Rain continues to hamper North American harvest

Tariff war has implications on how U.S. farmers usually sell their crop

Ontario farmers have harvested 25 per cent of the soybeans and 15 per cent of the corn as of Oct. 7. Harvest selling pressure along with the stronger Canadian dollar has weighed on the corn and wheat markets. However, Canadian soybean prices are holding value due to strong Chinese demand.

Quick look

The seven- to 10-day precipitation forecast calls for widespread rain and potential flooding from the United States Southern Plains up through Wisconsin. Southern Ontario is expected to receive 25 to 75 millimetres of rain. This will limit harvest progress and could cause Ontario basis levels to strengthen in the short term. The United States Department of Agriculture is expected to release its next World Agricultural Supply/Demand Estimates on Oct. 11. No major changes are expected for wheat but we could see upward revisions to the ending stocks of corn and soybeans.

There is no signal that China will lift the tariffs on U.S. corn and soybeans in the short-term. In past years, U.S. farmers have sold a large portion of their soybean crop in the fall, especially in the U.S. Northern Plains. Corn was the crop to be stored with regular incremental selling throughout the crop year. For 2018-19, U.S. farmers are storing soybeans and selling corn to pay bills. U.S. corn prices are similar to year-ago levels while soybean prices are about $1.50/bushel below break-even levels. Our marketing strategy is to do the exact opposite of the U.S farmer. If China lifts the tariffs on U.S. soybeans, the price in Ontario will drop sharply.

Soybeans

What to do: Earlier in spring, we advised Ontario farmers to sell 30 per cent of their soybean crop. This week, we’re advising farmers to sell an additional 30 per cent of their soybean crop bringing total sales to 60 per cent. Ontario soybean prices for October 2018 delivery are in the range of $11.30/bushel to $11.50/bushel. The cash market is showing a minimal carrying charge for deferred delivery; in some cases, the market is inverted with elevator bids for nearby delivery reflecting a premium over deferred delivery. This tells the farmer to sell now for immediate delivery because you will not be rewarded for storing your soybeans.

This is happening for several reasons. First, Brazilian soybean stocks will drop to very low levels later in December. Therefore, the Chinese soybean market is functioning to ration demand. Prices in China are at levels where their domestic crush pace is slowing due to negative margins. The Ontario market signals hog industry is resorting to alternative sources of protein or lowering their protein requirements in the feed rations.

Secondly, Brazilian and Argentine farmers are receiving the wrong signal from the world market. South America will experience a year-over-year increase in soybean production. Brazilian soybean seeding is running ahead of schedule and Argentinian soybean planting will move into high gear in November. Finally, it looks like the election in Brazil will result in a right-leaning government. The real has been strengthening this week so Brazilian farmers are aggressively selling both old and new crop soybeans.

Corn

Ontario corn prices for nearby delivery continue to hover in the range of $4.50/bushel to $4.60/bushel. Earlier in spring we advised farmers to sell 15 per cent of their corn off the combine. The market hasn’t given us a signal to make another sales recommendation. Our strategy is to make our next sale in November or December when domestic and export demand are at seasonal highs.

U.S. farmers have been aggressive sellers of corn off the combine, which has kept the market under pressure and saturated nearby demand. Adverse weather may hinder harvest progress in the U.S. Midwest over the next week but the market doesn’t appear to be overly concerned. We don’t see the futures market incorporating a risk premium at this time because traders are anticipating an upward yield adjustment in the upcoming WASDE report. The market is functioning to encourage demand.

What to do: Looking forward, U.S. farmer selling will slow during the second half of November and December. At the same time, demand tends to increase. Cattle on feed inventories in both Canada and the U.S. make a seasonal high during the winter period. U.S. export sales will also peak during November.

Finally, given the tightening of world stocks, the corn market will be very sensitive to Argentine and Brazilian growing conditions. We expect to have the bulk of the corn crop sold before the main South American harvest.

Wheat

Our strategy for wheat is to make incremental sales throughout the crop year. Usually, the wheat market experiences a seasonal rally throughout the fall period; however, Ontario elevator bids are relatively unchanged from last month. Soft red winter wheat bids range from $5.80/bushel to $5.95/bushel for nearby delivery and $6.40 to $6.50/bushel for July 2019 delivery.

For hard red winter wheat, elevator bids are around $6.10/bushel for nearby delivery and $6.70/bushel for July 2019.

Earlier in summer, we mentioned that wheat was the one crop producers should be prepared to store. Notice you can receive about an eight per cent return for storing wheat for eight or nine months.

What to do: The market is telling farmers to sell now for deferred delivery. Therefore, we’re advising producers to sell 20 per cent of your wheat for delivery in the deferred positions and capture the carrying charge.

The seasonal rally in wheat may not be as significant this year. It appears that Australian wheat production may come in higher than anticipated. Secondly, export offers from Russia and the U.S. continue to dominate the world market. Finally, winter wheat seeding in the U.S., Russia and Europe is progressing under optimal conditions. Harvest delays in Western Canada and in Russia’s spring wheat belt are having a minimal effect on the world market.

The Ontario wheat market is unique given the fact that U.S demand has a large influence on the domestic market. The market is reflecting a large carrying charge which will erode over time. U.S. winter wheat acres are expected to experience a year-over-year increase. Therefore, it’s prudent to sell 20 per cent for deferred delivery.

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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