Weather market erodes built-in risk premium

China’s corn carryout will be significantly lower than two years ago

Grain and oilseed markets continue to absorb the trade rhetoric between Washington and Beijing. Late last week President Trump once again threatened tariffs of up to US$50 billion on Chinese products. On Tuesday June 5, media reports stated that Beijing had offered to buy US$70 billion of energy and agricultural products and some manufactured products. However, this proposal cuts short the problem of market access and the problem of intellectual property transfer. The Chinese have stated the deal is off if the U.S. implements tariffs. Grain merchants are hesitant to sell soybeans or other products to China until the environment is more stable.

Quick look:

Soybeans: Planting conditions have been better than average across Ontario and the U.S. Midwest and seeded acres are expected to increase in the U.S.

Corn: Production of corn is expected to be higher in Ontario this year than in 2018 and growing conditions so far look good in the U.S.

Wheat: U.S. hard red wheat harvest is underway and a rally is unlikely during harvest.

Timely rains across the Midwest, U.S. Northern Plains and in Western Canada have enhanced yield prospects. Earlier in May, the futures markets incorporated a risk premium due to the uncertainty in production. This risk premium has now eroded as traders become more comfortable with new crop production estimates. Most of Ontario has received 85 per cent to 115 per cent of normal precipitation although some regions have received 60 per cent to 85 per cent of normal precipitation.

Soybeans

U.S. farmers had seeded 87 per cent of the soybean crop as of June 3 which compares to 81 per cent last year and the five-year average of 75 per cent. Soybean conditions were rated 75 per cent good to excellent so there are currently no crop concerns. Interesting to note that Michigan was only 65 per cent seeded compared to 79 per cent last year. Planting in Ontario is basically wrapped up and timely rains are needed moving forward. It is still early in the growing season and the soybean futures will continue to be extremely sensitive to weather forecasts.

The Ontario soybean crop is expected to total 3.8 million tonnes, about the same as last year. At this stage, trend type yields are expected in the U.S. with total production estimated at 116 million tonnes, down slightly from the 2017 crop of 120 million tonnes. To reiterate from our previous issue, we believe there is a higher probability that the USDA will increase their soybean seeded area by nearly one million acres on their next report due out June 29. This would be bearish for the market. On the next USDA WASDE report which will be released on June 12, traders expect the USDA to increase their Brazilian crop estimate from 117 million tonnes to the range of 118 to 120 million tonnes. It’s interesting to note that China’s northern growing region has experienced drier conditions over the past couple weeks. Apparently, this area produces 35 per cent to as much as 40 per cent of the Chinese production. Should drier conditions continue in this Chinese region, it would enhance import demand in the upcoming crop year and may influence trade negotiations.

Old crop Ontario soybean prices have been hovering around $12.50/bushel while new crop prices are in the range of $12.55 to $12.70/bushel. We want to draw attention to the July November futures spread which was trading at a 10 to 15 cent/bushel inverse earlier in May but is now trading at a 19 cent/bushel carry. This is a bearish signal for the market.

What to do: Earlier in May, we recommended producers finish up old crop sales and sell 25 per cent to 30 per cent of new crop. The soybean market could experience another seasonal bounce in late July or early August if adverse weather materializes during the critical pod filling stage. This would be a selling opportunity for new crop soybeans in case you missed the earlier opportunity.

