Ontario cropping regions received above normal precipitation over the past 30 days, enhancing crop development for corn and soybeans.
The corn crop is in the grain filling stage while pod filling is nearly complete for soybeans. The bulk of the winter wheat crop has been harvested while combines have rolled over limited acres of spring wheat.
Soybeans: There is little fresh news to show an end is in sight for Chinese tariffs on American beans continues to weight on the market.
Wheat: About half of Ontario winter wheat is expected to end up as feed, with sprouting and other quality issues.
Cash corn prices in Ontario have held value despite the weaker futures market. Remaining on-farm stocks in Ontario are snug and steady domestic demand has been supportive for the local corn market.
Soybean prices have softened since mid-August as Chinese buying interest has eased for the time being. Ontario milling wheat prices are relatively unchanged from last month because a significant portion of the 2018 crop was downgraded due to rain.
World markets continue to digest trade developments and policy changes. United States President Donald Trump announced a new trade agreement with Mexico on Aug. 27. Mexico is the largest market for U.S. corn so this was viewed as constructive for corn exports, although no deal has been officially ratified.
There is no fresh concrete news regarding Chinese tariffs on U.S. soybeans. Brazilian soybean basis levels collapsed last week after traders believed talks between China and the U.S. would progress this past weekend.
China is now viewing the U.S. as deliberately suppressing Chinese economic development and constraining growth. Certain media reports suggest the Chinese government could implement more restrictions on U.S. commercial interests operating in China.
Russian grain companies have been aggressive on wheat sales due to the threat of government intervention.
Crude oil prices are percolating higher with the onset of Iranian sanctions coming into effect on Nov. 1.
The U.S. ProFarmer crop tour estimated the average soybean yield to come in at 53 bushels per acre, up from the recent United States Department of Agriculture estimate of 51.6 bu/A. Traders now believe the USDA may have been conservative in its initial survey. U.S. soybean production estimates now range from 126 to 128 million tonnes, up from the USDA estimate of 125 million tonnes and up from the 2017 crop of 120 million tonnes.
Chicago Board of Trade soybean futures are currently trading near 10-year lows.
Soymeal values have been trending lower over the past couple weeks, which has set a negative tone for the crush market structure.
Producers should be aware that the October-December soymeal futures spread has moved from a US$3 inverse to a $2.50 carry. World soymeal stocks are not as tight as in spring and the risk premium due to lower Argentinean soymeal exports has eroded. Domestic U.S. demand has also slowed with stronger competition from other protein sources.
Chinese crush margins remain in negative territory. A few cases of African swine fever have been reported in China; limited information has surfaced about the outbreak and the outside world is trying to get a better handle on the severity of the situation. Chinese soybean purchases have slowed considerably.
We continue to project an Ontario soybean crop of 3.9 million tonnes, up from the 2017 crop of 3.8 million tonnes and above the five-year average output of 3.6 million tonnes.
What to do: We haven’t changed our marketing plan despite the recent developments. Earlier in spring, we advised producers to sell 25 per cent to 30 per cent of expected production. We will avoid selling during the harvest period.
Chinese soybean stocks are expected to tighten later in November and December, which should enhance demand for Ontario soybeans. Seasonally, domestic demand for soymeal strengthens throughout the winter.
The soybean futures market has potential to incorporate a risk premium if adverse conditions materialize during the South American growing season.
We’re watching these three major risks to determine the timing of our sales program.
Finally, it’s prudent to keep a portion of stocks on hand to capture a potential black swan rally next summer.
The ProFarmer crop tour was a non-event for the corn market. Crop scouts basically confirmed the recent USDA survey. The average yield came in at 177.3 bu/A., slightly lower than the USDA number of 178.4 bushels. Traders feel comfortable that the U.S. corn crop will finish with about 371 million tonnes, which is similar to last year’s output.
U.S. export sales have been strong over the past couple weeks. This sales pace will likely continue throughout fall and winter.
Cattle-on-feed inventories in Canada and the U.S. are currently at seasonal lows. Feedlot inventories tend to increase throughout the fall period and peak in early December.
