The grain and oilseed markets are digesting the Aug. 10 United States Department of Agriculture (USDA) report. U.S. corn and soybean yields came in on the high side of pre-report estimates setting a negative tone for the futures market. The 2018-19 U.S. soybean carryout will be a record. However, the downside is limited due to strong soymeal demand and better than expected exports.
Despite the record corn yield, U.S. ending stocks will finish below the five-year average due to a year-over-year increase in domestic and export demand. World corn ending stocks for 2018-19 were revised upward, but remain sharply below the 10-year average. In regards to wheat, the USDA lowered European production but didn’t make any significant changes to Australia, Russia or Ukraine. Further downward revisions are expected on the September report.
The U.S. dollar index reached 52-week highs the week ending Aug.10 as the U.S. economy divorces from the rest of the world. U.S. import tariffs and retaliatory trade action has tempered growth in Southeast Asia and curbed optimism in Europe. Turkey’s lira has deteriorated more than 40 per cent this year due to adverse economic policies, high levels of foreign currency debt and rising energy costs. Other emerging markets have been painted with the same brush as Turkey.
The Chinese government increased reserves for short sellers to stem the tide of traders making money off government incompetence. This did little to support the yuan as it traded near lows of May 2017. China’s economy is strained as investment in fixed assets dropped to the lowest level in two decades. The European Union is finishing up its quantitative easing program while absorbing Brexit and Italy’s right-wing government. Fresh U.S. sanctions on Russia have caused the ruble to weaken. The U.S. Federal Reserve will to continue to increase two more times this year. Recent data from Statistics Canada suggests the Bank of Canada will increase interest rates one more time in 2018. There’s been a flight to safety for currencies with the Swiss franc, Japanese yen and U.S. dollar gaining ground while all others have lost value.
Ontario soybean prices dropped by $0.25/bushel to $0.30/bushel after the Aug. 10 USDA report. The average U.S. soybean yield was estimated at 51.6 bushels, up from the July estimate of 48.5 bushels per acre. U.S. production is now expected to finish near 125 million tonnes, which is up from the 2017 crop of 120 million tonnes. The USDA didn’t make any significant changes to its domestic crush or export projection; therefore, the 2018-19 ending stocks are expected to finish near 21 million tonnes, up from the 2017-18 carryout of 12 million tonnes.
Export demand for U.S. soybeans has potential to be larger than the USDA estimate. Don’t get bearish at these lower prices.
Ontario soybean production is expected to finish near 3.9 million tonnes, up from the 2017 crop of 3.8 million tonnes and above the five-year average output of 3.6 million tonnes. The recent rains have enhanced crop prospects during the flowering and pod setting stage. We’re not hearing of any disease or mould concerns. Yields are expected to be slightly above average.
During the fall period, we’re expecting a sharp year-over-year increase in Ontario soybean exports to China, which will enhance local basis levels. Earlier in spring we advised producers to sell 25 per cent to 30 per cent of their 2018 production for fall delivery. Our next incremental sale will likely occur in November. Chinese stocks are expected to drop to very low levels in November or early December, which will bolster the basis for Ontario soybeans.
Brazilian and Argentinean farmers are expected to increase soybean acres this fall. China cannot afford a crop problem in Brazil. If adverse conditions materialize in South America during the key pod-setting phase, then we could see Ontario prices surge next March. Remember, it only takes one stroke of a pen in China to eliminate the U.S. tariffs. We don’t’ know what goes on behind the scenes.
USDA’s World Agricultural Supply and Demand Estimates (WASDE) report was initially bearish for corn given higher U.S. yields. However, the world corn situation remains relatively tight. U.S. corn yields were raised from 174 bushels per acre to 178.4 bushels per acre. Production is now expected to finish at 370.5 million tonnes, which is very similar to last year’s output. Given the larger supplies, the USDA raised domestic feed usage and also increased its export projection. It’s important to note its export number is still slightly below 2017-18 exports. This is where many traders differ from the USDA. Given the sharp year-over-year decline in world ending stocks, most of the industry expects U.S. exports to exceed year-ago levels. This will cause the U.S. corn carryout to drop below the five-year average, which should result in the futures market moving above the five-year average.
There were no significant changes to the world numbers on the USDA report.
