Wheat yield is good, but only 50 per cent could make milling grade

A lot of Ontario wheat was flattened by rains and much of that sprouted

Ontario’s wheat harvest is moving quickly to completion, earlier than usual.

The Ontario growing region has received more than 150 per cent of normal precipitation over the past 30 days, while temperatures have been two to three degrees above average. 

The Ontario winter wheat harvest was approximately 60 to 70 per cent complete as of July 25. There is downgrading in wheat due to sprouting and other problems associated with excessive moisture. The domestic wheat market is incorporating a risk premium due to quality uncertainty. 

Export offers remain firm due to adverse flooding in Europe and drought-like conditions in western Canada. The world wheat complex is contending with lower production estimates for milling quality wheat. 

Quick look
Soybeans: Declining yield expectations in the U.S. for soybeans should support prices.
Corn: Old crop supplies are tight, with little corn left on farms and ethanol plants taking any that does show up on the market.
Wheat: Only about 50 per cent of winter wheat is expected to make milling grade.

Ontario old crop corn bids are at historical highs. U.S. and Ontario corn stocks are extremely tight with limited supplies left on farm at this stage of the crop year. New crop corn prices are firm. 

Brazil’s second Safrinha corn harvest has been delayed due to adverse weather. In North Dakota and Minnesota, there has been severe yield drag due to drought-like conditions. Certain pockets in the Midwest are also contending with dryer conditions. Ethanol margins have deteriorated with the strong corn prices. However, the energy component appears to be a main factor sustaining old and new crop prices. 

Ontario soybean bids remain elevated but are about $2 per bushel off the May highs. Despite the historical tight stocks on farm in Canada and the U.S., domestic demand is moving through seasonal lows. Most crushers take downtime for maintenance and upgrades during the summer. 

Brazil and Argentina are dominating the export market for soybeans and soymeal. The Henan province in China experienced floods in late July. The main Chinese typhoon season occurs during August and September. 

At the time of writing this article, the September Canadian dollar was trading at 79.65 U.S. cents. There has been a resurgence in the Delta variant of the coronavirus. Europe and Southeast Asia are re-imposing social constraints. Canada continues to make vaccination progress; approximately 50 per cent of Canadians over the age of 12 are fully vaccinated. This has caused a divergence in economic activity between North America and rest of world. 

Canadian and U.S. third quarter GDP projections are in the range of seven to eight per cent. After a dismal second quarter, Canada is catching up to U.S. growth, which will be supportive for Canadian appreciation against the greenback. 

Soybeans

Optimal weather has enhanced yield prospects for the Ontario soybean crop. We’re now forecasting the average yield to come in around 51.2 bu./acre resulting in an Ontario crop size of 4.1 million tonnes. This is up from our earlier estimate of 3.8 million tonnes and up from the 2020 output of 3.9 million tonnes.

Ontario canola production is expected to finish around 49,200 tonnes, up from 33,400 tonnes last year. 

Weather conditions during the first half of August will have a large influence on U.S. soybean production. At the time of writing this article, the two-week forecast called for dryer conditions and above average temperatures in the western half of the Midwest. The market will likely hold value through this critical timeframe. 

The USDA was forecasting an average yield of 50.8 bushels per acre on the July crop report. We believe the trade is expecting an average U.S. yield around 49 to 50 bu./acre. This would result in a crop size of 116 to 118 million tonnes, down from the current USDA estimate of 120 million tonnes.

South America has been dominating the export market through the summer but U.S. origin is more competitive from October onward. Export demand for Ontario and U.S. soybeans will make seasonal highs during the fall period. Therefore, it’s important to monitor export sales for soybeans and soymeal because this will determine the price structure. 

Brazilian soybeans tend to come on the world market in late February. At this stage, traders are factoring in a year-over-year increase in Brazilian acreage. The 2021-22 crop production is expected to reach 140-144 million tonnes, up from this past spring’s harvest of 137 million tonnes. 

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. The market will be very volatile during the fall because the world cannot afford adverse weather during the North American harvest period. 

Secondly, demand for U.S. soybeans tends to make a seasonal high during November or early December. Over winter, the market will be contending with South American weather. It’s going to be a very interesting market over the six months. Stay close for our timely sales recommendations. 