The corn futures tend to follow a similar pattern. The market usually makes a harvest low during early September and then percolates higher throughout the fall. If adverse conditions materialize in South America, the market may incorporate a risk premium due to production uncertainty.
European feed grain prices are strong because of limited supplies. The USDA estimated 2018 European corn production at 60 million tonnes, down from last year’s crop size of 62 million tonnes; however, the trade believes there will be further downward revisions on subsequent reports.
Barley stocks are historically tight so Europe is experiencing a major feed grain deficit this year. We anticipate a sharp year-over-year increase in Ontario corn exports to Europe this fall.
The bulk of the Ontario corn harvest will occur in mid-October. Given the optimal conditions over the past month, we now forecast Ontario corn production at 8.7 million tonnes, similar to the 2017 crop size. Yields are expected to come in slightly above the five-year average. Currently, Ontario cash prices for August delivery are hovering around $4.70 per bu. while prices for November delivery are around $4.50 per bu. This tells farmers not to store old-crop corn into new crop positions.
The futures market spreads can provide a good indication of the commercial view of the market. This is considered the “smart money.”
The September-December futures spread is trading around 15 cents but notice in the deferred positions, the March-May spread is only at eight cents. This suggests that the fundamentals or available stocks will tighten between March and May of 2019. Keep in mind this is just before the main South American harvest period.
What to do: Earlier in spring, we advised farmers to sell 15 per cent of their new crop production. We’re planning to make our next sale after the harvest period just before the lakes freeze. Basis levels should strengthen as export and domestic demand increases.
As well, the focus will be turning to South American seeding intentions. We’re anticipating a year-over-year decline in Argentinean and Brazilian corn acreage, which will also be supportive for the market. This will provide a good opportunity to make our next sale.
Adverse rains have plagued the Ontario winter and spring wheat harvest. Our contacts confirm our earlier estimates that 50 per cent of the winter wheat crop will be feed quality due to sprouting and low weights. In some cases, samples have also shown black point and mildew.
The domestic market will have to ration demand away from export channels, which will be reflected in the basis. Most of the U.S. soft red winter wheat graded No.3. We expect stronger demand from northern states. The Ontario basis for soft red milling quality has remained relatively firm despite the drop in the futures markets.
Recent rains have delayed the Ontario spring wheat harvest and quality is uncertain. However, in Manitoba, the spring wheat harvest is nearly 70 per cent complete with 90 per cent of the crop grading No.1 CWRS. Protein is in the range of 14 to 16 per cent; protein premiums have eroded. Western Canadian and North Dakota farmers have been aggressive sellers through the harvest period.
The world market is currently digesting the Northern Hemisphere wheat harvest. U.S. farmers sell about 50 per cent of their crop in the summer months and the U.S. elevator system is plugged.
In Russia, the wheat harvest is about 55 per cent complete. Approximately 50 per cent of the Russian winter wheat crop may be downgraded due to adverse rains. Russian offers have become the most competitive on the world market due to the weaker ruble and harvest pressure. Therefore, U.S. wheat has taken a back seat for the time being.
In Europe, the winter wheat harvest is in the final stages and farmers were active sellers through the harvest period capturing the higher prices. We’ve seen no improvement in Australian conditions.
In conclusion, farmers in all major exporting countries, (with the exception of Australia) were aggressive sellers over the past month. Grain companies are holding large stocks and the market is functioning to encourage demand through lower prices. It usually takes a couple months for these stocks to move through the pipeline. Later in fall, we expect the wheat market to gradually climb higher as the market comes to terms with the lower production.
What to do: We’ve mentioned in previous issues that farmers should be prepared to store their wheat crop. The futures market spreads are reflecting that commercial stocks will tighten from February through April. Therefore, we’ll be more aggressive with sales in the latter half of the crop year. Currently, we’re watching for domestic policy changes in Russia and Ukraine that would limit milling quality wheat exports. All major exporters, with the exception of the U.S. are expected to have historically tight carryouts at the end of the 2018-19 crop year.