U.S. corn out of the Gulf has been the most competitive on the world market, which has enhanced export demand at the current levels. Despite the initial bearish reaction from the USDA report, the cash market is quite firm and the futures have basically recouped the losses after the report. There may be some harvest pressure in October, but keep in mind the U.S. farmer tends to market regular volumes of corn throughout the crop year. In November, the corn market is going to focus on South American acreage expectations. At this stage, there is potential for a year-over-year decrease in Brazil and Argentine corn acreage due to stronger soybean prices. In Ontario, the domestic demand is rather inelastic and we’re expecting a year-over-year increase in offshore movement due to the lower European crop.
Earlier in summer, we advised Ontario farmers to sell about 15 per cent of their 2018 production but stated corn could be the sleeper crop this year. The world is no longer comfortable with past stock levels. Compared to 10 years ago, one can say markets are more sensitive to changes in supply. Our next sales recommendation will likely come in early November. Cattle on feed inventories tend to make a seasonal high in December resulting in stronger domestic demand. U.S. exports also make a seasonal high in late November or early December.
Given the lower world stocks, the market cannot afford a crop problem in South America this winter, otherwise, the corn market could surge. Next spring, the corn market will function to encourage acreage through higher prices. Our third sale will occur during this spring rally. We’ll keep a small portion to sell next June depending on how the North American crop is developing. Currently, Ontario corn prices for August delivery are $4.82/bushel while elevator bids for October are around $4.72/bushel. Bids from ethanol plants are higher but also reflect an inverse between old and new crop positions. Farmers holding old crop corn should sell now and not store into new crop positions.
The Ontario winter wheat harvest is approximately 90 per cent complete. Recent rains have downgraded quality. Blackpoint, sprouting, and low test weights are common problems on recently harvested samples. We estimate that approximately 50 per cent of the soft red winter wheat crop will grade in the top two milling categories. We’ve trimmed our yield estimate for Ontario winter wheat given the recent precipitation. The 2018 winter wheat crop is now estimated at 1.9 million tonnes, down from our earlier estimate of 2.1 million tonnes and down from year-ago output of 2.2 million tonnes. Our spring wheat estimate remains at 111,000 tonnes, down from 114,000 tonnes last year.
All wheat futures markets came under pressure after the Aug. 10 USDA report. The non-commercial trader was holding a record long position in the futures and the report triggered long liquidation.
The USDA didn’t make any significant changes to the wheat numbers with the exception of Europe. Therefore, we’ll briefly discuss trade expectations relative to the USDA estimate. European wheat production was estimated at 137.5 million tonnes, down from the July estimate of 147 million tonnes and down from last year’s crop of 151.6 million tonnes. We believe there could be further downward revisions because of drought-like conditions in Germany, Poland, the UK, Denmark and in parts of France. It would not surprise the trade to see the EU wheat crop finish around 130 million tonnes.
The USDA actually increased Russian production by one million tonnes to 68 million tonnes, which was a surprise. Last year’s crop was 85 million tonnes. The industry believes that Russian production could eventually finish in the range of 62 million tonnes to 64 million tonnes so there is a large discrepancy regarding Russia. The Russian winter wheat crop received adverse rains during the last half of July, which downgraded about 30 per cent of the winter wheat crop. Ukraine production was left unchanged at 25.5 million tonnes but down from last year’s crop size of 27 million tonnes.
The USDA didn’t make any downward revisions to Australia’s crop, which was estimated at 22 million tonnes. Much of the industry now feels the crop will finish in the range of 16 to 18 million tonnes and this requires timely rains moving forward. There was no change to the U.S. or Canadian hard red spring wheat estimates.
In conclusion, there is a very strong tendency for the market to rally from early September through late October. This occurs for two reasons. The Canadian, U.S. and Russian spring wheat harvests will wrap up over the next month completing the Northern Hemisphere crop. Secondly, the U.S. farmers sell about half of their crop during the summer months. Farmers should keep in mind that the futures market factors in world supplies while the basis factors in quality specifications. Soft red winter wheat basis levels are expected to strengthen over the winter because of the lower supplies of milling quality in Ontario and the U.S. We’re planning to make our first wheat sale when the wheat market makes seasonal highs in October. The wheat market needs some breathing room to adjust to lower production estimates.