Corn

U.S. farmers had seeded 97 per cent of the corn crop as of June 3 and conditions were rated at 78 per cent good to excellent, up from 68 per cent last year. Seeding of the Ontario crop has also wrapped up. The Ontario corn crop is expected to finish in the range of 8.9 to 9.1 million tonnes, compared to the 2017 crop of 8.7 million tonnes. The market is contending with favourable growing conditions which allows some breathing room should weather turn warmer and drier. Brazilian second crop corn has experienced drier conditions over the past couple weeks and traders expect the USDA will lower their crop estimate on the next WASDE report on June 12. The year-over-year decreases in Argentina and Brazilian corn production will result in a larger than expected export program from the U.S. Traders are factoring in trend type yields for U.S. production but the 2018-19 carry-out is expected to come in near 1.7 billion bushels, which is down from the 2017-18 ending stocks of 2.2 billion bushels and similar to the five-year average of 1.6 billion bushels. The world situation is also rather snug for the 2018-19 crop year. The afundamentals are tightening in the upcoming crop year which will limit the downside in the market. More importantly, China’s carry-out for 2018-19 is projected to finish at 61 million tonnes, down from the 2017-18 ending stocks of 80 million tonnes and down from the 2016-17 level of 100 million tonnes. This situation probably helped the government lift the U.S. sorghum tariffs. China could be a major importer in the next crop year if adverse growing conditions materialize for their crop. Both the U.S. and Chinese fundamentals are such that they cannot afford a crop problem.

When the December corn contract traded around $4.25/bushel in late May, farmers on both sides of the border were very aggressive sellers. This caused the commercial to be an active seller of the futures and build up a larger short position. The futures market spreads widened which was a bearish signal at the top of the recent rally.

At the same time, the non-commercial trader has been an active seller over the past week liquidating about 80,000 contracts. Theoretically, the market needs to decrease to encourage demand when the commercials have significant ownership in the cash market.

What to do: Elevator bids for old crop corn in Ontario are in the range of $4.65 to $4.75 while new crop bids are around $4.80.

There is a minimal carry between old and new crop cash corn prices which tells farmers not to store old crop into new crop positions. The corn market has potential to incorporate a risk premium when the crop moves through pollination as adverse heat materializes. This would be an opportunity to sell about 15 per cent to 20 per cent of new crop production. At the same time, don’t be overly aggressive because the tighter fundamentals suggest further upside.

Wheat

The wheat complex has come under pressure over the past couple weeks due to favorable rains in Europe, Western Canada and the U.S. Northern Plains. The U.S. hard red winter wheat harvest is also getting underway and will be in full swing over the next couple weeks. Despite the lower production for U.S. hard red winter wheat, it is very difficult for a market to rally during the harvest period. Keep in mind the U.S. farmer sells about half of the crop during the summer months.

The Russian crop is experiencing a wide range of conditions. The Volgograd and Southern districts have experienced drier conditions which has tempered yield prospects. In Siberia, farmers are having a difficult time finishing up spring wheat seeding because of adverse rains. Traders have been lowering their estimates for Russian wheat production but we’ll only have the full scope of the situation once harvest gets underway in July. The Ukraine situation has improved, except for the southern region which is on the drier side. Russian and Ukrainian farmers will be aggressive sellers at harvest which will pressure the world market. Australia continues to contend with minimal moisture especially in Western and Southern Australia. The European crops in France and Germany are in very good condition with no problem areas.

World wheat ending stocks will be a record of 270 million tonnes which provides a cushion for the lower upcoming production. For 2018-19, we’ll see a draw down in supplies for all major exporters which will limit the downside in the market later in the 2018-19 crop year. However, during the first half of the crop year, the market has a bearish sentiment.

What to do: The cash market in Ontario is showing a different signal for soft red winter wheat. Cash prices for old crop are around $6.10/bushel while new crop prices are reflecting a five to 10 cent/bushel premium. The cash market is telling the farmer to sell old crop wheat now and not store into new crop. For Ontario hard red winter wheat, cash prices for June are around $5.70/bushel while bids for July are $6.25. Farmers holding old crop hard red winter wheat should sell now for July delivery to be rewarded for the storage. Ontario hard red spring wheat prices are around $6.25 for June and $6.65 for July. Similarly, farmers with hard red spring wheat should sell now for new crop delivery.

In conclusion, Russia and Australia are experiencing adverse conditions but given the large world ending stocks from 2017-18, it will be difficult for the market to rally over the few months. Rallies are considered selling opportunities.

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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