U.S. crop planting on schedule, but corn carry-out could still be tight

China-U.S. trade threats are causing uncertainty in global grains and oilseed trade

Grain and oilseed markets continue to digest northern hemisphere weather and crop conditions. Australia remains dry as farmers begin winter grain sowing. Precipitation levels have improved in Argentina for winter wheat seeding but have delayed the corn and soybean harvests.

The Brazilian soybean harvest is in the final stages; however, drier conditions have plagued the Safrinha second crop corn resulting in higher export prices. The corn and wheat futures markets have incorporated a risk premium as traders factor in the potential for lower production estimates.

On the flip side, Chinese demand for U.S. grains and oilseeds has become a large uncertainty due to the ongoing trade dispute between Washington and Beijing. Each side has announced US$50 billion worth tariffs with President Trump threatening to increase this amount to US$100 billion. The Chinese government stated that a 25 per cent import tariff on all U.S. grains and oilseeds was possible.

The U.S. dollar has strengthened against all major currencies over the past week while the Canadian dollar dipped to one-month lows.

Market trends quick look:

  • Soybeans: Fundamentals point to more bearish with commercial traders looking to unload their long cash position.
  • Corn: U.S. carryout for the fall looks “rather snug.”
  • Wheat: Russian rail subsidies help keep its wheat highly competitive in the market.

Soybeans

As of May 6, U.S. farmers had seeded 15 per cent of the crop compared to the five-year average progress of 13 per cent. Most of the Midwest is expected to receive one to two inches of rain over the next week, but that is not expected to delay seeding.

Using a trend yield, U.S. soybean production has potential to finish near 118 million tonnes, slightly lower than the 2017 crop of 119.5 million tonnes.

Statistics Canada’s prospective planting survey showed that Ontario farmers intend to plant three million acres of soybeans this year, down slightly from the 2017 seeded area of 3.1 million acres. Using an average yield estimate, Ontario soybean production is expected to finish at 3.8 million tonnes, relatively the same as last year.

Since mid April, the July-September soybean future spread has moved from a 10 cent per bushel inverse to a three cent per bushel carrying charge. Earlier in spring, the market was inverted (the July contract was trading at a premium to the September contract) when the Argentine crop was experiencing drier conditions. Now that the July-September spread is in a carrying charge, (the July contract at a discount to the September contract), this is actually a negative fundamental signal for the market.

Commercial traders are becoming somewhat bearish. As of May 1, the commitment-of-traders report had the fund position long 203,000 contracts while the commercials were short 147,000 contracts. Both of these positions are quite large. When the commercials have a large short position, this means they own significant stocks in the cash market. The basis will deteriorate or weaken which is reflective in the spread moving from an inverse to a carry.

The market needs to go down so that the commercials can liquidate their long cash position. The funds are also quite long the market so they are out of bullets or buying power.

What to do: In my previous article, we recommended that producers sell their old crop soybeans for summer delivery and also sell about 25 per cent to 30 per cent of their expected new crop. The recent market action is confirming this decision.

Corn

A tighter fundamental structure in the world corn market will be neutral to bullish for prices moving forward. A large portion of Brazil’s Safrinha second crop corn experienced less than 25 per cent of normal precipitation during April with the peripheral areas receiving less than 50 per cent of normal rainfall. Private trade estimates now have the total Brazilian crop in the range of 85 to 88 million tonnes, compared to the USDA estimate of 92 million tonnes and the 2017 crop of 98.5 million tonnes.

This will cut the exportable surplus from Brazil and increase U.S. offshore movement for 2018-19.

As of May 6, U.S. farmers had seeded 39 per cent of the corn crop, compared to the five-year average of 45 per cent. The fundamentals are tightening due to the year-over-year decline in seeded acreage and larger than expected exports. Using a trend yield, production has potential to finish at 361 million tonnes, down from 371 million tonnes last year. However, the lower Argentina and Brazilian crops have enhanced the export potential. Without going into detail, the 2018-19 U.S. corn carryout has potential to finish around 40 million tonnes, which is rather snug.

If adverse weather develops during the growing season, the corn market could jump $30/tonne to $40/tonne quite quickly. The corn market cannot afford to have a problem in the U.S. after the issues in Argentina and Brazil.

Statistics Canada’s survey had Ontario corn (for grain) acres at 2.2 million, up slightly from 2.1 million acres last year. Using a similar yield to last year, the Ontario corn crop has potential to finish in the range of 8.9 to 9.1 million tonnes, compared to the 2017 crop of 8.7 million tonnes. Old crop corn prices are in the range of $4.85/bushel to $5/bushel. In the previous issue, we mentioned that farmers probably want to finish up old crop sales but save a portion for a summer rally. New crop prices are hovering in the range of $5 to $5.25. Prices are decent to start a small portion of new crop sales. We expect the market to incorporate a risk premium later in summer when the U.S. crop moves through the pollination stage. Traders will usually factor in a worst-case scenario on yield causing the market to rally. Once harvest begins, the market will come under severe pressure as this risk premium evaporates.

What to do: Use the rally in summer to be aggressive on new crop sales.

Wheat

The wheat market is focused on growing conditions in the major exporting countries. The Russian winter wheat crop experienced less than 50 per cent of normal precipitation during April and timely rains will be needed. The spring wheat crop is being seeded under favourable conditions. Russian wheat production is expected to finish in the range of 71 million to 74 million tonnes, down from 81 million tonnes last year.

The Russian government announ-ced additional rail subsidies for exporting wheat, which has kept Russian wheat the most competitive on the world market. We’ve once again seen Russian wheat trade into Mexico over the past couple weeks. The Russian winter wheat harvest usually occurs in late June and July. The Ukraine and Eastern European countries including Hungary, Czech Republic, Slovakia, Poland, Romania received less than 50 per cent of normal precipitation during April. We’re anticipating a year-over-year decline in Ukraine and Eastern European wheat and barley crops. There are no major problems in France and Germany.

Manitoba, Saskatchewan and parts of Alberta have received less than 40 per cent of normal precipitation over the past 30 days. This is the first week of major seeding progress in Western Canada and timely rains are needed. In the U.S., the crop is about a month behind schedule and is vulnerable to warmer seasonal temperatures in late May and June. The 2018-19 hard red winter wheat fundamentals will be rather tight.

The world wheat carry-out for 2017-18 will finish at a record high of 272 million tonnes. This large carry-out is a cushion for the lower production in 2018-19. All major exporters will be contending with a year-over-year decline in production but it may take some time for prices to strengthen. To reiterate from our previous issue, the futures market spreads for soft red winter and hard red winter wheat are quite wide. However, Ontario cash wheat prices reflect a minimal premium between old and new crop delivery positions.

What to do: The cash market is telling farmers to sell old crop now, instead of holding into new crop delivery months. There will be significant harvest pressure in late June and July when the U.S. and Russian wheat harvests occur. For new crop sales, producers can be patient given the risks mentioned above.

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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