Strong yields and prices make for good Ontario harvest

Global buyers look to build larger ending stocks

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At the time of writing this article, Ontario corn and soybean harvests were in the final stages. Most of the growing region had received 60 to 80 per cent of normal precipitation from Sept. 15 through Oct. 15, providing optimal harvest conditions.

Quick look

Soybeans: Ontario prices increasing despite high yield harvest.
Corn: Ontario corn exports are expected to increase over the rest of the year.

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Wheat: Wheat market is expected to be volatile over the next few months.

Certain pockets in Ontario actually received less than 60 per cent of normal precipitation during this timeframe.

Yield reports have come in better than anticipated and we’ve increased our Ontario production estimates for corn and soybeans.

Compared to our previous issue, Ontario soybean prices have jumped about 40 cents per bushel while elevator corn bids are up nearly 30 cents per bushel. Corn and soybean futures on the Chicago Board of Trade continue to percolate higher because the fundamentals are tighter than earlier anticipated. The United States Department of Agriculture lowered the 2020-21 ending stocks projections on the October World Agricultural Supply and Demand Estimates (WASDE) report.

Ontario elevator bids for winter wheat are up 50 cents per bushel since early October. U.S. soft red winter wheat ending stocks for 2020-21 have potential to be historically tight. Ukraine and certain regions of France received timely rains during October to aid in winter wheat germination. Russia, the world’s largest wheat exporter, remains dry and seeded acreage may be lower than earlier projections.

The 2020-21 crop year has started the year with a counter seasonal price rally for corn and soybeans through the harvest period.

Winter wheat prices typically make seasonal highs in early November. While wheat prices have strengthened more than anticipated, the rally isn’t unexpected.

We’ve mentioned in previous issues that the world is no longer comfortable with past stock levels of grains and oilseeds. This past spring, we saw how quickly shelves can become bare.

In addition to the tighter fundamentals, we believe the grain and oilseed markets have incorporated a minor risk premium due to the rising COVID cases in Canada, the U.S., Europe and other parts of the world.

Soybeans

We’re projecting Ontario soybean production to finish near 4.1 million tonnes, which is on the high side of earlier estimates, which ranged from 3.8 to 4.1 million tonnes.

Despite the larger production, domestic prices are strengthening in line with the world market. Local crush margins have improved largely due to strength in soymeal values.

Export offers out of the Great Lakes are in line with world values and we’re anticipating a year-over-year increase in offshore movement during the first half of the crop year. Ontario soybean prices are similar to values just south of the border, which has hindered imports.

U.S. soybean production is expected to finish near 116.1 million tonnes, up from last year’s crop size of 96.7 million tonnes.

Secondly, U.S. soybean exports for the 2020-21 crop year are projected to reach 60 million tonnes, up from 46 million tonnes last year. U.S. exports are front-end heavy. The bulk of the offshore movement occurs in the first half of the crop year prior to South American beans coming on the market.

The USDA has U.S. soybean carryout at 7.9 million tonnes, down from the 2019-20 ending stocks of 14.2 million tonnes.

Brazil and Argentina continue to experience below-normal precipitation but at this stage, the USDA and the trade are projecting a year-over-year increase in South American soybean production. The soybean market has incorporated a risk premium due to the uncertainty in South American production.

Producers need to be aware that once the South American crop looks more certain, this risk premium will erode. It’s important to realize that U.S. farmers have held back on sales during the harvest period but eventually, they will also be aggressive sellers.

What to do: This week, we’re advising producers to sell their third 20 per cent increment bringing total sales to 60 per cent. We want to be selling into this strength. Keep in mind that importers are always working two to three months ahead of the farmer. Once we get into January, the market focus will be on Brazil and Argentinean beans. We also want to be selling when the U.S. farmer isn’t because we know there is a big crop south of the border. The January soybean futures are trading at a 13 cent premium to the March contract. This inverse in the market tells the farmer to sell now for immediate delivery. Listen to the market.

Corn

The Ontario corn crop is estimated to finish near nine million tonnes, up from the Statistics Canada estimate of 8.8 million tonnes and up from the 2019 output of 8.7 million tonnes. There are three main factors underpinning domestic corn prices.

