The top is likely in for soybean markets

Analyst predicts there is still more room for growth in corn prices

Reading Time: 6 minutes

At the beginning of December, Ontario elevator spot soybean bids were hovering around $15 per bushel, up 40 cents per bushel from mid-November and the highest levels since June 2016.

Quick look

Soybeans: Exports and domestic usage both up from 2019.
Corn: Ontario corn exports are 10 times greater than last year.
Wheat: Russian government likely to implement export quotas.

Elevator corn prices were averaging $5.70 per bushel while ethanol processor bids were around $6.20 per bushel, both up about 30 cents per bushel from two weeks earlier.

Corn prices are near 17-month highs. The corn and soybean markets are functioning to ration demand through higher prices but there is no signal this rally has come to an end. Domestic demand for corn and soybeans is rather inelastic, while export interest continues to step forward at the current levels.

Wheat prices are relatively unchanged from November with the ongoing Australian and Argentine harvests tempering the upside on the world market.

Traders are focused on South America weather. As of Dec. 1, Brazilian soybeans were 81 per cent planted, while Argentine farmers had planted about 22 per cent of the crop. Argentine corn is about 42 per cent planted, while Brazil’s first-crop corn seeding is in the final stages.

Timely rains are needed as southern Brazil and the bulk of the Argentine growing area remain on the drier side.

China is experiencing a food shortage, which has resulted in stronger demand for corn and soybeans. Three typhoons in late August and early September resulted in lower production of corn, soybeans and fresh vegetables.

Pork prices in mid-November were down about 13 per cent from November of 2019 but pork imports are running 126 per cent of year-ago levels. Food shortages are synonymous with civil unrest so this is a severe problem.

The Chinese government has assured the people that there is enough wheat but we’ve recently seen China become a buyer of United States wheat. When Time magazine has a story about world food shortage, the top is in place for all grains.

There has been a plethora of COVID vaccine news over the past couple weeks. Media reports suggest a vaccine should be available in the U.S during the first quarter of 2021.

Equity markets have been hovering near historical highs and the “risk on” sentiment has been supportive for the Canadian dollar. We believe that Canada and the U.S. are moving into a major inflationary period and this will be the only way the governments will be able to pay off the large deficits.

Soybeans

Ontario soybean prices continue to percolate higher due to the year-over-year increase in domestic and export demand.

For the week ending Nov. 22, Canadian crop year-to-date exports were 1.2 million tonnes compared to one million tonnes last year. Crop year-to-date domestic use to Nov. 22 was 576,400 tonnes, up about 50,000 tonnes from year-ago levels.

Basis levels in Ontario have remained firm despite the year-over-year increase in production in the province.

Talk in the trade is that there is a fairly strong export program in place through December. From January through March, the Ontario market will be determined by domestic demand. Basis levels are expected to ease even if the futures market continues to ratchet higher.

We’re seeing a unique situation develop in the soybean market. The most important piece of information for an analyst is “who is long” and “who is short” and “how much of each”. When one category of the trade has a position in an extreme, the market tends to turn.

On Aug. 17, The Commitment of Traders Disaggregated Report showed the commercial trader short about 275,000 contracts on the Chicago soybean futures. The commercial trade position on the report is the merchant, processor, user and producer.

On Nov. 24, the commercial was short 421,000 contracts. To put this is simple terms, imagine if a grain elevator had 200,000 tonnes capacity of storage and total stocks were 195,000 tonnes. We would say the commercial is full. This is the case in the soybean market. The merchant will have to lower offers to sell stocks.

For the week ending Nov. 19, U.S. soybean export sales were 768,000 tonnes, a marketing year low. The grain company owns a large amount of stocks and demand is waning.

Brazil’s soybean harvest begins in February and remember, merchants are always trading two to four months forward. Unless we see a significant drought in Brazil so that China continues to buy U.S. beans, the market will be vulnerable to the downside.

