Stable soybean prices could mean a lower drop in U.S. acres than expected

Chinese interest in buying Canadian soybeans remains quiet due to political tensions

Compared to two weeks ago, Ontario old crop soybean prices are up 15 to 20 cents per bushel while corn and wheat prices are unchanged. Adverse weather has caused farmer selling to come in below expectations. Therefore, basis levels are functioning to enhance farmer selling.

Argentina continues to experience favourable growing conditions; timely rains have maintained yield prospects in Brazil. Ocean freight rates are under pressure, which may be signalling softer growth in the world economy.

The Canadian dollar continues to strengthen with the March contract reaching a high of 76.32 U.S. cents on Jan. 30, up from the Jan. 2 low of 73.32 U.S. cents. Strength in the crude oil market along with robust gains in North American stock indexes has set a positive tone for the Canadian dollar. U.S Federal Reserve Chairman Jerome Powell appeared to have a neutral stance on monetary policy at their meeting on Jan. 30 which was supportive for Canadian dollar. The Bank of Canada and the U.S. Federal Reserve are not expected to increase interest rates in the first half of 2019.

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Chinese buying interest for Canadian soybeans remains quiet. The U.S. has requested extradition of Huawei CFO Meng Wanzhou and laid 23 criminal charges against the Chinese technology company. U.S. Trade Representative Robert E. Lighthizer led the U.S. delegation during two days of trade talks with the Chinese government led on their side by Vice Premier Leu He. The grain and oilseed futures markets appear to be firming as traders hope for a breakthrough in tariffs. The USDA will release its monthly WASDE report on Feb. 8 along with results of the winter wheat acreage survey.

Quick look:

Soybeans: American soybean acres aren’t expected to drop as much as originally thought.
Corn: Ontario corn carryout for 2018-19 is expected to be tight.
Wheat: With no news in January and February, the wheat market is quiet.

Soybeans

The Ontario soybean market continues to digest Chinese retaliation for the Canadian arrest of Huawei CFO Meng Wanzhou. However, Brazilian soybeans are currently trading at discount to U.S. and Ontario origin for the time being which is also stifling fresh export business. The Brazilian soybean harvest is approximately 15 per cent complete.

Usually, there is minimal harvest progress in January but this year, sup- plies are moving into export position approximately two weeks ahead of normal. Private trade estimates continue to project a Brazilian soybean crop around 117 million tonnes, down from 120 million tonnes last year. Most of the Argentinean crop is in the pod setting stage and output is still on track to reach 55 million tonnes, up from 37.8 million tonnes last year.

We’ve seen a change in the crush margin structure over the past two weeks. Earlier in winter, the soybean crush was dominated by the meal value. Argentina is the world’s largest meal exporter and the lower crop size last year had world buyers coming to the U.S. Export sales are actually ahead of last year for U.S. soymeal.

The Argentinean harvest will begin during March and we’re seeing more aggressive offers for the April forward positions. This is weighing on the meal component of the crush margin structure which is somewhat negative for soybean prices. On the flip side, world vegetable oil prices have been percolating higher and March soyoil futures are near seven-month highs.

For new crop, Ontario soybean acres are expected to be similar to year-ago levels. Earlier in fall, there were ideas that U.S. soybean acreage could experience a year-over-year decline of four to five million acres. However, soybean prices have held up relatively well in the face of Chinese tariffs. Early trade estimates have U.S. soybean acres down a marginal two million to three million acres. Using a trend yield, it appears the U.S. soy-

bean carryout has potential to reach 1.5 billion bushels in the 2019-20 crop year, which is up from the 2018-19 ending stocks of one billion bushels. This is extremely bearish for new crop prices.

What to do: In recent issues, we’ve advised Ontario soybean producers to be 80 per cent to 90 per cent sold on their 2018 production. We’ve also recommended that producers be 20 per cent sold on their expected 2019 crop.

