The grain and oilseed futures markets are digesting the trade war between Washington and Beijing. In part because of retaliation to the first round of U.S. tariffs, China will impose a 25 per cent tariff on U.S. soybeans and other agriculture products starting on July 6.
President Donald Trump gave the approval to draw up a list of tariffs for US$200 billion on Chinese products in response to this retaliation. A third round of tariffs worth an additional US$200 are threatened by the Trump administration should the Chinese retaliate to the second round of U.S. tariffs. Commodity traders are on the defensive because the fallout from tariffs will alter trade flows and distort prices.
- Soybeans: As the target for retaliatory tariffs against U.S. trade actions, soybeans have led the market downwards, despite solid demand.
- Corn: The U.S. corn crop looks to be in very good shape, with no risk premium now built into the market.
- Wheat: Russia continues to lead on price as its harvest is due to get underway in July.
Favourable crop conditions across the U.S. have contributed to the recent selloff. At this stage of the U.S. growing season, the corn and soybean markets are factoring in above trend yields. Currently, there is no risk premium in corn and soybean futures. The seven-day precipitation forecast is calling for above normal precipitation across the U.S. Midwest. The U.S. winter wheat harvests are well underway and yields are coming in slightly better than earlier anticipated. Commodity funds have been active sellers of corn, soybeans and wheat given the high crop ratings and adverse trade rhetoric.
Most of Ontario’s production area has received 60 per cent to 85 per cent of normal precipitation over the past 30 days with the northern regions receiving 40 per cent to 60 per cent of average rainfall. A couple small pockets are rather dry receiving less than 40 per cent of normal precipitation.
For the week ending June 17, the U.S. soybean crop was rated 73 per cent good to excellent which is up from the year-ago reading of 67 per cent. Given the current conditions, U.S. soybean production has potential to finish in the range of 118 to 119 million tonnes, which is similar to the year-ago output of 120 million tonnes.
The export markets are currently adjusting to the potential Chinese tariffs on U.S. soybeans. Brazilian soybeans are trading at a sharp premium over U.S. soybeans f.o.b. the Gulf. This has pressured interior U.S. values and spilt over into the Ontario market. Fresh export business from Ontario has been rather quiet over the past couple weeks.
The world is contending with record vegetable oil production. (palm,soy, canola/rape, sunflower) U.S. soyoil stocks will increase in the upcoming crop year. North American soymeal prices have also dropped sharply with South American supplies coming on the world market. Declining product values have caused the Ontario soybean crush margins to erode. Keep in mind that Ontario crushers usually take some downtime in the summer months for maintenance and upgrades.
What to do: Earlier in May, we recommended producers finish up old crop sales and sell 25 per cent to 30 per cent of new crop. Old crop prices are in the range of $11.25/bushel to $11.35/bushel. For October delivery, prices are hovering around $11.50/bushel. Elevator bids are down about $1/bushel from last month. Ontario soybean production is expected to finish at 3.5 million tonnes, slightly lower than last month’s estimate of 3.8 million tonnes. Ontario produced 3.8 million tonnes in 2017.
Despite the Chinese tariffs on U.S. soybeans, demand is growing each year. U.S. and Brazilian exports make up about 80 to 85 per cent of the world soybean trade. Brazil cannot satisfy all of Chinese demand. Secondly, U.S. soybeans will trade to other destinations albeit at a discount to the Chinese market. The critical period for the Ontario and U.S. soybean crops is in the first half of August when the crop moves through the critical pod setting stage. Currently, there is no risk premium in the market in case of adverse weather. If you missed the selling opportunity earlier, look for the market to strengthen later in July and potentially in the first half of August.
The U.S. corn crop was rated 78 per cent good to excellent as of June 17, up from year-ago ratings of 67 per cent. Since late May, the commodity funds have liquidated about 200,000 contracts of corn. The upcoming forecasts look optimal for crop development; therefore, traders are factoring in above trend yields. We may see some fine tuning on the upcoming USDA acreage report but no significant changes are expected from the March survey. U.S. production has potential to finish near 365 million tonnes, down slightly from the 2017 crop of 371 million tonnes. Harvesting of Brazil’s second crop corn is well underway in the Safrinha region. Brazilian production is estimated at 85 million tonnes, down from the 2017 crop of 98.5 million tonnes. Argentinean production will finish at 33 million tonnes, also down from last year’s crop of 41 million tonnes. Given the lower South American production, U.S. export sales have been larger than expected over the past month. The USDA is factoring in a marginal year-over-year decline in U.S. exports for the 2018-19 crop year; however, many analysts expect a year-over-year increase. This could be a surprise for the market later in fall or next spring. In the short term, the market is totally focused on U.S. production estimates and weather. Currently, market is functioning to encourage demand through lower prices.