Corn

At the time of writing, elevator corn bids were hovering around $8.50/bu. for old crop and $7/bu. for new crop. Old and new crop prices were at fresh 52-week highs. Basis levels have strengthened while the futures have come off the summer highs. The market is contending with historically tight old crop stocks. Therefore, farmer selling has been limited at the higher levels. 

Secondly, ethanol demand continues to absorb any supply that does become available. Finally, the market is contending with a wide range of production estimates. The USDA has a fairly optimistic outlook for the 2021 production resulting in a year-over-year increase in ending stocks. However, the private trade has a somewhat contrary view. 

We’ve bumped up our Ontario production estimate from 8.8 million tonnes to 8.9 million tonnes. While this isn’t significant, it shows the crop isn’t shrinking. South of the border it’s a different story. The USDA was using 179.5 bu./acre on its July WASDE report. Trade estimates are all over the map. The main point is that production is uncertain.

Last year’s average yield was 172. Although conditions are quite good in the eastern Midwest, it’s difficult to get a handle on yields in the Northern Plains. 

U.S. export sales commitments for the 2021-22 crop year are up sharply from year-ago levels. The USDA is factoring in a year-over-year decrease in exports but Chinese demand is a “best estimate” at this time. We believe that China still needs to rebuild stocks and we’ve seen how quickly their buying can change the overall price structure in North America. China is contending with floods for the second year in a row. 

In addition to the larger export program, ethanol demand remains firm despite deteriorating margins. The White House has delayed the release of its Renewable Fuels Standard and this needs to be monitored over the next couple months. 

What to do: We’ve advised producers to be 100 per cent sold on old crop and 20 per cent sold on new crop. The futures market is trading the USDA fundamentals. The cash market is trading tight old crop stocks and uncertainty in new crop fundamentals. The lack of farmer selling in the short term and strong U.S. export commitments have kept U.S. and Ontario basis levels firm. 

If the crop comes in lower than expected, changes in demand will be more significant to the price structure. We will monitor these changing conditions to plan our sales strategy for the 2021-22 crop year. 

Wheat

We continue to project an Ontario winter wheat crop of 2.5 million tonnes, up from the 2020 output of 2.3 million tonnes. However, we believe that only 50 per cent of the crop will be milling quality. The remainder will likely trade into feed channels. Wheat is competitively priced to move into the local feed market. We believe producers should be selling the lower quality now, rather than storing it. 

In Europe, excessive rains have also downgraded the wheat crop. As of July 15, the French winter wheat crop was only 33 per cent harvested, compared to 64 per cent at the same time last year. The crop was still rated 73 per cent good to excellent but we believe there will be a fair amount of feed wheat in France and Germany. The German harvest is also lagging year ago levels. 

In Russia, record yields were reported in the Krasnodar region. Comments from the Rostov and Stavrpol regions are also favourable. The Ukraine wheat harvest was approximately 25 per cent as of July 25 and yield reports are also better than expected. 

Western Canada and North Dakota continue to experience adverse dry conditions. However, there have been scattered showers over the past couple weeks that have sustained the crop potential. Analysts have been conducting yield surveys and yields will be better than expected. 

What to do: We’ve advised farmers to be 100 per cent sold on old crop and 20 per cent sold on new crop. We haven’t changed our recommendation. However, if you do have feed quality wheat, we believe it is prudent to sell at least 50 per cent off the combine. 

Once the corn harvest begins in Canada and the U.S., it will be difficult for feed wheat prices to strengthen. Secondly, producers with feed wheat also have storage risk, which may downgrade the wheat further. The milling wheat market tends to make seasonal lows during the first half of August. We’re planning to make our next sales recommendation for milling wheat in late October or early November.


For more content related to drought management visit The Dry Times, where you can find a collection of stories from our family of publications as well as links to external resources to support your decisions through these difficult times.

About the author

Markets Analyst

Jerry Klassen is president and founder of Resilient Capital, specializing in proprietary commodity futures trading and market analysis. Jerry consults with feedlots on risk management and writes a weekly cattle market commentary. He can be reached at 204-504-8339 or via his website at ResilCapital.com.

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