U.S.-China deal could be bad news for Ontario soybeans

To meet deal requirements, China would have to buy most of its soybeans from U.S.

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The Ontario wheat market remains firm due to tight old crop stocks and uncertainty in new crop production in Europe, Russia and Ukraine.

Quick look

Soybeans: Canadian soybean exports down versus year ago.
Corn: Available stocks of corn are tight in Ontario.
Wheat: Global factors are adding strength to the market.

Local corn prices have held value as the market functions to ration demand. Local prices remain above world values, limiting exports while attracting supplies from south of the border.

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Ontario soybean prices have softened but lagged the recent drop on the world market. The signing of the United States-China Phase One trade agreement is considered negative for Canadian soybeans longer term. China will have to buy all U.S. origin soybeans in new crop positions to achieve their agreed upon targets. Therefore, we’ve advised producers to increase their sales level in this issue on both old and new crop positions.

South American crop conditions have improved over the past couple weeks due to timely rains. We’re seeing more aggressive offers for Brazilian soybeans as the harvest is about five per cent complete, in line with the five-year average. Approximately 50 per cent of the Russian wheat crop is winter wheat. The southern district has experienced above normal temperatures with limited snow cover. The crop is vulnerable if adverse cold temperatures develop.

The Canadian dollar has deteriorated over the past couple weeks after trading near 52-week highs earlier in December.

Bank of Canada governor Stephen Poloz hinted at lowering their benchmark lending rate in the second quarter of 2020, which set a negative tone for the resource-based currency.

Crude oil prices continue to grind lower. U.S. crude oil inventories have been building. The Energy Information Administration reported that U.S. crude oil production for the week ending Jan. 10, increased to 13 million barrels per day, a record high for the U.S.

The discount of Western Canadian Select spread to the West Texas Intermediate has widened to about US$21 per barrel.

Federal fiscal policy remains negative because excessive government spending and regulation is hindering growth in the private sector according to the Fraser Institute.

Soybeans

Ontario soybean prices have dropped about 30 cents per bushel over the past two weeks. China has been on the sidelines for U.S. soybeans while exports to other destinations have increased.

Canadian soybean exports continue to sharply lag year-ago levels. Burdensome supplies in the domestic market have allowed for limited imports. Minor strength in the meal market has been supportive but the vegetable oil prices have eroded.

Adverse winter conditions in Ontario have slowed farmer selling in the short-term; however, farmers will be anxious to move stocks before spring. We don’t see this overall environment changing anytime in future. The Canadian soybean market will likely function to encourage demand and discourage acreage through lower prices as we move into the seeding timeframe.

Exports from Brazil are picking up and the main harvest is right around the corner. The details of the U.S.-China Phase One Trade Deal suggest that agriculture purchases will be based on market prices and commercial considerations. Traders are only expecting China to step up aggressively for U.S. soybeans from September through December when U.S. origin is the most competitive on the world market.

Ontario soybean exports for the remainder of the crop year will have strong competition from Brazil. For this reason, we’re somewhat negative on Ontario soybean prices moving forward.

What to do: We’ve advised producers to be 70 per cent sold on their 2019 production and 10 per cent sold on the expected 2020 crop. This week, we recommend increasing old crop sales to 80 per cent and if producers feel comfortable, increase new crop sales to 20 per cent of expected production. At $11.50 per bushel, producers have to assess the risk and reward of current price levels.

Corn

The Ontario corn market continues to ration demand due to limited available supplies.

Basis levels remain strong in Ontario and in the northern Midwest states. For the week ending Jan. 16, U.S. export sales commitments to Canada were 570,500 tonnes.

According to Agriculture and Agri-Food Canada, total imports are projected to reach two million tonnes for the 2019-20 crop year. Imports are lower than expected, which is supporting Ontario prices.

At the same time, Canadian crop year-to-date corn exports for the week ending Jan. 19 were a meager 12,500 tonnes, down from 782,000 tonnes last year. The statistics reflect that available stocks are tighter than earlier anticipated. It’s difficult to say how the crop will fare once harvest resumes in spring. Vomitoxin wasn’t a problem during 2019, so it’s safe to say there will be a fair amount of feed corn hitting the market in a couple months.

The corn futures have experienced significant volatility throughout January. The speculative funds have swung a large bat.

The market has consolidated instead of experiencing a longer-term trend, which has made it difficult to trade for the trend follower.

U.S. exports are improving, although they continue to sharply lag year-ago levels. There is a three to four-month window where U.S. values out of the Gulf of Mexico will be most competitive on the world market. The world is now focusing on the so-called “Black Swan” variable of coronavirus and this could be psychologically negative for the coarse grain complex.

In the future, we feel comfortable forecasting that Brazil and Argentina will dominate the world market later in June. Secondly, we’re factoring in a four to six per cent year-over-year increase in U.S. corn acres this spring.

What to do: We’ve advised producers to be 50 per cent sold in their 2019 production. This week, we’re recommending that producers increase their sales to 60 per cent of their 2019 production.

If you feel comfortable, we recommend starting new crop sales by forward contracting about 10 per cent of expected production.

At this stage, the Midwest is saturated with moisture. There is potential for the corn market to incorporate a risk premium similar to 2019 if adverse conditions delay seeding. This will provide farmers with a good sales opportunity for crop that will be harvested this spring.

Wheat

Ontario wheat prices have maintained a premium over world values to curb exports. The cash market is functioning to attract farmer selling in the short-term. Basis levels are very strong and the CBOT March-May futures spread is at an inverse. The market is telling farmers to sell soft red winter wheat stocks now because they won’t be rewarded for storage moving forward.

U.S. wheat export sales commitments are running 13 per cent above year-ago levels and continue to exceed expectations. It appears that the U.S. hard red winter wheat carryout will come in lower than earlier projections, which is supportive in the short term. At this stage, the U.S. winter wheat region has sufficient snow cover and conditions are favourable.

In Russia, the agriculture ministry is looking to set exports to 20 million tonnes for January through June. Russian wheat exports are down about 18 per cent from year-ago as prices have rallied to seasonal highs. Conditions haven’t improved in Russia throughout January. The southern district and the Volga District have experienced drier conditions and the crop is vulnerable to freeze damage. The eastern Ukraine has experienced similar conditions to Russia. This situation in Russia friendly for the world wheat market.

We mentioned in the previous issue that French and German production will be down this year due to lower seeded acreage. A recent strike in France has also contributed to stronger export prices in Europe in the short term.

What to do: The world market is strengthening or incorporating a risk premium due to the uncertainty in 2020-21 production. We’ve advised producers to be 70 per cent sold on their 2019 crop. We’re looking to make our next sales later in winter prior to the U.S. crop coming out of dormancy.

Seasonal rains tend to occur in Kansas during April, which sets a bearish tone for the market. We’ll be patient to sell an additional 10 per cent as the market may have more gas available if conditions deteriorate further in Russia and Europe. Our final 20 per cent sale will be made once the Ontario winter wheat crop is more certain.

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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