Ontario corn production is estimated at 8.3 to 8.6 million tonnes, down from year-ago output of 8.7 million tonnes. Drier conditions in parts of Ontario have caused analysts to lower their production estimates. Despite the lower futures, old crop Ontario corn prices are quoted in the range of $4.40 to $4.65. Elevator bids are down about $0.20/bushel from earlier in June. New crop prices for October delivery range from $4.50/bushel to $4.90/bushel.
What to do: The July-December corn futures spread has actually widened as prices dropped. This is a negative signal for the market and a sign that commercial grain companies are well covered for their nearby requirements. However, in the Ontario cash market, the spread between old and new crop delivery is rather small. The cash market is telling producers to sell now, rather than hold stocks into the new crop year. In previous issues, we stated that producers may want to sell 15 per cent to 20 per cent of new crop production but don’t be overly aggressive. The critical period for the U.S. corn crop is during pollination in July. The futures market has potential to incorporate a risk premium if above average temperatures materialize and if the rains subside. Longer term, the lower world corn stocks should result in higher prices. The corn market cannot afford another crop problem in South America next winter otherwise world stocks could drop to extremely low levels.
U.S. winter wheat was 27 per cent harvested as of June 17; Kansas farmers had taken off about 23 per cent of the crop. Hard red winter wheat yields are coming in slightly better than expected and average protein will be about one per cent higher than last year. We mentioned in previous issues that U.S. farmers sell 50 per cent of the crop during the summer which keeps the wheat futures and basis levels under pressure.
Russia and the Ukraine winter wheat crops have experienced dry conditions. Russian wheat production was estimated at 68 million tonnes, down from the 2017 crop of 85 million tonnes. Ukraine production was estimated at 26 million tonnes, down from 27 million tonnes last year. We may see further downward revisions in the Ukraine crop on subsequent USDA reports. The Russian wheat harvest will move into full swing in July and farmers also sell a larger portion at harvest. Currently, Russian wheat offers f.o.b. the Black Sea are a US$40 discount to U.S. hard red winter offers out of the Gulf. This puts the market in perspective. Russia will continue to dominate the world market until the spring of 2019. France has experienced optimal conditions but southern Germany and Eastern European countries have received below normal precipitation. European production will likely finish near 149 million tonnes, down marginally from the 2017 crop of 152 million tonnes. French soft wheat on the Atlantic Coast is offered at a US$15/tonnes discount to U.S. soft red winter out of the Gulf. In the short term, the winter wheat complex is contending with burdensome supplies because of the aggressive farmer selling in the major exporting countries. Australia remains on the drier side but this will only be a concern in August and September. At this stage, analysts are not significantly decreasing their production estimates.
Canadian non-durum spring wheat has potential to come in at 28 million tonnes, up from 25 million tonnes last year. U.S. hard red spring production is expected to finish around 14.9 million tonnes, up from the 2017 crop of 10.5 million tonnes. The function of the spring wheat market is to encourage demand through lower prices.
What to do: Ontario conditions are also on the drier side but the critical window for fungicide application is approaching. At this stage, the market doesn’t factor in major quality issues. Producers should be 100 per cent sold on old crop wheat. Ontario soft red winter wheat old crop bids range from $5.80/bushel to $5.85/bushel; new crop prices are $4.85/bushel to $6/bushel. The narrow spread between old and new crop prices tells farmers to sell now and not to store wheat into the new crop year. For hard red winter wheat, old crop prices are hovering at $5.40 and new crop prices are averaging $6/bushel. If you’re still holding old crop, the market is telling farmers to sell old crop hard red winter wheat stocks now for delivery in August or September. Hard red spring wheat bids have dropped about $0.50/bushel but we’ve advised farmers to sell old crop stocks in previous issues. For new crop, we’ve mentioned in the past that wheat is probably the crop you want to store in hope of rally later in winter.