Rains change corn, soybean outlook amid difficult seeding season
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By Jerry Klassen
Markets Analyst
Markets, Markets/Business
Some early planted corn has emerged in Ontario. Photo: Allexxandar/iStock/Getty Images
Ontario has received 115 per cent to 150 per cent of normal precipitation over the past 30 days. As of June 2, we believe 25 of the soybeans have been planted while nearly 50 per cent of the corn is in the ground.
Planting is furthest ahead in Bruce and Grey counties. We expect farmers will make significant progress over the next two weeks given the current weather forecast. The quality of the Ontario winter wheat crop has deteriorated. Adverse rains have caused straw and forage prices to skyrocket. Feedlots are struggling to cope under the strenuous conditions and negative feeding margins.
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Lack of seeding progress in Ontario and in the United States Midwest have caused corn and soybean markets to incorporate a risk premium due to the uncertainty in production. The seven-day precipitation forecast for the U.S. Southern Plains and Midwest calls for two to four inches (50 to 100 millimetres) of rain. Excessive rains have caused the quality of the U.S. soft red and hard red winter wheat to deteriorate. Most of Saskatchewan and Central Alberta has received less than 40 per cent of normal precipitation over the past 30 days. The 10-day forecast for the Russian winter wheat region calls for above normal temperatures and below normal precipitation.
Weakness in the Canadian dollar has contributed to the recent strength in Ontario grain and oilseed prices. Canadian monetary policy is viewed as neutral to slightly dovish while federal fiscal policy is viewed as extremely negative. This is one of the few governments in modern times that has increased taxes while increasing the deficit. Therefore, the Canadian dollar will continue to weaken.
Uncertainty in resource development and infrastructure has caused investor confidence to deteriorate in Canada. The trade war with China has taken a back seat. Even before the U.S.-Sino trade war, Canadian agricultural products were contending with tariff and non-tariff barriers from many countries. This restricted trade environment has become the new normal facing Canadian farmers, similar to the 1980s and 1990s.
Soybeans: Until soybeans are fully planted in the U.S. price will likely be supported.
Corn: Ontario corn production has potential to come in at about 24 per cent less than last year.
Wheat: More Ontario wheat is expected to end up as feed this year.
Ontario old and new crop soybean prices are up approximately 60 cents per bushel from mid-May. Elevator bids are averaging $10.40/bushel for old crop and $10.60/bushel for new crop. Ontario farmers sold most of the crop in the first half of the crop year; therefore, producer selling has been rather slow through May and early June.
U.S. farmers have been taking advantage of the recent rally by liquidating old crop stocks. Talk in the trade is that China purchased nearly 20 cargoes of South American soybeans over the past week. It's important to realize that U.S soybeans out of the Pacific Northwest are offered at a US$4 discount to Argentinian soybeans and $10 discount to Brazilian soybeans for July shipment on a delivered Chinese basis. Chinese buyers are going into another crop year of higher prices due to the tariffs on U.S. soybeans.
The market focus is on U.S. seeding progress. Farmers south of the border planted 39 per cent of the crop as of June 2, down from 86 per cent last year and down from the five-year average of 79 per cent.
Analysts have production estimates all over the map. Without going into detail, the U.S. fundamentals are not as burdensome as earlier anticipated. There is a high probability that 10 per cent to as much as 20 per cent of the U.S. soybean crop does not get planted. Secondly, there is no doubt that yield drag will be evident on a large portion of the crop due to the later seeding dates. Until U.S. seeding is wrapped up, we don't expect much slippage in the soybean market.
Keep in mind that 80 per cent of soybeans is destined for feed. Meal values are percolating higher. In addition to steady domestic North American demand, U.S. offshore export soymeal sales are coming in higher than anticipated for this time of year.
The Argentinian soybean harvest is in the final stages. U.S. offers remain competitive with Argentina and Brazil to non-Chinese destinations. This should be supportive for the soybean market in the short-term. The world soybean and oilseed fundamentals have changed significantly over the past two weeks and there is a fair amount of uncertainty. China's Manchuria region remains on the drier side, although a portion of this area is under irrigation.
What to do: We've recommended that Ontario farmers be 90 per cent sold on old crop and 20 per cent to 30 per cent on new crop.
We are in the same thought process as the previous issue and advising producers to be patient on making additional sales.
