Trade war between U.S. and China continues to alter trade flows

China is buying from Argentina and Argentina is buying from the U.S.

Ontario grain and oilseed markets have traded in a sideways range over the past couple weeks. Farmers in Ontario have harvested about eight per cent of the soybean crop while the corn harvest will begin in a couple weeks. The Ontario forecast looks variable over the next week.

Quick look

  • Soybeans: Market structure favours China buying Ontario soybeans over the next couple of months.
  • Corn: Ontaro corn exports continue to run ahead of a year ago.
  • Wheat: Rate of farmer selling will influence the wheat market over the next month.
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    close-up of soybeans

The U.S. Midwest has also been inundated with rain over the past week, which has slowed harvest progress. Early harvest reports have U.S. soybean yields coming in above expectations while corn yields are in line with estimates from the United States Department of Agriculture. Favourable rains have enhanced seeding prospects for winter wheat in the U.S. Southern Plains.

In Western Canada, adverse weather has slowed harvest progress. In Alberta, only 35 per cent of the spring wheat is harvested; Saskatchewan farmers have combined only 50 per cent of the spring wheat. Corn, soybean and wheat futures markets appear to be moving through a seasonal low. South American seeding conditions are starting to come into focus. On Sept. 24, the U.S. imposed $200 billion in tariffs on China, which caused China to call off further trade talks.

Soybeans

Chinese tariffs on U.S. soybeans have altered traditional trade flows. Over the past week, talk in the trade included China buying 10 to 15 cargoes of Argentine soybeans; at the same time, Argentina bought 10 to 15 cargoes of U.S.-origin soybeans out of the Gulf.

Brazil and Argentinian soybeans are offered at US$2.65 per bushel over the November futures; U.S. soybeans out of the Gulf are offered at 25 U.S. cents per bushel over the November futures. Brazilian and Argentinian soybean stocks will drop to very low levels during December and basis offers are expected to percolate higher moving forward.

Brazilian farmers have seeded approximately 10 per cent of the soybean crop under optimal conditions. Argentinian farmers will begin seeding next month in the central region.

Ontario soybeans prices have been hovering around $11/bushel for nearby delivery. The market structure favours China buying Ontario soybeans over the next couple months. Domestic crushers appear to be well covered for nearby requirements but local basis levels are expected to ratchet higher. Soymeal stocks are expected to be very tight come March and April. We believe the domestic soybean market will have to ration demand away from export channels by trading at a premium to offshore bids in late winter. Longer term, the function of the soybean market is to discourage production in the U.S. Next spring, U.S. farmers will increase corn acres at the expense of soybeans.

What to do: Earlier in spring, we advised farmers to sell 30 per cent of new crop production. Our strategy is to make our next sale in November or early December.

Corn

Bearish news has plagued the corn market over the past couple weeks. There’s an old saying that the bear needs to be fed daily in order for the market to keep trending lower. We now find that market sentiment is neutral at the current levels.

Approximately 16 per cent of the U.S. corn crop was in the bin as of September 23. Favourable weather should allow U.S. farmers to make excellent progress over the next week. Once the U.S. harvest is more than 50 per cent completed, harvest pressure tends to ease. Ontario corn exports are running sharply above year-ago levels. Seasonally, domestic demand tends to increase at this time of year as more cattle move into feedlots. Crude oil values continue to percolate higher which should enhance ethanol margins.

Global corn stocks will drop to the lowest levels since 2008; therefore, traders are hesitant to press the market at the current levels. Brazilian corn planting is underway in Parana and Rio Grande do Sul. In Argentina, seeding has started in the Northern region. Corn futures will be extremely sensitive to South American growing conditions because the world cannot afford a crop problem.

Chinese ethanol policy is uncertain given the recent trade spat with the U.S. Last year, China unveiled a plan to use ethanol in gasoline nationwide by 2020. The proposed plan would consume an additional 45 million tonnes of corn. Major expansion plans have been put on hold because companies can’t get approval from the government. The USDA forecasts Chinese corn stocks to drop to 50 million tonnes by the end of the 2018-19 crop year. If this policy were implemented, there would be a food shortage unless tariffs are lifted on U.S. corn.

What to do: Earlier in spring, we advised farmers to be 15 per cent sold on their 2018 production. We’re looking to make our next sale in November after the U.S. harvest is completed and the South American corn crop is more established. The futures markets spreads are narrower in the May through June time frame so this is when commercial traders believe stocks will be rather tight.

Wheat

In the previous issue, we mentioned that wheat had a strong seasonal tendency to rally throughout the fall period. Old time traders use to say, “buy wheat on Yom Kippur and sell it on U.S. Thanksgiving.”

It appears this pattern is holding true another year. The Northern Hemisphere wheat harvest is in the final stages. We expect to see minor adjustments to production estimates in Europe, Russia and Western Canada, however, there won’t be “market influential” changes moving forward. Australian and Argentine crops are moving through the critical head-filling phase.

Argentina’s wheat crop is expected to finish around 19.5 million tonnes, up 1.5 million tonnes from last year. Analysts have Australia’s wheat crop in the range of 18 to 20 million tonnes, down from 21.3 million tonnes last year. The market appears to be content with current production estimates in the southern hemisphere. The largest factor influencing the wheat complex over the next month will be slower farmer selling, which will allow the market some breathing room. Secondly, the wheat market experiences seasonally strong demand during October and November.

The Russian ministry stated that Russia had sold 10.2 million tonnes of wheat so far this crop year, compared to 6.2 million tonnes last year. Russia has a smaller crop and yet exports are running ahead of year-ago levels. They cannot keep up this pace longer term. Demand for North American wheat will increase in the latter half of the crop year when Russian exports are expected to slowdown.

What to do: Ontario wheat prices are relatively unchanged from two weeks ago. Milling quality supplies will tighten later in the crop year. We’re anticipating a year-over-year increase in Ontario wheat exports to the U.S. given the lower quality of the U.S. crop. Our strategy is to make our first sales recommendation in October.

About the author

Markets Analyst

Jerry Klassen is the manager of Canadian operations for Swiss-based grain trading house GAP SA Grains & Products.

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