U.S.-China trade dispute continues to hold down soybean prices

Many currencies are falling around the world, with impact on ability of some countries to buy grains

Most of Ontario’s cropping region received 20 to 30 millimetres of precipitation over the past two weeks. Corn and soybeans have been developing under favourable conditions.

The winter wheat harvest is wrapped up while harvest progress for spring wheat is quite variable. Statistics Canada released its crop survey on Aug. 30 and production came in very close to our earlier estimates on all crops. The Canadian dollar has been under pressure over the past week.

Canadian gross domestic product data came in lower than expected and the Supreme Court Ruling on the Trans Canada pipeline project set a negative tone for the exchange rate. Uncertainty over NAFTA negotiations has also caused traders to discount the value of the Canadian dollar.

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Emerging market currencies have all taken a beating over the last week. Weaker currencies along with protectionist measures by all countries have altered commodity trade flows and weighed on corn, soybean and wheat futures markets. Surprisingly, ocean freight rates have been strengthening in this environment. The U.S. and China trade dispute continues to weigh on the U.S. soybean complex.

Quick look

Soybeans: A weaker Canadian dollar enhanced crush margins while curbing import potential.
Corn: If rains continue, it could make Ontario corn harvest challenging.
Wheat: The basis for milling wheat is expected to strengthen, due to a lack of milling quality wheat.

Soybeans

Statistics Canada estimated the Ontario soybean crop at 3.6 million tonnes, down from last year’s output of 3.8 million tonnes. The Ontario soybean crop is holding up fairly well despite some regions receiving excessive moisture. Precipitation after the pod filling enhances yield prospects so the recent rains are timely. Ontario canola production was estimated at 50,900 tonnes, up from 45,400 tonnes last year.

Ontario oilseed processors will favour soybeans over canola during the 2018-19 crop year. World vegetable oil prices have deteriorated due to historically large stocks; however, soymeal prices have been holding value. Argentina is the world’s largest soymeal exporter and the lower soybean production has resulted in a year-over-year decline in exportable supplies. The December soymeal futures are trading at a premium to the January contract, which is bullish for the soymeal market. A weaker Canadian dollar has also enhanced soybean crush margins in Ontario while curbing the import potential for U.S. soybeans. This stronger price environment for soymeal will keep Ontario soybean prices supported at the current levels.

The soybean market has factored in all the bearish news for the time being.

What to do: Ontario soybean prices have limited downside potential during the harvest period due to the weaker Canadian dollar and firm soymeal values. Chinese soybean stocks are expected to drop to very low levels in November and December, which will enhance demand for Canadian soybeans. Look for basis appreciation later in the fall, which will provide an opportunity to make our next sales recommendation. Canadian prices are expected to further divorce from the U.S. market. Ontario soybean bids are in the range of $10.90-bushel to $11-bushel, unchanged from two weeks earlier. Earlier in spring we advised producers to sell 30 per cent of new crop production.

Corn

Statistics Canada’s crop survey had Ontario corn production at 8.6 million tonnes, down marginally from the 2017 crop size of 8.7 million tonnes. The corn harvest may be delayed if rains continue because fields are saturated in many areas. Ontario corn prices are in the range of $4.70-bushel to $4.80-bushel for September delivery with a $0.15 premium for the October timeframe.

The corn market is factoring in harvest pressure while moving through a period of seasonal low demand. Canadian and U.S. yield potential is largely determined by this time; therefore, supplies are not growing from current levels. Minor yield adjustments on subsequent USDA reports will have limited effect on the market.

Cattle on feed inventories are currently at 12-month lows. Domestic demand is rather sluggish for the time being. Canadian and U.S. cattle on feed numbers tend to peak over the winter, which should drive the market higher later in fall. U.S. export sales have been coming in larger than expected as world stocks drop to six- year lows. It’s important to realize that U.S. corn demand is rather inelastic. A small change in supplies will have a larger effect on price. Available U.S. corn supplies will tighten in the latter half of the crop year when domestic and export demand are at seasonal highs. Chinese tariffs on U.S. soybeans have altered the market signals for South American farmers. Brazilian and Argentine farmers will increase soybean acres at the expense of corn. Look for the corn market to incorporate a risk premium in December as seeding gets underway in South America.

What to do: Earlier in spring, we advised farmers to sell 15 per cent of their new crop production. Our next sales recommendation will occur in late November or early December once South American acreage is more certain.

Wheat

Ontario winter wheat production was estimated at two million tonnes on Statistics Canada’s crop survey. This compares to the 2017 crop size of 2.2 million tonnes and down sharply from the 2016 output of 2.6 million tonnes. Ontario spring wheat production was estimated at 122,100 tonnes, up from 114,300 tonnes last year. Ontario soft red winter wheat prices are hovering around $6.00-bushel for nearby delivery; hard red winter wheat bids are averaging $6.15-bushel while hard red spring wheat is quoted at $6.08-bushel. The basis for milling quality wheat is expected to strengthen moving forward. A weaker Canadian dollar along with lower quality U.S. crop in the northern states has enhanced buying interest from south of the border. The Ontario domestic market will eventually have to ration demand through higher prices.

There’s an old saying among wheat traders; buy Chicago December wheat on Yom Kippur and sell it on U.S. Thanksgiving. There’s no reason why this seasonal tendency should not develop this year. It appears that the wheat complex is in the process of making seasonal lows. The Northern Hemisphere spring wheat harvest is in the final stages.

Russia and the Ukraine are expected to impose some type of policy to curb exports. Adverse rains during harvest have downgraded about 40 per cent of the Russian winter and spring wheat production. Higher grain prices are the largest source of food inflation in Russia and the Ukraine; the governments will not risk the potential for civil unrest. Hog and cattle producers are complaining about higher feed costs with barley prices jumping US$20-tonne since early August. The Russian ruble has weakened along with other emerging market currencies. Russian grain merchants have been aggressively selling wheat over the past month but this export pace will not continue. Russian and Ukrainian wheat is the most competitive on the world market. The potential to cap exports could cause the wheat market to jump quite sharply.

In Europe, the domestic wheat market is contending with lower production and very strong feed grain prices. Therefore, French wheat is a US$18 premium compared to U.S. soft red winter wheat out of the Gulf. Lower river water levels along with the recent rail strike, has hindered offshore movement.

In Australia, conditions have improved in Western Australia but Queensland and other regions remain dry. In Argentina, the Cordoba province is on the dryer side. A revision of the export tax structure has made the Argentine market more susceptible to currency fluctuations. The Argentine peso has also eroded to detrimental levels. The U.S. hard red winter wheat region has experienced timely rains that have enhanced seeding conditions. Traders are expecting a marginal year-over-year increase in U.S. seeded acres. Farmer selling in the U.S. has slowed.

What to do: We’ve mentioned in the past that wheat is probably the crop you want to store. We’re looking to make our first sale in late October or early November. The market needs time to adjust to changes in export policies from Russia, Ukraine and potentially Europe; at the same time, production is still vulnerable to downward revisions in Russia, Europe, Canada, Argentina and Australia.

About the author

Markets Analyst

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

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