The World Agricultural Supply and Demand Estimates issued by the United States Department of Agriculture Feb. 8 was considered bearish for soybean and corn markets.
U.S. winter wheat acreage came in below expectations on the USDA acreage survey.
South American corn and soybean crops are developing under favourable conditions.
Compared to late January, Ontario old crop soybean prices are down about 20 cents per bushel; elevator bids for corn and wheat are relatively unchanged.
There are no signs of a U.S.-China trade agreement. In early February, U.S. Secretary of Commerce Wilbur Ross indicated that the U.S. and China remain “miles and miles” apart. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to continue to negotiate with their Chinese counterparts during February.
In addition to trade issues, other tensions are brewing. For example, the U.S. continues to send warships through the South China Sea as China strives to maintain military dominance in the region.
Soybeans: Export demand for Ontario soybeans is likely to slow, but domestic needs continue strong.
Corn: Exports have drawn down Canadian corn stocks.
Wheat: Watch for a price rally as the U.S. hard red wheat crop comes out of dormancy.
The USDA WASDE report was considered bearish for the soybean complex. A downward revision was noted for U.S. soybean yields but production was still estimated at 124 million tonnes, up from 120 million tonnes last year.
Without going into detail of demand, the U.S. 2018-19 soybean carryout is expected to reach a record 25 million tonnes with most of the trade projecting a number closer to 30 million tonnes. Last year’s ending stocks came in at 12 million tonnes to put this in perspective.
U.S. soybeans will have stiff competition from Brazil for the remainder of the crop year. U.S. soymeal exports have been exceeding year-ago levels but Argentina will dominate the world market from April forward. The Argentine soybean crop was rated 49 per cent good to excellent, which compares to only 11 per cent last year and the five-year average of 50 per cent. Some areas are a bit wet due to extensive rain. The USDA projects the Argentine crop to come in at 55 million tonnes, up from 37.8 million tonnes last year.
Brazil’s soybean harvest is 25 per cent complete and the USDA had the Brazilian crop at 117 million tonnes, down marginally from 121 million tonnes last year.
Similar to the U.S. situation, Ontario soybean exports will slow down moving forward. Therefore, Ontario elevator prices will depend on domestic processor demand. Ontario soybean prices are strong compared to U.S. elevator bids so the domestic market is attracting imports. Keep in mind that the U.S. soybean market needs to discourage acreage over the next month, which will put severe downward pressure on prices.
What to do: We’ve advised producers to be 80 per cent to 90 per cent sold on old crop soybeans and 20 per cent sold on new crop soybeans. If producers feel comfortable, we believe it’s prudent to step up new crop sales to 30 per cent of expected production.
Statistics Canada estimated on-farm Ontario corn stocks at 4.7 million tonnes, which is down from 5.1 million tonnes last year. Stocks reports are important because they provide an idea of feed usage and confirm the production estimate. Without going into detail, we believe that feed usage is similar to last year, while the year-over-year increase in corn exports is the main factor drawing down stocks. We continue to factor in a rather tight corn carryout in Ontario for the 2018-19 crop year, which should be supportive for prices.
The USDA made no significant changes to the U.S. fundamentals; however, confirmation of South American production set a negative tone.
The Argentine corn crop is rated 60 per cent good to excellent, which compares to only 20 per cent last year and the five-year average of 34 per cent. Argentine corn production was estimated at 46 million tonnes, up 3.5 million tonnes from the December estimate and up 14 million tonnes from last year.
Brazil’s corn production was unchanged from December coming in at 94.5 million tonnes, up from year-ago output of 82 million tonnes.
For new crop, Ontario corn acres are expected to be unchanged from 2018. At this stage, U.S. corn area could experience a year-over-year increase of two to three million acres. Larger new crop supplies will weigh on old crop prices.
The Argentina harvest begins in March and Brazil’s second crop corn moves into export position during May and June. Unless the U.S. has a major drought, the corn market will function to encourage demand and absorb South American supplies before U.S. new crop comes available.
What to do: As of mid-February, we’re advising producers to sell 10 per cent of their 2018 production bringing total sales to 60 per cent. Ontario elevator bids are hovering around $4.73 per bushel for old crop and $4.83 per bushel for new crop. The market is telling farmers to sell now for immediate delivery because there is minimal carry in the cash price. Farmers are not rewarded for storing corn. Given the favourable crop prospects in South America and increased acreage in the U.S., we feel it’s prudent to sell 20 per cent of expected 2019 production.
Chicago wheat futures continue to trade at a premium to Kansas wheat futures, which is an abnormality. However, the fundamentals for U.S. soft red winter wheat are significantly tighter than U.S. hard red. Secondly, the Chicago market has more speculative activity. Finally, traders always struggle with the question of whether Chicago represents the world fundamentals or more specifically U.S. soft red; this year, the Chicago market is reflecting the U.S. soft red winter fundamentals.
U.S. farmers seeded 5.7 million acres of soft red winter wheat this past fall, down three per cent from the fall of 2017. Using a five-year average yield and a traditional abandonment rate, production has potential to finish near 7.4 million tonnes, down from 7.7 million tonnes last year the five-year average output of 10.2 million tonnes (2013 to 2017).
Without going into detail of demand, the 2019-20 carryout has potential to drop to 2.6 million tonnes, which would be a 10-year low. Stocks of soft red winter wheat in North America are rather tight. More importantly, we’re seeing U.S. soft red winter wheat shipped out of the Gulf of Mexico competitive on the world market with Russian and French values. Given the tight stocks, the soft red winter market needs to ration demand through higher prices.
U.S. hard red winter wheat acreage came in at 22.2 million acres, down three per cent from last year. Using a five-year average yield and traditional abandonment rate, production has potential to finish near 17.9 million tonnes, very similar to last year’s crop size of 18 million tonnes, but well below the five-year average of 23.9 million tonnes. The 2019-20 carryout has potential to finish around 10.8 million tonnes, which is slightly higher than the five-year average of 10.5 million tonnes.
Russian and French export offers are unchanged from two weeks ago. Stronger domestic prices in Russia are starting to limit export movement. In Europe, strong feed prices due to last year’s drought have sustained French milling wheat values. Therefore, we don’t see any significant slippage in world prices.
We want to draw attention to the Chicago March-to-May futures spread, which is only trading at a two-cent carry. To put this in perspective, last September this spread was at 13 cents. A narrow spread is a bullish signal for the market. We’ve also seen the March-to-May Minneapolis futures spread trade at a four cent inverse. This means the nearby March contract is four cents premium to the May contract. This is considered a very bullish signal.
What to do: We’ve advised producers to be 40 per cent sold on their 2018 wheat production. In the previous issue, we stated the wheat market usually experiences a seasonal rally before the U.S. hard red winter crop coming out of dormancy. Let’s be patient and see if the wheat complex can rally 20 to 30 cents per bushel at which time we’ll advise our next sale.