Ontario corn stocks expected to hit historic low this year

Large exports and fewer acres for 2019 continue to reduce Ontario corn stockpiles

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During the past 30 days, about 75 per cent of the Ontario cropping region has received 150 per cent to 200 per cent of normal precipitation. About 25 per cent of the crop area has received greater than 200 per cent of normal precipitation. There has been minimal seeding progress in Ontario due to extensive precipitation.

The United States corn crop was 23 per cent planted as of May 6, down from last year’s progress of 36 per cent and down from the five-year average of 46 per cent complete.

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U.S. soybean seeding progress came in at six per cent planted as of May 6, down from the year-ago progress of 14 per cent and down from the five-year average of 14 per cent complete.

The seven to 10-day forecast as of May 6 called for above normal precipitation and below normal temperatures for the U.S. Midwest and the Northern Plains.

World wheat prices remain under pressure as the markets digest the year-over-year increase in production. South American corn and soybean crops have yielded better than anticipated.

On May 5, U.S. President Donald Trump stated that the U.S. would raise tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent on May 10.

Trump also suggested that the U.S. would impose a new tariff of 25 per cent on an additional $325 billion worth of Chinese products. According to Trump, the negotiations are progressing too slow and he said the Chinese are trying to renegotiate previously agreed terms.

Corn and soybean futures fell hard on the tariff announcement but modestly recovered by the end of the trading session on May 6. China’s ability to further retaliate on agriculture products is limited. Grain traders have downplayed previous media hype that an agreement is within reach and this latest tweet appears to confirm the lack of progress. We want to draw attention to the drier conditions in Manchuria, the northerly region of the Chinese soybean and corn area. This situation warrants daily monitoring.

Quick look:

Soybeans: Ontario farmers are now planting few soybean acres.
Corn: Corn stocks in Ontario are expected to hit record low by the end of 2019.
Wheat: A third of the Ontario wheat crop is considered in poor condition.

Soybeans

Earlier in spring, we were under the impression that Ontario farmers would increase soybean acres this year. However, this is not the case.

Ontario farmers intend to plant 2.9 million acres of soybeans this year, according to Statistics Canada. Using a traditional abandonment rate and a five-year average yield of 47 bushels per acre, Ontario soybean production has potential to finish nearly 3.7 million tonnes down from the 2018 output of 4.2 million tonnes. Given the current forecast, the bulk of the Ontario soybean crop will be seeded from May 17 to May 30.

The world soybean market has a cushion to absorb adverse growing conditions in the U.S. Argentine soybeans into China are offered at a US$20/tonne discount to U.S. origin out of the Pacific Northwest; Brazilian soybeans are offered at a US$10/tonne discount to U.S. origin. The Argentine harvest was approximately 65 per cent complete as of May 5, up slightly from year-ago progress of 55 per cent.

South America will continue to dominate the world soybean and meal markets until October, which will temper offshore movement for U.S. and Canadian soybeans.

U.S. production has potential to come in at about 113 million tonnes, down 10 million tonnes from last year. If traders start to take the soybean crop estimate under 100 million tonnes, there is potential for a minor rally.

We expect the market to trade in the sideways range over the next month until the North American crop is planted.

What to do: Producers following our advice are in good shape because they were 90 per cent sold on old crop and 20 per cent to 30 per cent sold on new crop.

If you’re still holding soybeans, don’t panic at the lows.

Looking forward, South American farmers will be encouraged to seed more corn next year at the expense of soybeans. We can make the argument that the market is not getting more bearish at this time but rather stabilizing. We’re looking for a minor rally in the soybean market over the next month.

Corn

According to Statistics Canada, Ontario farmers intend to seed 2.9 million acres of corn this year, down marginally from the year-ago area of three million acres. Using a traditional abandonment rate and a five-year average yield of 160 bushels per acre, Ontario production has potential to reach 8.8 million tonnes, which would be the same as last year.

For the week ending April 28, Canadian corn exports were 1.1 million tonnes, up from 0.5 million tonnes last year. We’re looking for Ontario corn stocks to drop to historically low levels at the end of the 2018-19 crop year.

Ontario ethanol plants were showing bids from $5.30/bu. to $5.40/bu. during the first week of May. Prices have been relatively flat in Ontario since January. The Ontario market is functioning to ration demand by trading at premium to export values.

Water levels along the Mississippi and Illinois rivers were too high to load corn barges in early May. U.S. corn offers out of the Gulf of Mexico are US$10/tonne higher than Brazilian origin and US$15/tonne higher than Argentine corn. The Ontario and U.S. export pace will slow down due to stiff competition from South America. The Argentine harvest is approximately 35 per cent complete while Brazil’s second crop corn harvest is in the early stages.

About 75 per cent of the corn crop needs to be seeded by May 21 or we’ll see significant reductions in the crop size. The media is comparing this year to 1993 when U.S. corn production experienced a year-over-year decline of nearly 30 per cent due to wet weather.

While technology has improved to offset adverse conditions, the market will be sensitive moving forward. Chinese tariffs have little effect on the corn market.

Keep in mind the funds have a large short position in place and the market is prone to a short covering rally. U.S. corn exports will be down, there is no doubt about it; however, U.S. domestic demand is rather inelastic and a small change in supply can have a larger effect on price.

What to do: We’ve advised farmers to be 80 per cent sold on old crop and 20 per cent sold on new crop. Given the current conditions across the U.S. Midwest, we’ve changed our view on the market from the previous issue. We’re not expecting a run-away bull market but we may see a minor rally over the next month in North American corn prices. Weaker currencies have contributed to the Brazilian and Argentine price advantage but we’re also expecting the U.S. dollar to weaken. Our strategy is to finish selling the 2018 production and add onto the 2019 sales on the upcoming rally.

Wheat

Ontario farmers seeded one million acres of winter wheat last fall. Statistics Canada estimated that there were 957,000 acres remaining this spring. About one-third of the crop is in good condition, one third is in fair condition and remaining third is in very poor condition.

Ontario winter wheat production for 2019 is uncertain. Most of the crop was seeded during the final week of October and later seeding usually results in below average yields. Secondly, the swamp-like conditions throughout April and early May have inhibited early crop development.

The U.S. hard red winter wheat crop is in very good shape with Kansas ratings at 58 per cent good to excellent. However, the Midwest states are not faring as well. Illinois was just 38 per cent good to excellent and 20 per cent poor to very poor; Ohio was only 30 per cent good to excellent and 30 per cent poor to very poor. The year-over-year decline in U.S. and Ontario soft red winter wheat production will eventually result in stronger basis levels.

Next winter, we could see Ontario wheat prices divorce from the world wheat complex, especially for milling quality supplies.

We mentioned in the previous issue that U.S. mills will have to attract imports from Ontario during the winter of 2019-20.

In the short-term, the wheat markets are contending with the upcoming winter wheat harvests. Kansas continues to experience greenhouse conditions and the U.S. farmer is expected to be an active seller of old and new crop hard red winter wheat over the next month.

The world market is also anticipating a year-over-year increase in Canadian, European, Australian, Ukrainian and Russian wheat production.

There is a US$20/tonne inverse between old and new crop cash wheat prices in European and Black Sea ports. This inverse will erode and eventually move into a carrying charge. We may see some volatility in the futures, but cash values will trend lower moving forward.

What to do: We’ve advised producers to be 85 per cent to 90 per cent sold on their 2018 production.

Yield and quality remain uncertain for the soft red winter crop.

Europe and Russia are in good shape, but June and July are the critical months for yield development. Be patient for the time being on new crop sales.

About the author

Markets Analyst

Jerry Klassen

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

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