Ratio favours soybeans over corn

The hot reaction to Argentina’s excessive rain problem cooled last week, causing soybean futures to give back some of their gains, but they are still attractive relative to corn.

Farmers are working on their crop budgets and determining seeding plans for 2017.

The supply-demand picture for canola looks favourable for an increase in seeded area this spring, but according to Ed White’s story on Thomas Mielke of Oil World’s presentation at Manitoba Ag Days in Brandon last week, you have to look beyond canola statistics to get a feel for the oilseed market in 2017-18.

The following are more details to help fill in the picture.

Canola futures last week rose even as soybeans slipped.

A weaker loonie helped, but also the strong pace of canola disappearance has to be supporting the canola market.

The domestic canola crush has been continuously exceeding last year’s pace right from the first week of the crop year. It is running 13.5 percent ahead of last year.

The export pace started out slow but now is running ahead of last year.

As of the end of week 23 of the crop year, canola exports are 3.5 percent ahead of last year’s pace.

If the current pace of crush and exports was to continue to the end of the crop year, the total disappearance of canola would be about a million tonnes more than what Agriculture Canada has forecast.

Many analysts think the canola crop is bigger than Agriculture Canada’s estimate of 18.4 million tonnes, but even if it is 19 million tonnes, the amount left over by the end of the crop year should not be a burden given the strong demand.

However, although canola might be able to ride high on the waves, it can’t ignore the overall tide that is the global oilseed market, which includes soybeans and palm oil.

And as Mielke notes, that tide will likely fall this year with palm production recovering, a favourable South American soybean harvest and expectations of increased American soybean planting.

Analysts are still uncertain what the problems in Argentina mean for final soybean production.

The Rosario grain exchange in Argentina last week cut its soy production forecast by 1.5 million tonnes to 52.9 million. However, analysts in Brazil in December increased their forecast for their crop by a similar amount.

So is it a case of the two cancelling each other out?

It is too early to say, but I’d put my money on a bet that there won’t be a crop disaster in South America of a magnitude that would significantly lift oilseed prices globally.

There is no El Nino or La Nina at play this year, so we can’t say there will be a dominating weather pattern in South America in the coming weeks.

The neutral position is expected to carry on into the Northern Hemisphere spring.

The U.S. Midwest and northern Plains are expected to have good soil moisture reserves at the start of seeding.

Forecasters expect a big increase in soybean acres in the Midwest this year.

The soybean-to-corn ratio does favour soybeans as a more profitable seeding option for American farmers.

The rule of thumb is that soybeans are the more attractive option when soybeans are 2.5 times the price of corn or higher.

Comparing new crop futures for the two crops, soybeans are 2.59 times the value of corn and so the oilseed is the more profitable. According to a Reuters analyst, 2.6 would be the highest ratio in 20 years for this time of year.

Last year at this time, soybeans were only 2.27 times the value of corn, so corn was the favourite and its acreage jumped 6.8 percent from the year before.

Still, soybeans climbed .8 percent last year, stealing away acres from wheat.

With the ratio in soybean’s favour this year and even more former winter wheat acres available for spring planting, it is understandable that analyst In-forma Economics forecast soybean plantings would soar 5.5 million acres, or 6.6 percent, to 88.9 million this spring.

If that happens, and the spring planting weather is favourable, then there could be a lot of downward pressure on soybean prices.

That would definitely lower the tide, dropping canola along with every oilseed.

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