U.S. crop fundamentals change as harvest arrives

A reduction in supply as of early September has improved crop prices

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Above normal temperatures over the past month have accelerated development for corn and soybeans. We estimate that 60 per cent of the Ontario soybean crop was dropping leaves and 30 per cent of the corn was mature as of Oct. 7.

The seven- to 10-day forecast looks favourable, which should allow the corn and soybean harvests to get underway by mid-October. There is no major frost in the forecast until the last week of October.

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Quick look

Soybeans: Ontario soybean demand remains sluggish, with competition from the United States.
Corn: Ontario elevator bids down recently attempting to encourage demand.
Wheat: The feed wheat market remains under pressure due to large feed wheat amounts in Western Canada.

The United States Department of Agriculture Sept. 1 stocks report was considered bullish for both corn and soybean futures because supplies were sharply lower than pre-report expectations. Active Chinese buying of U.S. soybeans has also been friendly for the overall soybean complex. Ontario soybean prices are up approximately 30 cents per bushel from Sept. 23.

Elevator bids for corn are slightly softer while ethanol processor bids are up about 20 cents per bushel since mid-September. According to the USDA, 15 per cent of the corn and 14 per cent of the soybean crops were harvested as of Oct. 6.

Outside influences are also supportive for corn and soybean prices. Traders are hopeful the resumption of U.S.-Chinese trade talk in early October will produce positive results.

Below normal temperatures are in the forecast for most of the U.S. corn belt and the markets could incorporate a risk premium due to the uncertainty in production.

Argentina is experiencing drier conditions as seeding moves into the early stages. Brazilian conditions are quite variable with southern Brazil experiencing extensive moisture while central and northern Brazil are on the drier side.

Soybeans

Ontario old crop soybean stocks are tight and the upcoming harvest will occur about two weeks behind normal. Therefore, local basis levels have improved as the market functions to attract farmer selling.

We continue to forecast a crop size of four million tonnes, down from 4.2 million tonnes last year. It’s important to realize that export demand for Ontario soybeans is sluggish with strong competition from the U.S. Gulf. Secondly, we expect western Canadian soybeans to trade into Ontario throughout the fall and winter.

The USDA estimated Sept. 1 stocks at 24.8 million tonnes, which was below the average trade estimate of 26.7 million tonnes. This stocks number now becomes the carryout for the 2018-19 crop year. The USDA is expected to release its October supply and demand report on Oct. 10 but we’re not expecting major changes to their supply and demand table. However, this lower starting point puts more emphasis on the upcoming crop.

There isn’t as much of a cushion as we earlier expected. Traders will focus on weather developments over the next couple weeks and we expect the soybean market will incorporate a weather risk premium.

The USDA was forecasting a soybean crop of 99 million tonnes, down from last year’s crop size of 123.7 million tonnes. If adverse weather shaves another three to four million tonnes off production, the 2019-20 carryout will come in near the five-year average. All of sudden, this soybean market isn’t as bearish as we earlier anticipated.

What to do: It’s a bit early to discuss South America but the weather warrants monitoring. There is always a tendency for traders to become complacent. After holding a bearish view on the soybean market over the past couple years, the tide eventually turns and the market is considered rather neutral rather than bearish. We’ve advised producers to be 30 per cent to 40 per cent sold on their 2019 production and we’ll be patient for further weather developments before making additional sales recommendations.

Corn

In my previous report, we mentioned that the Ontario market will function to encourage demand through lower prices as harvest approaches. Average elevator bids are down about 40 cents per bushel since mid-September, while ethanol processor bids are up about 20 cents per bushel. Ontario old crop corn stocks are snug and ethanol margins have improved; therefore this isn’t surprising but the elevators sourcing for domestic feed or export markets are facing lower prices.

Our crop contacts continue to suggest a crop size of nine million tonnes, up from the 2018 crop of 8.8 million tonnes. The crop is relatively clean and fusarium isn’t expected to be a major problem this year.

The Sept. 1 USDA corn stocks estimate was 53.8 million tonnes, down from the average pre-report estimate of 61.7 million tonnes. Similar to the soybean situation, this stocks number now becomes the carryout for the 2018-19 crop year and the beginning stocks for 2019-20. There are still many uncertainties for the 2019 U.S. production. Traders expect the USDA to lower its harvested acreage on upcoming reports.

Secondly, a potential frost could cut the average yield estimate by three to six bushels per acre. Even if the previous supply and demand projections materialize and we have a perfect harvest, the carryout for the 2019-20 crop year will likely finish near 46 million tonnes, which is similar to the five-year average.

The corn market may experience harvest pressure but the fundamentals are not bearish moving forward. A freeze in the U.S. cornbelt over the next couple weeks could result in a minor rally. Secondly, the market will be more sensitive to South American growing conditions. Currently, the Argentine corn region is on the drier side and warrants close monitoring.

What to do: In conclusion, the U.S. fundamentals have changed significantly. Lower than expected supplies on Sept. 1, 2019, have made the market very sensitive to 2019 production. The potential for frost over the next two weeks along with drier conditions in Argentina have caused us to have a slightly bullish outlook on the market. In previous issues, we advised producers to be 30 per cent sold on their 2019 production. The upcoming risks favour waiting to make additional sales.

Wheat

Ontario and world wheat prices are relatively unchanged from mid-September. The only exception is hard red spring wheat prices in Western Canada, where adverse weather has delayed harvest progress.

Trade estimates suggest that only 30 per cent of the hard red spring wheat will grade in the top two milling categories. About 70 per cent will grade No.3 or lower and traders project about 10 million tonnes of feed wheat will be available in Western Canada. Total Canadian domestic demand for feed wheat is about four million tonnes, so the feed wheat market will remain under pressure. We expect western Canadian feed wheat to readily trade into Eastern Canada throughout the 2019-20 crop year.

We’ve adopted Statistics Canada crop estimate of 1.4 million tonnes for Ontario winter wheat. This is down from last year’s output of 2.1 million tonnes. The USDA estimated U.S. soft red winter wheat production at 6.5 million tonnes, down from the 2018 output of 7.8 million tonnes. We’ve mentioned in previous issues that the Canadian and U.S. soft red winter wheat market will divorce from the world wheat complex.

Canadian and U.S. soft red winter wheat stocks are expected to drop to historically low levels while the 2019-20 world wheat stocks could reach a historical high. The Ontario milling wheat market for soft red winter will function to ration demand through higher prices. Given the isolation of the Ontario market, local soft red prices have potential to trade at a premium to hard red spring and hard red winter values.

What to do: In previous issues, we mentioned that producers should sell 100 per cent of their feed wheat stocks. The current situation reinforces this recommendation. We advised farmers with milling quality to be 30 per cent sold on their 2019 production.

The wheat complex usually experiences a seasonal rally during October. We have a bullish corn situation developing and this will also spillover into the wheat market.

We feel Ontario soft red winter wheat prices could reach up to $7 per bushel over the winter given the current fundamentals. The cash market is reflecting an inverse between nearby and deferred prices, which is a bullish signal. Be patient in the short-term.

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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