Soybeans: Ontario soybeans will see significant competition from U.S. soybeans for the rest of this crop year.
Corn: U.S. corn yield needs to drop below 155 bushels per acre in order to turn the market to bullish.
Wheat: Despite the poor Ontario wheat crop, 2019 is globally expected to be the second largest wheat crop on record.
Statistics Canada’s seeded acreage survey released June 26 was conducted from May 14 to June 11. When Ontario farmers were surveyed, they likely gave intended acreage rather than actual seeded area because of the cool, wet conditions.
Statistics Canada stated that there may be changes on subsequent reports. Most of Ontario received 85 per cent to 115 per cent of normal precipitation throughout June. Traders and analysts believe the resumption of normal precipitation levels allowed farmers to complete their initial seeding plans.
Of the Ontario winter wheat seeded in the fall, only 65.4 per cent will be harvested this summer, compared to the traditional 90 to 95 per cent that holds over through the winter. Fusarium is expected to be a major problem this year; therefore, soft red winter milling wheat supplies will be historically tight in Ontario for the 2019-20 crop year.
United States corn acres came in above expectations on the U.S. Department of Agriculture acreage report released June 28. U.S. soybean acres were sharply lower than the average trade estimate. The USDA plans to re-survey 14 states in July and release the updated data on the August World Agricultural Supply and Demand Estimates (WASDE) report. Uncertainty continues in regards to corn and soybean fundamentals due to the variability in seeded acreage and yields. The corn and soybean markets will be extremely sensitive to weather over the next month.
U.S. President Donald Trump and China’s President Xi Jinping restarted trade talks at the G20 meeting in Japan. Traders are skeptical that progress will be made to enhance soybean exports during the next four to six months. China continues to block imports of Canadian canola and soybeans.
The Canadian dollar appreciated by about three per cent over the past four weeks. It appears that the U.S. Federal Reserve will be inclined to lower interest rates at its July meeting. Canada will likely follow, albeit two to three months later. The narrowing of the U.S. interest rate premium over Canada has strengthened the Canadian dollar in the short term. Crude oil fundamentals appear to be tightening, which is also supportive for the Canada-U.S. exchange rate.
Ontario farmers planted an estimated 3.1 million acres of soybeans this spring, up from last year’s seeded area of three million acres. Using a traditional abandonment rate and five-year average yield, Ontario soybean production is expected to finish near four million tonnes, down from the 2018 output of 4.2 million tonnes. The 2018 yield was 51.4 bushels per acre compared to the five-year average yield was 47 bushels per acre.
From Aug. 1, 2018, through April 30, 2019, China bought 3.055 million tonnes of Canadian soybeans compared to 1.3 million tonnes last year. This demand will not be available next year, which will cause Ontario soybean prices to trend lower during the fall period.
Ontario soybeans will have serious competition in the export market with U.S. origin for the 2019-20 crop year. U.S. farmers planted 80 million acres of soybeans this spring according to the USDA. Although this was below the trade estimates which ranged from 83 to 86.5 million acres, the soybean market had a difficult time maintaining any strength. The lack of Chinese demand will result in a burdensome fundamental structure for U.S. soybeans during the 2019-20 crop year.
What to do: In the previous issue, we advised producers to finish up old crop sales and use the latest rally to meet our new crop recommendation, which is to be 30 per cent sold. Ontario soybean elevator bids have dropped 45 to 50 cents per bushel since we made this recommendation. We’re bearish on soybean prices for the first half of the upcoming crop year. Our strategy for 2019-20 is to bide time because this situation with Hauwei chief financial officer Meng Wanzhou should be worked out by the end of December. The outcome of this situation will determine the price structure for the 2019-20 crop year.
Statistics Canada estimated that Ontario farmers planted 2.2 million acres of corn, which was the same as the March survey and up marginally from the 2018 acreage. Using a five-year average yield, production and traditional abandonment rate, Ontario corn production has potential to finish near 8.7 million tonnes, which is the same as last year.
U.S. farmers planted 91.7 million acres of corn according to the USDA. This is up from the June WASDE report estimate of 89.8 million acres and up from the 2018 seeded area of 89.1 million. Pre-report estimates ranged from 84.3 to 88.8 million acres, so this number was a shock to the trade. Approximately 35 per cent of the U.S. corn crop was seeded in June and there will be yield drag due to the later seeding period. However, the market has a cushion in regards to yield potential due to the larger seeded area. The initial view of this survey was bearish.
If I run a sensitivity analysis on the supply and demand table by varying the yield, it looks like average yield needs to drop below 155 bushels per acre to change the sentiment from bearish to bullish. Keep this in mind moving forward. Traders and analysts will start releasing yield projections in late July once the forecasts become more certain for the pollination period. In any case, the market may have one more run up in late July or early August if extreme heat materializes in the U.S. Midwest. The rally would be considered a selling opportunity so don’t get overly bullish if the December corn futures move back up to the highs near $4.70.
What to do: In the previous issue, we advised farmers to finish up old crop sales and catch up to our new crop recommendation to be 20 per cent sold. Elevator bids have dropped about 30 cents a bushel for old and new crop delivery periods. I want to draw attention that old crop is still trading at a premium to new crop.
This tells farmers two things. First, sell now because you will not be rewarded for storing the crop. Second, do not store old crop into new crop positions. There is significant downside potential during the harvest period.
Ontario farmers seeded one million acres of winter wheat last fall. Back in April, Statistics Canada’s survey showed that 957,300 acres were still remaining. On June 26, there were only 656,100 acres remaining. Using a five-year average yield, Ontario winter wheat production is expected to finish near 1.5 million tonnes, down from the 2018 output of 2.1 million tonnes.
Our contacts in the country rate the Ontario wheat crop 25 per cent poor to very poor, 40 per cent fair and 35 per cent good to excellent. Conditions have improved during the past couple weeks as the precipitation eased. Approximately 60 per cent of the crop has a major fusarium problem so milling supplies are estimated to be around 600,000 tonnes.
In a normal year, one third of the crop is exported; one third is milled domestically and one third moves into domestic feed channels.
For 2019-20, domestic flour mills will have to pay a premium over export values to secure supplies; however, don’t get bullish on wheat. The northern states in the Midwest, which usually grow soft red winter wheat are also experiencing adverse conditions. These U.S. mills will likely switch over to hard red winter wheat, eliminating the need to import Canadian soft red winter. Secondly, the larger U.S. corn crop will be substituted for wheat feeding in Ontario and Quebec.
World wheat production for 2019 will be the second highest on record after 2017. The U.S. winter wheat harvest is in the early stages and record yields are expected. Keep in mind that U.S. farmers sell 50 per cent of their winter wheat crop in the summer.
Europe and Russia have experienced above-normal temperatures over the past couple weeks. Some reports have overhyped it as severe drought. Don’t be fooled. The harvest will begin in Russia and Europe in the middle of July and above-average yields are expected. Protein will be higher due to the dry and hot conditions in the final maturing phase.
Canadian spring wheat production is expected to finish near 26.5 million tonnes, up from 23.5 million tonnes last year. There is no shortage of wheat in the world.
What to do: In the previous issue, we advised Ontario farmers to finish old crop sales. Since then, the market has dropped about 30 to 40 cents per bushel. We feel there is further downside risk so don’t hold old crop supplies into new crop positions. For new crop, there is a strong seasonal tendency for the wheat market to rally from early September through mid-October.
We’ll likely advise our first sale in late October. At this time we want to avoid the Northern Hemisphere harvest pressure and farmers need to be certain about their quality before making forward sales.