Corn

Exports of Ontario corn have subsided over the past month due to the freeze up of the lakes system. U.S. corn out of the Gulf is most competitive on the world market. Despite the slower farmer selling in Ontario, supplies are sufficient to satisfy domestic demand so the market has remained relatively flat over the past two weeks. Canadian crop year-to-date exports for the week ending Jan. 20 were 811,800 tonnes, up from 386,400 last year. We’re expecting a rather tight Ontario corn carryout for the 2018-19 crop year. The year-over-year increase in exports along with steady domestic demand will result in a drawdown in supplies. It’s also important to remember that the crop estimate may be deceiving. High vomitoxin levels has made approximately 15 to 20 per cent of the crop unusable for feed.

Argentina corn acreage may come in below expectations because of extensive rains. Harvest will begin later in February and move into full swing in March. At this stage, the crop estimate is unchanged from our previous issue at 42.5 million tonnes, which is up from last year’s drought stricken output of 32 million tonnes. In Brazil the first crop corn is in the grain filling phase; the second Safrinha crop, which is seeded after early harvested soybeans is approximately 12 per cent planted. Early estimates have the total Brazilian crop at 90.0 million tonnes, up from 81 million tonnes last year.

For new crop, we expect similar corn acres in Ontario but U.S. acres are expected to be up two to three million over last year. Despite the year-over-year increase in U.S. corn acres, the market will be very sensitive to yields. U.S. corn demand is rather inelastic so a small change in supplies can result in a significant change in price. The U.S. corn carryout will be near the five-year average at the end of 2018-19 crop year so the market cannot afford a crop problem. It appears that North America will be heading into spring with adequate moisture.

What to do: We advised farmers to be 50 per cent sold on their 2018 production. Given the year-over- year increase in exports, the Ontario domestic market will function to ration demand causing domestic prices to trade at a premium to export values. Brazil’s second crop corn seed- ing is in the early stages and we don’t believe there is any weather premium in the corn market. We’re somewhat friendly towards corn prices head- ing into spring. The July-December corn futures spread has been trading around six cents per bushel which reflects a relatively snug fundamental structure for U.S. corn. We’ll see a summer rally if any part of the U.S. experiences adverse conditions.

Wheat

The wheat market is experiencing the winter doldrums. We mentioned in the previous issue that January and February are two months where there are no supply concerns in either the Northern or Southern Hemisphere. This can make for a dull market.

Traders have been monitoring the Russian wheat market where domestic prices have surged higher over the past month. Russian export prices f.o.b. the Black Sea are now premium to U.S. hard red winter and soft red winter prices f.o.b. the Gulf; French values f.o.b. Rouen are also a slight discount to Russian origin. Russian wheat exports are running sharply ahead of last year but we expect to see a slowdown in shipments later in spring. World buyers will have to turn to the U.S. prior to new crop Northern Hemisphere supplies coming on the market.

The U.S. Southern Plains has adequate snow cover to protect the crop from extreme temperatures. How- ever, the soft red winter crop from Missouri over to Ohio is susceptible to winter-kill. There are also ideas that the U.S. hard red winter wheat acres may be down from last year. Extensive rains delayed seeding progress in the Southern Plains preventing farmers from finishing. We’ll receive the first survey result from the USDA on Feb. 8 and this could be a market mover.

Ontario hard red spring wheat prices are up about 30 cents per bushel from two weeks ago. Canadian non-durum wheat exports are up approximately 1.4 million tonnes from last year. We’re anticipating a historically tight non-durum wheat carryout in Canada. Keep in mind Alberta and Saskatchewan have received below normal precipitation over the past 30 days.

What to do: We’ve advised producers to be 40 per cent sold on their 2018 wheat production. The wheat market usually experiences a seasonal rally prior to the U.S. hard red winter crop coming out of dormancy. The market will be watching for winter kill in the U.S. soft red winter wheat regions. Russian exports will slowdown during March which will cause world buyers to source U.S. origin. We’re planning to make our next sales recommendation in February.

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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