Soy price rises with Chinese demand and deteriorating U.S. crop

Ethanol, feed demand help raise corn prices in North America

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Over the past 30 days, Ontario temperatures have been one to two degrees above normal while precipitation has been quite variable. A large portion of the Ontario growing region, mainly north of Toronto, received 100 to 150 mm of precipitation. Isolated pockets south of Toronto down to Windsor have received 40 to 90 mm of rainfall.

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Soybeans: Average soybean yield expected to be higher in Ontario.

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Corn: Ontario corn supplies expected to be tight after harvest.
Wheat: Global harvest pressure is over and prices should increase through fall.

The Ontario winter wheat harvest is basically finished while the corn and soybean crops are in the final stages of development. Corn is denting in the Chatham -Kent and Middlesex counties. The corn and soybean harvests may start seven days ahead of normal as the warmer temperatures have advanced crop progress.

Ontario corn and soybean prices have rallied $0.30/bushel to $0.50/bushel since early August. The USDA WASDE report was considered bearish due to above average yields for corn and soybeans but dryer conditions in the Midwest, mainly Iowa and the “Derecho storm” earlier in August have caused yield estimates to deteriorate from earlier expectations.

The corn and soybean futures appear to be incorporating a risk premium due to the uncertainty in production. The wheat market has finished absorbing northern hemisphere harvest pressure and the seasonal lows are likely in place. Chinese demand for U.S. corn and soybean continues to exceed earlier expectations.

The September Canadian dollar reached over 76 cents U.S. in mid August while the U.S. dollar index dipped down to 14-month lows. The index funds have been actively buying corn, soybean and wheat futures due to the weaker U.S. dollar. The Canadian dollar has resumed the personality of a resource-based currency strengthening in line with crude oil, gold, metals and grains. The Bank of Canada and the U.S. Federal Reserve have stated they will keep interest rates low for an indefinite period and stronger commodity values are typically a byproduct of this environment.

Soybeans

Ontario weather conditions have been favorable for crop development over the past month. However, elevator bids are quite wide reflecting the various crop conditions in their area and also the level of farmer selling.

In previous issues, we were using a five-year average yield of 46.7 bushels per acre, but recent reports suggest the yield will be closer to 50 bushels per acre. We’re now estimating the Ontario soybean crop to finish near 3.9 million tonnes, up from our earlier estimate of 3.6 million tonnes and up from last year’s output of 3.7 million tonnes. Export demand for Ontario soybeans has improved over the past couple weeks. Ocean freight rates out of the lakes are percolating higher.

Although it appears that we’ve seen better movement for Western Canadian soybeans off the West Coast, we’re not seeing the selling pressure from Western Canada on the Ontario market. Domestic crush margins have improved due to stronger meal and oil values.

Soybean futures are approximately 35 cents per bushel higher compared to earlier in August. Lower yield estimates for the U.S. soybean crop along with steady Chinese demand has resulted in a minor rally off the summer lows. An isolated pocket in Iowa is experiencing extreme drought-like conditions; most of the state is in a moderate to severe drought according to the U.S. drought monitor. The USDA estimated the average U.S. yield at 53.3 bushels per acre; however, in mid-August, the Pro Farmer crop tour estimated the average yield to finish at 52.5 bushels per acre. We’re now hearing of trade estimates in the range of 50 bushels per acre to 52 bushels per acre.

We continue to forecast a U.S. soybean crop in the range of 113 million tonnes to 119 million tonnes, down from the USDA August estimate of 120.4 million tonnes but up from the 2019 output of 96.7 million tonnes. U.S. soybean offers out of the Gulf are more competitive than South American origin, which has caused China to step forward more aggressively for U.S. origin.

What to do: Earlier, we advised producers to be 100 per cent sold on old crop and 20 per cent sold on their 2020 production; we’re planning to make our next sale after the U.S. soybean harvest. We’re looking for the soybean market to be quite volatile over the next month as the futures digest harvest pressure while China will continue to be an active buyer. Ontario export demand should improve to non-Chinese destinations. If you’re not caught up to our recommendations, this recent rally is a good opportunity to catch up.

