Recent rallies create opportunities for pricing corn and soy

There will be more pressure on corn price heading into harvest

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Statistics Canada released its second yield estimates for the 2020 crop using a model-based procedure.

Winter wheat yields were lower than the previous estimate but higher than last year. Corn and soybean yields were both up from the previous estimates and above last year. Private trade and industry trade estimates are above those of Statistics Canada.

Quick look

Soybeans: Chinese demand continues after typhoons in that country hurt crops.

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Corn: Speculative funds continue to be in a long position, which could dampen demand.
Wheat: Eighty per cent of the 2020 Ontario crop should be milling quality, well up from 2019.

As of Sept. 22, most of the soybean crop had dropped leaves and harvest was in the early stages.

The bulk of the corn crop is mature with the black layer forming on about 80 per cent of the crop. The Ontario corn harvest will likely occur one week ahead of normal.

At the time of writing this article, Ontario winter wheat prices are up about 20 cents per bushel from early September; ethanol producers have increased their corn bids by nearly 40 cents per bushel and soybean prices are up nearly 80 cents per bushel.

This week, we’re advising farmers to increase their sales for corn and soybeans while we are waiting for additional upside in the Ontario wheat prices.

Chinese demand is coming in larger than anticipated for United States corn and soybeans. China’s corn and soybean crops suffered damage from three typhoons in the provinces of Heilongjiang, Jilin, Liaoning and the inner Mongolia region during late August and early September. China is also fulfilling Phase 1 of its trade commitments to buy U.S. agriculture commodities.

Wheat futures are incorporating a risk premium due to the uncertainty in production in Russia, Ukraine and Argentina. Drier conditions are a concern in the Black Sea region as farmers seed winter wheat.

September and October are typically bearish months for equity markets. The Canadian dollar has been highly correlated with the major stock indexes since the U.S. and Canadian central banks lowered their benchmark rates to near zero per cent to 0.25 per cent. The “risk off” sentiment has set a negative tone for the Canadian dollar. All major G10 currencies appear to be deteriorating against the U.S. greenback in late September.

Soybeans

Statistics Canada increased its Ontario soybean yield from 46.1 bushels per acre to 48 bushels per acre on its latest crop estimate. Production is now expected to finish near 3.7 million tonnes, unchanged from last year. Private trade and industry estimates range from 3.8 million tonnes to four million tonnes so we expect minor upward revisions on subsequent reports from Statistics Canada.

We estimate that China has bought about 32 million tonnes of U.S. soybeans, which is slightly more than 50 per cent of the U.S. Department of Agriculture projection for the 2020-21 crop year. Ideas are that China has covered its requirements through December while there is significant open demand January forward.

While China has been an active buyer, the speculative funds have also built a record long position in the soybean futures. This buying from China and the large speculators have occurred before the main U.S. soybean harvest.

The weather forecast looks favourable over the next couple weeks so we expect American farmers will be aggressive sellers during harvest. It now looks like the market has defined the upside potential in the short term. Brazilian soybean seeding is in the early stages in the southern regions. The soybean market will be very sensitive to growing conditions in South America over the winter.

What to do: We’ve advised Ontario producers to be 20 per cent sold on their 2020 production. This week, we’re advising producers to sell their second 20 per cent increment, bringing total sales to 40 per cent for the 2020 crop.

At the time of writing, the November soybean futures contract was trading at premium to the March and May soybean contracts. The market is telling the producer to sell now for immediate delivery.

We continue to look for an increase in soybean exports to non-Chinese destinations this fall. Fobbing capacity is filling up in the U.S. Gulf of Mexico and recent hurricanes have also stalled export loading. This market environment will enhance demand for Canadian soybeans during fall.

Corn

Statistics Canada increased its average yield by 1.2 bushels per acre from its previous estimate to 160.8 bushels per acre. Ontario corn production is expected to reach eight million tonnes, up from 8.6 million tonnes last year. Trade and industry estimates are slightly higher than Statistics Canada so we could see upward revisions of 200,000 to 400,000 tonnes on subsequent reports but this amount is negligible and would not influence markets.

We estimate that China has bought about 10 million tonnes of U.S. corn. Total U.S. export sales are coming in sharply higher than anticipated. U.S. ethanol production is lagging year-ago levels by approximately eight per cent, but we expect this to improve over the next month.

At the same time, cattle-on-feed inventories are above year-ago levels as the slaughter pace has not been sufficient to clean up the backlog of market-ready supplies in feedlots.

The speculative funds have covered their short positions and have a long of about 140,000 contracts (estimate as of close Sept. 18). It is important to note that at this stage, overall demand is not improving.

Over the next month, U.S. farmers are expected to harvest a record crop. We’ve seen a nice rally in corn but the upside is limited. Demand will decrease and supplies will increase moving forward, which will result in lower prices.

What to do: This week, we are advising Ontario producers to sell their second 20 per cent increment of the 2020 crop. We’re looking for Ontario export demand to improve from October through December with stronger demand from Europe.

Ontario ethanol production is expected to increase over the next month as well.

Finally, the Canadian dollar is expected to weaken. This should enhance Ontario basis levels.

Farmers in Ontario tend to increase sales during harvest but it’s relatively short-lived because of the small window. It’s prudent to increase sales given the recent rally in the futures.

Wheat

Statistics Canada decreased its average winter wheat yield projection by 1.2 bushels per acre from its earlier estimate to 82.9 bushels per acre. Production is now estimated to finish near 2.3 million tonnes, up from the 2019 output of 1.4 million tonnes.

Unlike 2019, we estimate that 80 per cent of the crop is milling quality. The domestic market has experienced limited upside despite the rally in the Chicago wheat futures over the month.

Strength in the domestic market is lagging world prices due to the larger Ontario supplies. The Ontario wheat market is functioning to encourage export demand.

We are looking for offshore movement to improve during November and December, which will drain the Ontario exportable surplus. World wheat values continue to percolate higher and Ontario wheat is competitive on the world market. The U.S. soft red winter wheat fundamentals will be historically tight for the second year in a row, therefore, we also expect steady exports to the U.S. throughout the crop year. We feel the downside in the Ontario market is limited.

Dryness in the Ukraine and Russia is a concern as the optimal seeding window narrows. European conditions are variable. France has experienced above-normal temperatures and certain regions have received below-normal precipitation.

U.S. winter wheat seeding is occurring under comfortable conditions. The Argentine crop will move through the critical head-filling stage over the next month and timely rains are needed to sustain yields.

Keep in mind the Canadian hard red spring crop was revised lower on the recent Statistics Canada report. Canadian spring wheat yields are not as good as earlier anticipated and the trade is looking for downward adjustments on the final crop report.

The world wheat market is incorporating a risk premium due to the adverse conditions affecting Northern Hemisphere winter wheat seedings. The only country that is in good shape is Australia where production will be up about 13 million tonnes from last year.

This crop will only come on the world market in January. In the short term, it looks like the world fundamentals are tightening, which should result in higher prices.

What to do: We’ve advised Ontario wheat farmers to be 20 per cent sold on the 2020 crop. We’re planning to make our next sales recommendation in late October or early November once the export demand improves.

The wheat market has a strong seasonal tendency to rally during October. This seasonal strength will be enhanced if the dryer conditions continue in Russia, Ukraine and France.

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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