Soybean market fundamentals starting to stabilize

Less U.S. China trade rhetoric and an expected lower carryout have brought some balance to market

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Above normal temperatures during September have allowed Ontario corn and soybean crops to develop under favourable conditions. Approximately 75 per cent of the Ontario corn was in the early stage of denting as of Sept. 23.

We expect the corn harvest to occur between mid-October and first week of November. Most of the soybean crop will be dropping leaves over the next couple weeks which should allow the harvest to get underway by mid October. Industry yield estimates are coming in very close to Statistics Canada’s model-based crop survey.

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Quick look

Soybeans: Old stocks in Ontario are tight making for a bump in Ontario basis.
Corn: Better Ontario corn prices likely to decline as American corn harvest is underway.
Wheat: There’s a lack of milling-grade wheat due to poor harvest volumes in 2019.

We’ve seen a slight bounce in Ontario soybean prices. A relaxed tone in U.S. China trade negotiations along with recent U.S. soybean sales to China have caused the soybean futures to strengthen. Domestic soybean crush margins have improved due to stronger product values. Corn prices are unchanged to slightly higher compared to two weeks-ago. The weaker Canadian dollar has been supportive but burdensome U.S. fundamentals and limited export movement have limited the upside. Wheat values have improved now that the Northern Hemisphere harvest is in the final stages.

High level trade negotiations between the U.S. and China are expected to occur on Oct. 10. Government sources on both sides are optimistic that some progress will be made on the agricultural front. However, Chinese demand for Canadian soybeans remains quiet. The Canadian dollar is expected to strengthen over the next couple weeks. U.S. and Canadian equity markets have been trading near historical highs lending support to the resource-based currency. Canadian crude oil exports to the U.S. are running above year-ago levels as U.S. crude oil stocks have dipped to four-year lows.

Soybeans

Statistics Canada’s model-based crop survey, which was conducted in August, had the average Ontario soybean yield at 46.3 bushels per acre, up from the July crop survey of 43.6 bushels per acre. Industry and private crop tours over the past couple weeks have estimates on either side of the recent Statistics Canada number. At this stage we feel comfortable with an Ontario soybean crop of four million tonnes, down slightly from the 2018 output of 4.2 million tonnes.

The Sept. 12 USDA WASDE report was viewed as constructive for the soybean complex. It now looks like the U.S. soybean production will finish around 99 million tonnes, down from the 2018 crop size of 123.6 million tonnes. There was no frost risk in late September and early October. Without going into details of demand, the 2019-20 U.S. soybean carryout is projected to finish at 17.4 million tonnes, down from the August estimate of 20.5 million tonnes and down from the 2018/19 ending stocks of 27.4 million tonnes. The main point is that the fundamentals are not getting more bearish but rather stabilizing.

The year-over-year decline in U.S. production along with the lower ending stocks projection is constructive for the soybean market. Argentina conditions are on the dry side and seeding will begin next month. Planting has started in Brazil’s Mato Grosso region and conditions are favourable. In the short term. The market focus is on North America production.

What to do: We mentioned in the previous issue that Ontario old crop soybean stocks are rather tight and the upcoming harvest will be two weeks behind normal. This has been friendly for local basis levels. We’ve advised producers to be 30 per cent to 40 per cent sold on their 2019 production. We feel producers can be patient to make further sales because the risk-reward scenario favours waiting. Ongoing trade negotiations and the tighter U.S. fundamental structure will limit the downside. At some point over the winter, the soybean market will incorporate a risk premium due to the uncertainty in South American production. We’re bound to get a weather market at some point.

Corn

Statistics Canada’s model-based crop survey had the average Ontario soybean yield at 162.5 bushels per acre. Industry yield estimates have ranged from 160 bushels per acre to 164 bushels per acre so the Statistics Canada number is in the middle of the range. In any case, recent yield projections are significantly better than earlier estimates that were given during the summer. Fusarium doesn’t appear to be an issue this year and the long-term forecasts look favourable. The Ontario corn crop could reach nine million tonnes which is slightly above last year’s output of 8.8 million tonnes.

Earlier in summer, Ontario corn was trading at a premium to U.S. and South American origin. Moving forward, the price structure will change amongst major exporters. The Ontario corn market will function to encourage demand through lower prices. The risk premium due to the uncertainty in Ontario production will erode as new crop becomes available. Ocean freight rates have increased which favors smaller vessels over shorter distances. This will be a minor disadvantage shipping out of the lakes during the fall period. Domestic ethanol margins remain under pressure due to lower demand. Cattle on feed inventories are at seasonal lows and will only increase later in fall.

The USDA expects the corn crop to finish near 350 million tonnes, down from the 2018 crop size of 366 million tonnes. Despite the lower production, total beginning stocks for 2019-20 will be similar to year-ago levels due to the huge carry-in from the previous crop year. Traders believe the USDA is optimistic on its demand projection. The USDA projected the 2019-20 corn carryout to come in at 56 million tonnes although private trade estimates are closer to 60 million tonnes. This is only marginally lower than the 2018-19 ending stocks of 62 million tonnes. Weather forecasts across the Midwest are optimal for crop development and the market will start to absorb harvest pressure over the next month.

What to do: Earlier in summer, we advised producers to be 30 per cent sold on their 2019 production. It’s hard to find reasons for the Ontario corn market to rally in the short term. We may see corn prices strengthen over the winter if South America has a crop problem. However, our strategy is to make regular sales throughout the crop year on seasonal rallies. Don’t expect too much upside in the corn market.

Wheat

The world is contending with burdensome wheat supplies. However, Canada is in a unique situation because milling wheat supplies will be down sharply from last year. First, Ontario winter wheat production is projected at 1.4 million tonnes, down from 2.1 million tonnes last year. We’re still getting a better handle on the quality situation but fusarium was a major problem.

Some trade estimates suggest that only 50 per cent of the crop will be milling quality. Given this environment, Ontario soft red winter wheat prices will trade at premium to world values to limit export movement. Secondly, adverse rains have deteriorated the crop quality in Western Canada.

While it is still early, we estimate that only 40 per cent of the crop will grade in the top two milling categories. Protein is below average on early spring wheat samples. This is lending support to the Ontario milling market. Basis levels for milling quality hard red spring wheat in Western Canada are strengthening because companies are struggling to fulfill commitments off the West Coast. Manitoba spring wheat is moving west, instead of east.

The wheat complex usually experiences a seasonal rally during October. U.S. winter wheat farmers tend to sell 50 per cent of their wheat crop during the summer months. European, Russian and Ukraine farmers also sell a large portion of the crop which weighs on the world market. We now sense that Northern Hemisphere harvest pressure is easing.

What to do: We’ve advised producers to be 30 per cent sold on their 2019 wheat production. Given the burdensome feed grain supply, we advised producers with feed quality wheat to sell all their wheat right after harvest. Later in fall, we will likely see western Canadian feed wheat feed trade into Ontario feed channels. Ukrainian feed wheat is trading at US$175/tonnes F.O.B. the Black Sea. Elevator bids in Saskatchewan need to be around $4/bushel to compete on the world market; therefore, western Canadian feed wheat will saturate the eastern Canadian market before moving offshore to destinations such as South Korea. We don’t see any upside for feed wheat prices. Our next sales recommendation for milling wheat will likely occur in late October or early November.

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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