Corn

Ontario corn prices have experienced a minor rally for three main reasons. Ethanol demand has improved now that energy values have strengthened. Despite some setbacks, it appears the North American economy is slowly improving as states and provinces lift constraints. Secondly, domestic feed demand remains firm with feedlots backed up with market ready supplies of fed cattle.

Finally, Ontario corn stocks are expected to be rather snug late in the crop year. Export demand is starting to step forward for the fall but notice elevator bids for October and November are about $0.50/bushel below nearby values. The cash market is telling farmers not to store old crop corn into new crop positions.

U.S. corn yield potential has deteriorated over the past month due to limited rainfall and above normal temperatures. The USDA estimated the average corn yield at 181.8 bushels per acre on its August WASDE report; however, the Pro Farmer crop tour yield estimate came in at 177.5 bushels per acre. Some analysts are even skeptical that yields will reach 177.0 bushels per acre. We’re not expecting the U.S. corn crop to finish in the range of 370 million tonnes to 378 million tonnes, down from the USDA August estimate of 388 million tonnes but still up from the 2019 output of 346 million tonnes.

The main point is that the crop is not getting bigger at this stage. U.S. farmer selling has been limited late in the crop year as well, which may suggest the 2019 crop was overstated. U.S. corn out of the Gulf is more competitive than South American origin. China continues to be a major buyer of U.S. corn and ideas are that this will continue over the next three to four months. Domestic feed demand is also larger than last year because there’s an estimated 700,000 head of cattle backed up in U.S. feedlots. The second point is demand is larger than anticipated.

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. The corn market tends to make a seasonal low just prior to the U.S. corn harvest but this year, the lows may be in place. There is a fair amount of uncertainty with the U.S. crop so expect the corn market to be quite volatile over the next couple months. Our strategy is to make our next sale after the U.S. corn harvest. Later in fall, we’ll be watching South American growing conditions and overall export demand, especially from China.

Wheat

The seasonal lows in the wheat market are likely in place. We’re looking for the wheat market to percolate higher throughout the fall period. The northern hemisphere winter wheat harvests are wrapped up. U.S. farmers have combined more than 50 per cent of the spring wheat while Western Canadian harvest progress is in the early stages. Given current weather forecasts, the Canadian spring wheat harvest should be 50 per cent complete by Sept. 5.

Canadian spring wheat production will not be as large as earlier projections due to the dryer conditions in the Eastern half of the prairies and above normal temperatures. On a global scale, harvest pressure is over.

Farmers are probably hearing that world wheat stocks will be record high at the end of the 2020-21 crop year but this is somewhat misleading. We have to look at the fundamentals of the major exporters to have a clearer idea. Production from all major exporters including the U.S. will be down about four to five million tonnes from year-ago levels and there is still uncertainty with the Australian and Argentinean crops.

We’ll likely see a drawdown in ending stocks from major exporters in the 2020-21 crop year. More importantly, the U.S. hard red winter carryout is projected to finish under the five-year average while U.S. soft red winter wheat stocks will remain at historically low levels.

European stocks will also be under the five-year average. Without going into major detail, one can make the argument for a slightly bullish wheat market from the fundamental perspective of major exporters. Looking forward, the wheat markets will be extremely sensitive to U.S. and European winter wheat seeding conditions.

We mentioned in previous issues that the major importers are no longer comfortable with past stocks levels after the COVID pandemic. The last thing governments want are bare shelves of bread and flour so demand from importers will be larger than last year, including Europe. Given this market environment, we’re looking for a rally in the wheat market through September and October.

What to do: We continue to estimate that 80 per cent of the Ontario wheat crop will be milling quality. We’re looking for a year-over-year increase in soft red winter wheat exports this fall largely to the U.S. and potentially Mexico. We’ve advised producers to be 20 per cent sold on their 2020 production. Be patient to make further 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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