First, cattle on feed inventories are increasing and will make seasonal highs over the winter. Ethanol processing capacity is running about 85 per cent of normal, which is a minor improvement from last month.

Finally, we’re looking for a sharp year-over-year increase in offshore exports over the next couple months. Keep in mind export movement will be curtailed once the lakes freeze over.

The USDA lowered its harvested acreage and yield projection on its October report.

U.S. production is now expected to finish near 374 million tonnes, down from earlier estimates around 378 million tonnes but up from the 2019 output of 346 million tonnes. We’re anticipating further downward yield revisions given recent harvest reports. While production is coming in lower than anticipated, export demand has been exceeding earlier projections. U.S. corn export commitments for the week ending Oct. 8 were 26.5 million tonnes, up 156 per cent from year-ago levels. China has been the major destination.

Corn futures on the Dalian Commodity Exchange for January delivery reached $385.14 per tonne on Oct. 14, the highest on record. China’s corn crop suffered damage from three typhoons during August in the provinces of Heilongjiang, Jilin, Liaoning and the Inner Mongolia region. Lower Chinese production along with the drawdown in state reserves has contributed to the higher prices.

U.S. ethanol production is also improving and running about four per cent below year-ago levels. U.S. domestic feed demand also makes a seasonal high over the winter period. Interior basis levels remain strong because the U.S. farmer has largely been on the sidelines during harvest.

As of Oct. 18, Brazil’s full season corn was about 45 per cent planted. This represents about 25 per cent of Brazil’s corn crop. The remaining 75 per cent of production is the Safrinha second crop corn seeded after January.

Argentine corn planting is about 25 per cent complete. The corn market is sensitive to South American weather but it’s not as critical as it is for the bean crop at this time.

What to do: We’ve advised Ontario producers to be 40 per cent sold on their 2020 production.

At the time of writing this article, the December-to-March corn futures spread was trading at about five cents per bushel but the March-to-May spread was at even money.

This is a signal that farmers will probably want to make their next sale during the winter period. Catch up to our recommendation if you haven’t done so but we’re inclined to be patient on further sales at this time. The corn market will be sensitive to Brazilian weather during February through May.

Wheat

Ontario winter wheat production is estimated at 2.3 million tonnes, up from 1.4 million tonnes last year.

Domestic prices have been ratcheting higher over the past couple weeks although the market continues to encourage exports by trading at a discount to U.S. and world values.

The 2020-21 U.S. soft red winter wheat carryout is expected to be historically tight; therefore, the U.S. soft red winter market is functioning to ration demand. At the time of writing this article, December Chicago wheat futures had rallied US$1.40 per bushel off the August lows, but Ontario prices are only up C$1 per bushel from early August. Usually, we see a certain amount of Ontario soft red winter trade into feed channels but the wheat market is holding a significant premium to corn. Ontario winter wheat seeding is completed and we’re anticipating a minor year-over-year increase in acreage.

The U.S. hard red winter situation is rather unique. Approximately 50 per cent of the demand is for domestic use and the 2020-21 carryout is projected to finish sharply below the five-year average. Therefore, the domestic market is functioning to ration demand in an effort to curb exports. Currently, sales commitments are running above year-ago levels so the market has some work to do. Kansas is abnormally dry while Oklahoma is in a moderate drought.

Russian wheat production for 2020 has potential to reach 85 million tonnes, up from the 2019 output of 74 million tonnes.

Despite the near record production, the market is focused on winter wheat seeding conditions. A larger portion of the southern Russian winter wheat region has received less than 40 per cent of normal precipitation over the past 30 days.

The Ukraine received timely rains earlier in October but conditions remain on the drier side. It appears that conditions have improved in France and Germany over the past couple weeks.

What to do: We’ve advised producers to be 40 per cent sold on their 2020 production. The wheat market will continue to be sensitive to weather and precipitation in the U.S., Russia and parts of Europe.

We expect to see a volatile market over the next few months. We’re planning to make our next sale before the main Australian harvest, which is expected to reach more than 28 million tonnes, up from the 2019 output of 15 million tonnes. This will cap the upside in the market.

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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