Soybean stocks mean trade truce could result in little price movement

Likely further weakness in the Canadian dollar could mean export opportunities

Ontario soybean, corn and wheat yields were higher than expected on Statistics Canada’s November crop survey.

Despite the larger-than-expected production, Ontario prices are slightly higher this month for all grains and oilseeds due to stronger export demand. Ontario exports of corn, soybeans and wheat continue to exceed year-ago levels as the Canadian dollar trades near 18-month lows. There have been no significant changes to the world fundamental situation.

South American weather conditions have been favourable for the soybean and corn crops. Excessive rains have delayed the Argentine wheat harvest and downgraded the quality in certain regions. The Australian wheat harvest is in the final stages.

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The potential for slower economic growth in the U.S. along with weaker energy prices has cast a dark shadow over the grain and oilseed markets. Political and trade tensions amongst many countries (not only U.S. and China) appears to increasing rather than decreasing. The Bank of Canada’s monetary policy has changed from hawkish to a neutral. Canadian fiscal policy remains negative; therefore look for further weakness in the Canadian dollar.

Quick look:

Soybeans: Soybeans unlikely to rally even with trade improvements.
Corn: Ontario corn production grew again in 2018 over the five-year average.
Wheat: Continued dry conditions in Europe and potentially Russia could create a wheat pricing opportunity in March.

Soybeans

According to Bloomberg, a U.S. government delegation led by Deputy U.S. Trade Rep Jeffrey Gerrish and Treasury Under Secretary for International Affairs David Malpass will travel to Beijing in early January to hold trade talks with Chinese officials. Over the past two weeks, state owned companies in China have bought an estimated 24 cargoes of U.S. soybeans.

Even if China relaxes the tariffs on U.S. soybeans for non state enterprises, it’s unlikely the soybean market will rally. Prior to Christmas, Brazilian soybeans f.ob. Paranagua were US$9.66/bushel and U.S. soybeans f.o.b. the Gulf were US$9.55/bushel. Given the ocean freight advantage, Brazilian soybeans are cheaper into China compared to U.S. origin. Chinese buyers have held off on purchases over the past month because new crop Brazilian beans will be available in late January.

We now find Brazilian soybeans cheaper into China than U.S. soybeans out of the Pacific Northwest or the U.S. Gulf. There will be extreme competition moving forward. The potential for record crops in all three major exporters has the soybean market functioning to encourage demand through lower prices.

This is the double-edged sword situation for the U.S. farmer. During the first half of the crop year, U.S. soybean exports were hindered by the Chinese tariffs; during the second half, strong competition from Brazil and Argentina will result in lower prices even if China does buy U.S. origin. This was the main reason for our aggressive sales strategy.

In the December USDA report, Brazilian soybean production was estimated at 122 million tonnes, up from the November forecast of 120.5 million tonnes and up from last year’s crop size of 120.3 million tonnes. The Argentine soybean crop is approximately 75 per cent seeded. The USDA had the Argentine crop at 55.50 million tonnes, unchanged from November but up from the last year’s drought-stricken output of 37.8 million tonnes.

Ontario’s average soybean yield came in at 51.4 bushels per acre on the Statistics Canada’s November crop survey. This is up from the 2017 yield of 45.6 bushels per acre and also up from the five-year average of 46.4 bushels per acre. Despite the marginal year-over-year decrease in seeded acreage, Ontario soybean production finished at 4.2 million tonnes, up from the 2017 output of 3.8 million tonnes and up from the five-year average production of 3.5 million tonnes.

What to do: We’ve advised Ontario farmers to be 80 per cent to 90 per cent sold on their 2018 production and sell 20 per cent of their expected 2019 output. Don’t be bullish soybeans with the record large 2018-19 U.S. soybean carry-out and year-over-year increase in South American soybean production.

Corn

World corn prices are relatively unchanged from last month but Ontario corn prices are slightly higher largely due to the weaker Canadian dollar. Despite the weaker energy prices, ethanol bids are also marginally higher than last month. Canadian crop year-to-date corn exports for the week ending December 21 were 539,000 tonnes, up from 294,000 tonnes last year for the same timeframe. The bulk of this year-over-year increase is from Ontario with Western Canada remaining a net importer.

Statistics Canada estimated the average Ontario yield was 166 bushels per acre, down from 167 bushels last year but up from the five-year average of 155 bushels per acre. Ontario corn production for 2018 came in at 8.8 million tonnes, up from the 2017 output of 8.7 million tonnes and up from the five-year average of 8.5 million tonnes.

The USDA Argentine and Brazilian corn crop estimates are somewhat premature at this stage for two main reasons. In Argentina, the corn crop is only 61 per cent seeded. Adverse rains have hindered seeding progress and flooding has been a problem in some areas. Argentine corn production was estimated at 42.5 million tonnes on the latest USDA report, unchanged from last month and up from last year’s output of 32.0 million tonnes. Secondly, Brazil’s second crop corn is only seeded in February and composes about 65 per cent of the total corn crop. There’s a fair amount of time before this crop is in the bin. Brazil’s total corn production was estimated at 94.5 million tonnes, unchanged from last month and up from last year’s crop of 82.0 million tonnes

What to do: We’ve advised Ontario farmers to be 50 per cent sold on their 2018 corn production. Domestic corn demand moves through a seasonal high in late winter because this is when cattle-on-feed inventories peak. Export demand will also remain strong moving in the spring period. Usually, the corn market incorporates a risk premium in March or April due to the uncertainty in South American production. Our strategy is to wait until the South American crop is further along, before making additional sales recommendations.

Wheat

Ontario winter wheat production was estimated at 2.1 million tonnes on Statistics Canada’s November crop survey. This is down marginally from last year’s winter wheat crop of 2.2 million tonnes but up from the five-year average of 1.9 million tonnes. Ontario spring wheat production came in at 120,000 tonnes, up from 114,000 tonnes last year.

The CBOT wheat futures experienced a minor rally during the first half of December but are now at similar levels compared to late November. Northern Hemisphere winter wheat crops are in dormancy; the Australian wheat harvest is basically wrapped up and the Argentine wheat harvest is approximately 70 per cent complete. There are no major changes in world production levels from last month. January is a typically a very slow month for the wheat market.

Earlier in fall, the Russian government stated that exports should be limited to 33 million tonnes; however, they’ve now stated that 37 million tonnes are an acceptable level without causing major domestic food inflation. Additional Russian wheat exports will keep world values under pressure through February.

What to do: We’ve advised Ontario farmers to be 40 per cent sold on their 2018 production. Looking forward, the wheat market has potential to strengthen during March prior to the Russian, European and U.S. winter wheat crops coming out of dormancy. The U.S. Southern Plains has received sufficient precipitation; however, drier conditions continue to prevail in Germany, Poland, Eastern Europe and Russia. The wheat market has a high probability of incorporating a risk premium during March, especially if longer-term forecasts show prospects for below normal precipitation in Russia. This will provide a decent sales opportunity for Ontario farmers. For the time being, we advise farmers to remain dormant, just like the winter wheat.

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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