Tighter global stocks should increase Canadian soy exports

A larger Ontario corn crop is making prices competitive

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At the time of writing, Ontario farmers had mostly wrapped up the corn and soybean harvests.

Final yield reports confirm earlier production estimates. There were no major quality or disease issues and that will enhance export demand.

Farmers have finished planting winter wheat and conditions are favourable given the recent precipitation.

Ontario corn and soybean prices are slightly higher compared to late October despite the weaker futures market.

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Basis levels remain firm due to strong domestic and export demand and the weaker Canadian dollar.

Ontario winter wheat prices have declined by 20 to 30 cents per bushel.

Timely rains in Russia and the United States Southern Plains have enhanced winter wheat crop development prior to dormancy. The wheat futures incorporated a risk premium due to the uncertainty in upcoming production but this risk premium is now eroding.

The U.S. corn and soybean harvests are in the final stages.

Argentine farmers have planted about 28 per cent of the corn crop while soybean seeding is in the early stages.

Brazilian farmers have planted about 25 per cent of the soybeans while first crop corn planting is about five per cent complete.

All eyes are watching South American weather for the time being. The weather phenomenon known as La Nina (cooler temperatures in the equatorial Pacific ocean) has potential to keep southern Brazil on the drier side and hinder soybean yield prospects.

The Australian wheat and rapeseed harvests are in the early stages while the Argentine wheat harvest will move into high gear during December.

Analysts continue to trim Argentina wheat production due to drier conditions.

The Canadian dollar has been highly correlated with major stock indexes since the summer period.

Rising COVID cases in the U.S., Canada and Europe have set a negative tone for the equity markets, which has contributed to recent weakness in the Canadian dollar.

China has been a major buyer of U.S. corn and soybeans and there is no signal that this buying has come to an end. U.S. corn and soybean export sales are running sharply ahead of year-ago levels.

Quick look:

  • Soybeans: Stronger meal demand should increase Canadian soybean crush.
  • Corn: No new developments will make it harder for corn prices to rise.
  • Wheat: Ontario wheat isn’t competitive into the northern U.S., but is into other destinations.

Soybeans

Ontario soybean production is expected to reach 4.1 million tonnes, which is up from the 2019 output of 3.7 million tonnes.

Despite the year-over-year increase in production, Canadian soybean fundamentals are tightening for the 2020-21 crop year. We’re looking for an increase in the Canadian domestic crush pace largely due to stronger meal demand.

Secondly, exports will also exceed year-ago levels to non-Chinese destinations due to tighter stocks in Brazil and the U.S.

Ontario export values are in line with the world market, which has kept domestic elevator bids well supported.

Without going into detail, the Canadian soybean carryout has potential to finish near 400,000 tonnes, down from the 2019-20 ending stocks of 720,000 tonnes. Soybean stocks will be rather snug at the end of the crop year and the market will need to trade at sufficient levels next spring so we don’t see a decline in acres.

We may see further downward revisions to U.S. soybean production on subsequent USDA crop reports.

Yield reports have been somewhat disappointing in the main growing areas and the recent hurricanes have also resulted in lower harvested area.

We’ll have the final production number in January but the soybean market will be very sensitive to yield changes on upcoming U.S. Department of Agriculture’s world agricultural supply and demand estimates (WASDE). U.S. sales commitments for the 2020-21 crop year as of Oct. 22 were 46.9 million tonnes, up 27.8 million tonnes from last year. Sales commitments are now 78 per cent of the USDA projection.

It’s important to note that 26 million tonnes or 45 per cent of the export sales were to China. We’ll likely see upward revisions to U.S. exports on upcoming USDA reports.

The larger Chinese demand for U.S. soybeans has allowed Ontario soybeans to trade into other markets.

We wouldn’t be surprised to see the 2020-21 U.S. soybean carryout finish near six million tonnes, down from the USDA estimate of 7.9 million tonnes and down from the 2019- 20 ending stocks of 14.2 million tonnes.

Chinese buyers have covered their demand to about mid January. There are only 1.5 months of demand before Chinese buyers switch to Brazilian beans, which will come on the market during March.

The Brazilian states of Rio Grande do Sul and Parana are suffering from drier conditions, which may be due to the La Nina. These two states produce about 33 per cent of the Brazilian soybeans.

The Argentine soybean growing area is also struggling with drier conditions.

The next couple months will be critical. Given the lower U.S. carryout, the market cannot afford a crop problem in Argentina or Brazil.

What to do: In the previous issue, we advised producers to be 60 per cent sold on their 2020 production.

We sold 20 per cent earlier in spring; we sold 40 per cent on this recent fall rally. Our next 20 per cent sale will be based on growing conditions in South America.

