Six-month Canadian dollar highs weigh on crop prices

Larger expected corn and soybean crops in the United States affecting prices

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Over the past 30 days, the Ontario growing region has received above normal precipitation while temperatures have hovered two to five degrees above average.

Quick look

Soybeans: U.S. soybeans exports increasing with Chinese demand.
Corn: Aim to make targeted corn sales this winter, as large rallies are unlikely.
Wheat: Wheat harvest continues around the world, with generally good yields.

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We’re estimating the Ontario winter wheat harvest at 80 per cent complete. A large portion of the growing region received two to four inches of rain during the first couple days of August, which has downgraded approximately 20 per cent of the crop. The corn crop has finished pollinating while soybeans are in at the tail end of the pod filling stage. We have not changed our yield projections for corn and soybeans. Statistics Canada will be out on Aug. 31 with results of their first yield survey.

Compared to two weeks ago, Ontario old- and new-crop soybean prices have fallen about $0.50/bushel while corn prices are relatively unchanged; wheat prices are down $0.30/bushel to $0.50/bushel. The market is factoring above trend yields for the U.S. corn and soybean crops. The world is awash with wheat for the time being as the Northern Hemisphere winter wheat harvest moves into the final stages. Spring wheat conditions are favourable in Russia while above average wheat yields are expected in Western Canada.

The Canadian dollar reached up to six-month highs over the past couple weeks, which has weighed on Ontario grain and oilseed prices. Political trade issues have once again become the focus, not only with China but also the U.S. The U.S. Federal Reserve and the Bank of Canada have stated that their key benchmark rate will remain near historical lows for an indefinite period, which is somewhat supportive longer-term for all commodities.

China has been actively buying U.S. corn and soybeans as food prices are up 13 per cent over year-ago levels; pork prices are up a whopping 87 per cent compared to July of 2019.

Soybeans

Above normal temperatures may have hindered yield potential for the Ontario soybean crop; however, we haven’t changed our production forecast. We continue to estimate an Ontario soybean crop of 3.6 million tonnes, down marginally from the 2019 output of 3.7 million tonnes but up from the five-year average of three million tonnes. The eastern and southern regions that were on the drier side earlier in July have fared better than expected.

China has been an active buyer of U.S. soybeans over the past month because U.S. offers are more competitive than South American origin. Brazil appears to be sold out of old crop soybeans and farmers in Argentina have been on the sidelines due to the economic environment.

We always say that large exports confirm the price structure, it is not a bullish or bearish feature of the market. For example, if soybean exports are low, then the market will search for demand.

The focus of the soybean complex has been U.S. production. Yield estimates for the 2020 U.S. soybean crop range from 50.5 bushels per acre to
52 bushels per acre. Production is expected to finish in the range of 113 million tonnes to 119 million tonnes, up from the USDA’s June estimate of 112 million tonnes and up from the 2019 output of 97 million tonnes. The larger crop size has likely been factored into the market at this stage. Longer term, traders are expecting Brazilian soybean acreage to increase by four per cent to five per cent from last year.

In the short term, we’re seeing stronger demand on the world market for soybean meal. World vegetable oil values are also percolating higher due to lower palm oil production. Both of these factors are supportive for domestic crush margins.

Canadian soybean exports have slowed over the past month. Canadian crop year-to-date soybean exports to June 30 were 2.6 million tonness, down from 3.7 million tonness for the same timeframe last year.

What to do: Earlier in summer, we advised producers to sell 20 per cent of their 2020 production, which will provide movement off the combine. The soybean market tends to make a seasonal high in November and we’re planning our next sales recommendation around this time. We’ll avoid selling during harvest pressure.

Corn

The Ontario corn crop appears to be developing under favorable conditions and the harvest is expected to occur one week ahead of normal. We’re now forecasting the Ontario corn crop to reach 8.9 million tonnes, up from last year’s output of 8.6 million tonnes and up from the five-year average of 8.7 million tonnes.

This year-over-year increase in production is coming on the heels of a historically tight corn carryout in Ontario. While ending stocks for the 2019/20 crop year are rather snug, we’ve seen demand increase over the past month. At the same time, exports have increased to Europe. Crop year-to-date exports for the week ending Aug. 2 were 456,300 tonnes, down from 1.7 million tonnes last year. Ethanol producers continue to pay a small premium over elevator bids to enhance farmer selling.

The U.S. corn crop will be big but the question is how big? Yield estimates range from 179 bushels per acre to 183 bushels per acre, compared to the USDA July estimate of 178.4 bushels per acre. This would result in a crop size in the range of 382 million tonnes to 390 million tonnes compared to the USDA July figure of 381 million tonnes.

There is an old saying that big crops get bigger throughout the harvest season. Talk in the trade is that U.S. farmers haven’t sold much new crop. Therefore, there is a fair amount of corn to come on the market through the harvest period. The function of the U.S. corn market is to encourage demand through lower prices.

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. Ontario elevator bids for old crop are around $4.70/bushel while new crop bids are hovering from $4.20/bushel to $4.30/bushel. The cash market is telling farmers to sell old crop now. Don’t store into new crop positions. There will be no home runs in the corn market this year. We’re looking to make timely sales on seasonal strength in demand. U.S. cattle on feed inventories are at seasonal highs during the winter and ethanol processing will likely increase as the economy recovers from the COVID pandemic.

Wheat

To reiterate from our previous issue, we believe the wheat market is currently moving through a seasonal low. The Russian, Ukraine, European and U.S. winter wheat harvests are basically finished. Without going into detail, wheat from all major exporters were similarly priced.

Above normal temperatures have accelerated crop development for the spring wheat in both Canada and the U.S. We expect harvest to move into full swing over the next couple weeks on both sides of the border.

We haven’t changed our Ontario winter wheat production estimate, which is 2.2 million tonnes, up from 1.4 million tonnes last year and up from the five-year average of 1.9 million tonnes. The world wheat market will continue to digest harvest selling over the next month. The Canadian spring wheat crop could be a record. Wheat prices tend to make seasonal lows during August.

At the time of writing this article, the Chicago December wheat contract was trading at a $0.75/bushel premium to the Kansas contract. We’re expecting this premium to erode over the next couple months for three main reasons. During the 2019/20 crop year, soft red winter milling wheat supplies in Ontario and the U.S. were rather tight, which caused the domestic market to trade at a premium to world values.

For the 2020/21 crop year, the Ontario market will function to encourage demand by trading at equivalent values to the world market or even a slight discount. Secondly, during the 2019/20 crop year the market needed to encourage millers to substitute soft red winter wheat for hard red winter or hard red spring wheat. The substitution effect will not be evident in 2020/21. Finally, with the larger corn crop coming on the market, wheat for feed usage will be minimal.

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We’re looking for the wheat market to experience a seasonal rally later in October.

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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