Chinese influence is alternating trade flows for wheat

The financial and commodity markets have been digesting consequences of U.S. tariffs and retaliation responses from various countries. Equity markets have sold off significantly and have further downside potential.

Quick look:

Soybeans: The export basis for Ontario soybeans is expected to increase due to higher demand from China.

Corn: Corn futures will be extremely sensitive to weather and crop developments.

Wheat: China has been strategic by not imposing tariffs on wheat importing countries.

It appears that the U.S. and other major economies will experience a recession. This has triggered a “risk-off” sentiment for commodity markets and enhanced volatility from day-to-day. We’re looking for the grain and oilseed markets to experience a rally in late April and May as the markets incorporate a risk premium due to the uncertainty in production. The wheat and corn markets cannot afford a crop problem in the Northern Hemisphere. Lower U.S. soybean acres will result in tighter fundamentals despite Chinese tariffs on U.S. soybeans.

Soybeans

China implemented a tariff of 135 per cent on U.S. soybeans. China is the world’s largest soybean importer and sets the price structure on the world market.

In the previous Trump administration, soybean futures traded in the range of $8-$9/bu. and farmers remember this. The USDA Prospective Plantings Report had soybean acres at 83.5 million, down from the 2024 area of 87.1 million. There is speculation that U.S. farmers will trim soybean acreage by another one to two million acres, resulting in 81.5-82.5 planted acres.

In the previous Trump adninistration, the U.S. provided a direct subsidy to U.S. farmers for the lower soybean prices due to Chinese tariffs.

The Chinese tariffs on U.S. soybeans will result in lower export demand. This will increase supply for the U.S. domestic crush. Secondly, there will be additional volume of soybean oil and soybean meal for the North American market. Thirdly, there will be a natural trade flow for U.S. soybeans to trade into Ontario.

At the time of writing this article in mid-April, Brazilian soybeans were offered at US$394/tonne f.o.b. Paranagua while U.S. soybeans were trading at US$395/tonne f.o.b. the Gulf. Argentinean soybeans were valued at US$394/tonne Up River (Rosario). Ontario soybeans were quoted at US$395/tonne f.o.b. St. Lawrence.

The export market is in a transition stage. Later in spring and summer, Brazilian soybeans will move to a premium over U.S. soybeans due to the Chinese captive market. U.S. soybeans will trade to other destinations. China imports about 100 million tonnes of soybeans annually from all destinations. The rest of the world imports about 70 million tonnes. The U.S. is expected to export about 49 million tonnes in the 2024/25 crop year. Brazil is projected to export 105 million tonnes in 2024/25 but has potential to export 110 million tonnes if farmers release stocks. Total Canadian exports will likely reach five million tonnes in the 2024/25 campaign.

At this stage, there are no Chinese tariffs on Canadian soybeans. The export basis for Ontario soybeans is expected to increase because we will see more demand from China moving forward. Canadian prices are expected to have a higher correlation with Brazilian offers later in summer and fall.

What to do: This week we are advising farmers to sell 10 per cent of their 2024 soybean crop bringing sales to 90 per cent. We’ve advised farmers to be 10 per cent sold on new crop.

Corn

Elevator bids for corn in Ontario are starting to percolate higher. Farmer selling comes to a halt in Ontario and the U.S. during April and May. This allows breathing room for the market to move higher.

Secondly, Ontario on-farm corn stocks are expected to drop to bin-bottom levels at the end of the 2024/25 crop year. This puts more emphasis on the upcoming production to replenish stocks. The corn market in Ontario will function to ration demand by trading above world values in the later part of the crop year. Prices also need to move high enough to encourage Ontario farmer selling.

Finally, the Ontario corn market needs to import about 500,000 to 700,000 tonnes to satisfy demand. During the 2023/24 campaign, Ontario imported about 114,000 tonnes.

The latest USDA WASDE Report (World Agriculture Supply and Demand Estimates) was bullish for corn. U.S. corn exports for the 2024/25 crop year were adjusted upward by 100 million bushels. The U.S. corn carryout for the 2024/25 crop year is now expected to finish near 37.2 million tonnes, down from the 2023/24 carryout of 44.8 million tonnes and down from the five-year average of 38.9 million tonnes.

