybeans from the U.S. but export demand for old crop beans will slow once Brazil’s harvest is in full swing. This will cause the North American soybean market to be dictated by domestic demand. The soybean market tends to trend lower during the Brazil and Argentine harvests.
What to do: The current price structure is an opportunity for Ontario farmers to catch up to our recommendation to be 80 per cent sold on the 2021 production. We’ll have 20 per cent remaining in case adverse conditions develop in Brazil. The soybean market tends to experience a minor rally during the main U.S. planting period. This is when we’ll sell our final 20 per cent increment.
Corn
Canadian crop year-to-date corn exports for the week ending Jan. 16 were 551,900 tonnes, up from the year-ago pace of 456,300 tonnes. We’re looking for export demand to remain firm. Europe is the largest user of wheat in compound feed rations and higher wheat prices have encouraged the imports of Ontario corn.
On the flip side, western Canadian feedlots are in an extreme shortage and economics favour moving corn from Ontario to Lethbridge. This will limit slippage in Ontario corn prices. Ethanol processors are covered for nearby requirements but they’re showing hefty premiums for April and May. The key is that the farmer has to sell for deferred delivery to capture the price structure. Once demand is full, the price from ethanol processors tends to move in line with local elevator bids.
The feed market is quite variable. Feedlots and end users can always source sufficient quantity given the record corn production this past year. This is always the price floor but it seems to be ratcheting higher.
On the world market, U.S. corn out of the Gulf and Ukraine corn out of the Black Sea are the two most competitive origins. We’re just starting to see Argentine new crop offers surface at a discount to U.S. origin. However, if a buyer needs larger volumes, they still must come to the U.S. Brazil’s second corn crop, known as the Safrinha crop, will only be available for export in late May. The corn futures market tends to incorporate a risk premium during April when this Safrinha crop is in the late vegetative stage and early reproductive phase. This is also when North American farmers are planting. It’s crucial that the U.S. crop has favourable weather during the early stages of development to obtain trend type yields. April is a critical time in regard to world production. The corn market won’t collapse until May.
U.S. crude oil inventories are at the lowest levels since 2014. Ethanol margins have deteriorated from over US$1.50 per gallon in December to a meagre 10 to 15 cents per gallon. The main point is that ethanol producers had sufficient time to lock in margins in the deferred positions so we don’t expect much slippage in the ethanol grind.
What to do: We’ve advised farmers to be 70 per cent sold on their 2021 production. We’re waiting to sell the final 30 per cent. We expect the corn market to incorporate a risk premium in April. Our strategy is to sell into this strength. Last year, the market rallied over $1 per bu. in April and peaked during the first week of May. We’re expecting a similar price pattern.
Wheat
In previous reports, we’ve stated that the wheat market makes seasonal highs during the third week of November. The second seasonal rally in the crop year occurs when the Northern Hemisphere winter wheat crop comes out of dormancy during March and April.
The U.S. Southern Plains have received below normal precipitation, but keep in mind that April is when Kansas receives seasonal rains. France and Germany had decent precipitation earlier in November and December but January has also experienced limited snowfall or rain. A similar situation has occurred in Ukraine but Russia is in good shape heading into spring.
Australian wheat is dominating Southeast Asia while Russia and Ukraine are most competitive to the Middle East. U.S. hard red winter wheat is more competitive to central America. The problem is limited demand. Major importers took coverage earlier in fall in anticipation of rising prices in late winter or spring. The few tenders that pop up have exporters fighting over the last dime to get the business. This isn’t conducive for higher prices.
What to do: This week, we’re advising Ontario producers to sell 10 per cent of their 2021 production, bringing total sales to 70 per cent. The wheat market is experiencing a seasonal rally and we want to be selling into this strength. We have 30 per cent remaining if adverse conditions develop later in April or May. If normal weather conditions materialize, we could see the soft red winter wheat market drop $1 to $1.50 per bu. rather quickly. It’s important to asses the risk reward. There is limited upside but significant downside potential from current levels.