What to do: Ontario farmers have a large volume of soybeans to sell over the next seven months. We’ve advised producers to be 80 per cent sold on their 2020 production. We’re planning to make our final sale on the 2020 production once the upcoming crop is more certain.

New crop prices are around $13 per bushel. This week, we’re advising producers to sell their first 20 per cent increment of their 2021 production. Let’s sell 20 per cent at $13 per bushel and hope we’re wrong and sell the remaining 80 per cent at higher prices.

Corn

The Ontario corn market is experiencing seasonally strong demand. Cattle-on-feed inventories tend to peak in January.

Canadian crop year-to-date exports for the week ending Nov. 22 were 173,400 tonnes, compared to 12,500 tonnes last year. Once the lakes freeze over, export demand will slow down. Canadian exports are largely from Ontario because Western Canada has been importing U.S. corn and is in a feed grain deficit.

Ontario corn prices are expected to consolidate over the winter. Ontario corn prices remain competitive on the world market.

Ontario ethanol processing is expected to increase, which will limit any slippage in the short term.

Similar to the soybean market, the Commitment of Traders Report for the Chicago corn futures shows the funds have a historically large long position while the commercials have a historically large short position. Unlike the soybean market, U.S. corn is most competitive on the world market for the next couple months so the commercial has homes for their ownership.

Argentine corn will come on the market in March but the Brazilian exportable surplus from the second safrinha crop will only be available in late May or June.

In the U.S., domestic demand will remain at seasonal highs for the next couple months, which will limit any downside in the market.

We still think there could be another leg higher in the corn market in late January or February. Keep in mind the U.S. Department of Agriculture plans to release its final production number Jan. 12 and this could be a shock to the trade. There is a wide variation on crop production estimates.

What to do: We’ve advised Ontario farmers to be 60 per cent sold on their 2020 production. The corn market tends to incorporate a risk premium when Brazil’s safrinha corn crop moves through pollination later in May. The corn market will also function to encourage acreage this spring in the Northern Hemisphere.

These two factors are expected to result in a seasonal rally during the spring period. We’re going to be patient to make our next sale. The May-July futures spread has been trading near even. This tells us that commercials (the smart money) expect available stocks to tighten at this time. Listen to the market.

Wheat

There is no home run in the wheat market this year. The strategy is to make timely sales during seasonal rallies in the market.

In my previous article, we stated that the Northern Hemisphere winter wheat crop was in the dormancy stage and farmers should also be on the sidelines. There are four main variables that we are monitoring to make our next sales recommendation.

In the short term, the world market is digesting the Australian and Argentinean harvest pressure. At the same time, U.S. and Canadian wheat exports are running ahead of year-ago levels. There is no shortage of wheat in the short term. We tend to avoid selling during January and February for this reason.

Later in April, the Northern Hemisphere wheat crop will come out of dormancy. At this stage, Russia and the U.S. winter wheat regions are on the drier side and if this trend in weather continues, the market will incorporate a risk premium.

The USDA will release its winter wheat acreage on Jan. 12 but U.S. winter wheat acres are expected to be similar to year-ago levels. Traders estimate that Russian farmers seeded another 2.5 million acres of winter wheat this fall. European winter wheat acres are expected to be marginally higher than last year.

As well, Russia is the world’s largest wheat exporter. It appears that the Russian government will implement export quotas in February for the remainder of the 2020-21 crop year.

Each company’s export quota will be based on market share in the first half of the crop year. This has encouraged companies to be more aggressive on sales in the short term to increase market share. This may be viewed as somewhat friendly for wheat prices February forward.

Finally, U.S. and Canadian spring wheat acreage will be down sharply for the 2021 growing season. Farmers in Canada will increase canola, barley and pea acreage. U.S. farmers in North Dakota and Minnesota will increase corn and soybean acreage at the expense of spring wheat.

What to do: We’ve advised Ontario farmers to be 60 per cent sold on their 2020 wheat production. We’re planning to make our next sale when the Northern Hemisphere wheat comes out of dormancy. The wheat market will be sensitive to growing conditions at this time and we usually see a seasonal rally.

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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