There will be upward momentum on the market through spring. Limited farmer selling and lower on-farm supplies will result in higher prices.

Corn stocks in Brazil and Argentina will drop to historical lows at the end of 2024/25 campaign. The USDA WASDE Report had Brazilian output at 126 million tonnes, unchanged from March and up from 119 million tonnes last year. Argentinean corn production was estimated at 50 million tonnes, down one million tonnes from last year. Brazil’s first corn harvest has been completed and the Argentine corn harvest is about 25 per cent complete as of April 15. U.S. corn will be the lowest priced corn on the world market until July, which is when supplies from Brazil’s second corn harvest will be available.

The USDA’s Prospective Plantings Report had U.S. corn acreage at 95.3 million, up 5.1 per cent or 4.7 million acres from last year. The U.S. hasn’t achieved trend yields in the last six years so this projection by the USDA is a stretch.

Very simply, if the 2025 yield comes in at 179 bu./acre, like last year, the 2025/26 carryout will be around 48 million tonnes, which is above the five-year average. If the yield turns out like the five-year average of 173 bu./acre, we can make the argument for a carryout near 33-34 million tonnes, which is below the five-year average.

What to do: We’re looking for the corn market to rally $0.75-$1.00/bu. over the next month. The corn futures will be extremely sensitive to weather and crop developments. We’ve advised farmers to be 60 per cent sold on their 2024 production. Our next sale of 20 per cent will occur in early May and the final sale will be made when the upcoming crop is more certain.

Wheat

Flour milling is an extremely competitive market and the flour milling industry has become very sophisticated over the past 20 years. There has been consolidation in the U.S. milling industry while in Canada, the market is saturated by two main players. Hence flour milling in most countries is a very protected industry and that’s why there are limited flour exports from the main wheat exporters.

Flour milling is a major source of employment in less developed countries. I visited a flour mill in Malaysia and there were about 60-70 people working in the mill. This is similar in the Caribbean. If you tour a flour mill in Germany or Italy, there are only one or two people at the actual mill and they are the security guards. Everything is automated. The only time people come to the mill is for cleaning or when a sensor goes off.

In Europe and less developed countries, the mills can use a very low quality wheat and make a very high quality flour. Flour additives is big business.

The European crop in 2024 was low quality. European exports are down sharply from year-ago levels resulting in a higher carryout. However, domestic mills in Europe are using the lower quality wheat and imports are lower than expected.

The 2025 wheat crop will be up about 15 million tonnes from 2024. This has limited the upside on the world market for soft red winter wheat. The 2024 EU wheat crop is now moving into export channels as new crop supplies draw near. The EU has set up new trade agreements with major developing economies over the past month. This has also taken away some U.S. wheat demand.

Earlier in spring, we believed the Russian cap on wheat exports would cause exports to increase from the U.S. late in the crop year. In past years, Russian wheat exports have reached into Mexico, Central and South America and Southeast Asia. These were once captive markets for North American wheat. The commercial demand for U.S. hard red winter wheat hasn’t materialized.

The U.S.-induced trade war has been negative for U.S. wheat markets. U.S. wheat continues to trade to South Korea and Taiwan due to military support but other countries are not as reliant on the U.S.

China has a strategic long term plan when it comes to the trade war. The top 20 developing countries in the world are in the global south. This includes the Middle East, North Africa, Asia Pacific and sub-Sahara Africa. Last year, China announced zero tariffs on these developing countries in the global south which cemented its position as the trade leader for these countries. You guessed it, these regions are all major wheat importers and with the Chinese influence, they are not looking at the U.S. any longer for food security.

On the flip side, the U.S. now has tariffs on one-third of the global economy and on most of the poor nations of the world. The Chinese influence is alternating trade flows for wheat. China is influencing flour milling wheat purchases with credit and trade preferences.

What to do: This week, we’re advising Ontario farmers to move to 90 per cent sold on their 2024 production for feed and milling wheat. The U.S. harvest starts in late May and U.S. farmers sell 50 per cent of their wheat in the summer months. The chances of a wheat rally are less and less.

Source: Farmtario