Ontario corn prices have rallied 70 cents a bushel to $1 /bushel over the past month. Elevator bids for old crop corn are hovering around $5.50/bushel while new crop bids are at $5.44/bushel. The cash market is at an inverse, which reflects that available stocks are tight.
Canadian crop year-to-date corn exports were 1.4 million tonnes for the week ending May 26, up from 0.8 million tonnes last year. The year-over-year increase in exports has drained available supplies. We believe that Ontario corn stocks will dip to historical lows at the end of the 2018-19 crop year. We have lowered our production estimate for the 2019 Ontario corn crop for two main reasons. First, we've once again lowered our seeded acreage as we believe farmers will switch to soybeans. Secondly, there is going to be significant yield drag on the 2019 crop due to the later seeding dates. Ontario corn production has potential to come in near 6.5 million tonnes, down from the last year's crop size of 8.8 million tonnes.
To reiterate from our previous issue, the Ontario corn market will function to ration demand by trading at a premium to alternative feed grains, such as wheat. The domestic market also has to trade at a premium to world values to curb exports. Europe will have a larger barley, corn and wheat crop, limiting the imports of Canadian corn.
U.S. farmers had seeded 67 per cent of the corn crop as of June 2, down from 96 per cent last year and down from the five-year average, which also comes in at 96 per cent.
We now forecast 12 million acres will not be seeded, which will result in a harvested area of about 72.8 million acres. It's important to note that approximately 25 per cent of the corn seeded area is experiencing root rot or poor germination. Farmers would like to reseed but it's too late. Therefore, when condition reports come out, we expect that 30 per cent to 40 per cent will be rated poor to very poor.
At this stage, some farmers are looking at shorter-season varieties, which have lower yields than longer-season types. We're using a projected yield of 162 bushels per acre, which would result in a crop size of 300 million tonnes, down from the 2018 crop of 366 million tonnes and down from the five-year average of 363 million tonnes.
There is no doubt that U.S. corn stocks will drop to historically low levels for the 2019-20 crop year.
The market is starting to ration demand. U.S. hard red winter wheat is trading into feed channels in the Southern Plains. We're also hearing that South American corn is trading into coastal regions, such as Wilmington, North Carolina.
Offshore sales have been strong but we're expecting export movement to subside. U.S. values are premium to most destinations compared to Argentina and Brazil origins.
What to do: We've advised farmers to be 80 per cent sold on old crop and 20 per cent sold on new crop. We're not advising any sales at this time because there is too much uncertainty in actual seeded acreage in Ontario and the U.S. This environment is unprecedented and there could be another $1/bushel upside potential in this market.
Ontario winter wheat conditions have deteriorated over the past couple weeks. We're now rating the crop 35 per cent poor to very poor, 40 per cent fair and 25 per cent good to excellent.
Fusarium is going to be a major problem this year and protein will come in below average. We're expecting a sizable year-over-year increase in winter kill on Statistics Canada's June acreage report. We haven't changed our production forecast for Ontario winter wheat.
The crop is expected to come in at 2.1 million tonnes, similar to last year's output although a larger percentage of the crop will be feed quality.
The U.S. winter wheat crop was rated 64 per cent good to excellent compared to only 27 per cent last year. While the U.S. hard red crop has favourable ratings, the U.S. soft red crop is struggling with similar issues as Ontario. We're estimating U.S. soft red winter production at seven million tonnes, down from 7.7 million tonnes last year and down from the five year-average production of 11.0 million tonnes. The U.S. hard red winter wheat crop has potential to finish at 23 million tonnes, up from last year's output of 18 million tonnes. Record yields are expected in the U.S. Southern Plains.
World coarse grain production will be down from earlier estimates due to lower U.S. corn output However, the world wheat fundamentals appear to be quite heavy. A year-over-year production increase is projected for Europe, Russia, Ukraine and Western Canada.
What to do: Strength in the corn market continues to drive the Ontario and U.S. wheat complex. We've advised producers to be 80 per cent to 90 per cent sold on their 2018 production but we haven't advised any new crop sales due to quality concerns. North America is going to be an island during the 2019-20 crop year, which means that high wheat and corn prices will be localized to Canada and the U.S. In this situation, the market usually reaches the highest levels for the crop year just before the U.S. corn harvest begins.
Once Ontario farmers have an idea of their quality, our strategy is to be aggressive with sales in the first half of the crop year.
Jerry Klassen
Jerry Klassen is the manager of Canadian operations for Swiss-based grain trading house GAP SA Grains & Products.
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