If Brazil has a problem, this market will make another leg higher. Our final 20 per cent sale will be determined by how the U.S. crop fares next spring and summer. For example, excessive moisture in the Midwest during spring or drought-like conditions in summer. This is a methodical, diversified sales strategy based on all variables that will influence the Ontario soybean market.

Corn

We haven’t changed our Ontario production estimate of nine million tonnes, which is slightly higher than the 2019 output of 8.7 million tonnes.

We believe this crop is coming on the heels of tight ending stocks from the 2019-20 crop year. However, the market is currently functioning to encourage demand. Domestic prices have been moving in line with world values. At the time of writing this article, U.S. corn out of the Gulf of Mexico was trading at US$222 per tonne and Ontario out of a Great Lake port was quoted at US$195-$200 per tonne. Ontario offers are equivalent with values out of the U.S. Gulf given traditional laker and ocean freight spreads to compare f.o.b. seaport.

From a domestic standpoint, trade estimates suggest that ethanol processing is running at 85 per cent capacity and cattle-on-feed numbers will increase over the next few months. Domestic demand is secondary when supplies are burdensome during the harvest period.

The U.S. corn market has been trending higher since mid August. At the time of writing this article, the December corn futures were trading around $4 per bushel, about 20 cents per bushel off the recent highs.

The market has been factoring in a tighter fundamental structure due to lower U.S. production estimates and growing demand.

We believe the upside has been defined for the time being. We’ll need to see significant changes in either production or exports to provide incentive for another leg higher.

For the corn market, the production and export statistics are secondary for the time being. The U.S. farmer has been a reluctant seller through harvest but this will change now that we’ve seen a pullback in the futures.

Farmers generally don’t sell into a rising market; producers typically sell into a falling market with a herd mentality.

Our challenge is to sell when the U.S. farmer is not.

South American weather is not as significant with the corn as with the beans. Brazil’s first crop corn is about 26 million tonnes but the second crop corn, which will be planted in February, composes about 76 to 80 million tonnes. The trade is watching Argentine conditions where about 90 per cent of the corn region has favourable moisture for the time being.

What to do: We’ve advised Ontario farmers to be 40 per cent sold on 2020 production. This week, we’re advising Ontario producers to sell their third 20 per cent increment to bring total sales to 60 per cent. The U.S. farmer is going to sell the bulk of the crop in the back half of the crop year; therefore, we want to be 60 per cent sold in the front end of the crop year. Our next 20 per cent incremental sale will be based on Brazil’s second-crop corn development.

Our final sale will be based on U.S. and Northern Hemisphere growing conditions next spring and summer.

Wheat

The North American soft red winter wheat market is in a unique situation.

U.S. soft red winter wheat stocks have potential to be historically tight at the end of the 2020-21 crop year, so the U.S. market is functioning to ration demand.

U.S. soft red winter wheat prices need to trade above world values in an effort to curb export movement and encourage imports. The function of the Ontario soft red winter wheat market is in a totally opposite. position The Ontario domestic market will function to encourage demand by trading at a discount to world prices in an effort to enhance exports.

Ontario f.o.b. lake prices are US$230 per tonne, whereas U.S. values out of the Gulf are at US$273 per tonne.

Prices in Chicago truck arrival bids are only US$220 per tonne. We see an anomaly where Ontario wheat is too high priced to trade into northern U.S. markets but it is competitive to other destinations.

U.S. soft red values out of the Gulf are high enough to curb exports. To provide a comparison, Black Sea milling wheat was quoted at US$255 per tonne f.o.b. and French wheat was quoted at US$243 per tonne f.o.b. Rouen.

U.S. hard red winter wheat was quoted at US$273 per tonne f.o.b. the Gulf. U.S. hard red winter wheat is clearly priced above world values but we’ve seen steady export sales over the past couple weeks. Ocean freight spreads are variable and we’ve seen an increase in values out of the lakes.

Therefore, without going into detail, Ontario wheat may be a bit high.

Over the past month, the wheat complex has been focused on the Russian and U.S. winter wheat conditions.

Southern Russia has received timely rains and traders are expecting a yearover-year increase in seeded area of five per cent to 10 per cent in Russian winter wheat acreage.

The U.S. Southern Plains are also in good shape after recent precipitation.

It’s important to note that the correlation is minimal between fall precipitation and U.S. winter wheat yields.

What to do: This week, we are advising producers to sell their third 20 per cent increment of the 2020 wheat production bringing total sales to 60 per cent. The wheat market has a bearish tendency through the winter months.

The Australian harvest will move into full swing and take the steam off the market during December and January.

Keep in mind the Australian crop will be about 11 million tonnes larger than last year.

— Jerry Klassen is the manager of Canadian operations for Swiss-based grain trading house GAP SA Grains + Products.

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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