Market Trends

Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.

Post-March 31 Special 2016

US and World

Over a myriad of years the USDA has provided all kinds of statistics of crops grown in the United States. For the most part these are only numbers, which gets swept into the dustbin of history. However, for crop prices in the United States and the rest of the world, these USDA reports are very important. Sometimes, there are surprises. The March 31 USDA Prospective Plantings report will go down as one of the more surprising in history. With crop prices close to their contract lows more production is set to take place in the United States.

In the March 31 USDA prospective plantings report, it was like scorched earth to the corn market. The USDA shocked the market by predicting American corn acres would swell to 93.6 million in 2016. The average trade guess had been from 88-92 million acres, with previous February USDA estimates of 90 million acres. When the USDA released 93.6 million acres you could almost hear silence across American farm country. This will be the largest corn acreage since 2013/14 and the largest misjudgment from baseline projections from USDA ever in the March prospective plantings report. It was both a physical and psychological blow to the market sending corn futures plummeting on the day.

The corn quarterly stocks for March 2016 were 7.808 million bushels. This was close to the average trade estimate. The USDA predicted 82.24 million acres of soybeans, which was slightly below the average trade estimate. The US wheat crop is projected at 49.56 million acres, which is below the average trade estimate and the lowest wheat acres in the United States since 1970. The quarterly soybean stocks came in at 1.53 million bushels, which was in line with the average trade estimate. Wheat stocks came in at 1.372 million bushels, which was also within trade estimates. In many ways after the corn number was announced for projected acreage in 2016 so much higher than expected, much of the rest of the report was noise. If the corn number was not such an outlier, the biggest news from the report would have been the lowest wheat acres in years.

On April 1st, corn futures prices were lower, but soybeans and wheat nearby futures prices were higher than the last Market Trends report. The May corn 2016 futures were at $3.54 a bushel. December 2016 corn futures were at $3.69 bushel. The May 2016 soybean futures was at $9.18 a bushel. The November 2016 soybean futures were at $9.32 a bushel. The May 2016 Chicago wheat futures closed at $4.75 a bushel. The Minneapolis May 2016 wheat futures closed at $5.29 a bushel with the September 2016 contract closing at $5.47 a bushel.

The nearby oil futures as of April 1st closed at $36.79/barrel down from the nearby futures of last month of $38.55/barrel. The average price for ethanol on April 1st in the US was $1.67 a US gallon slightly higher than last month at $1.63 a US gallon.

The Canadian dollar noon rate on April 1st was .7665 US up from the .7576 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.

Ontario

In Ontario there will soon be seed in the ground. However, the province has been inundated with heavy rains pushing what looked like an early spring back. The just under one million acre wheat crop looks good, even though much of it has been underwater in late March. Producers will be working toward side dressing nitrogen on the wheat when it dries up over the next month.

The old crop basis levels have decreased more so for corn versus soybeans. Ontario still has a lot of corn in storage and is exporting into Michigan and New York State. The value of the Canadian dollar has risen over 77 cents over the last two weeks settling back to .7665 as of April 1st. This has had a negative effect on basis levels. Managing the Canadian dollar will continue to be that other crop price management layer for Ontario farmers.

With the recent meltdown in the corn futures market there will be much debate going into spring about acres switching out of corn in Ontario. The foreign exchange always helps the new crop corn price optics along with its increased productivity versus soybeans. Much will depend on any continuing corn price bearishness in the next few weeks along with planting weather.

Old crop corn basis levels are .65 to $0.94 over the May 2016 corn futures on April 1st across the province. The new crop corn basis varied from .55 to $0.87 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.33 cents to $2.45 over the May 2015 futures. New crop soybeans range from $2.05-$2.34 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on April 1st was $8.02 for SWW, $5.80 for HRW, $5.80 for SRW and $6.11 for Red Spring Wheat. On April 1st the US replacement price for corn was $5.04/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

The USDA report on March 31 set many of us back on our heels. All through the winter there was somewhat of a consensus that corn was still more profitable than soybeans, but the November soybean contract had done fairly well all winter with the general trade estimate from 89-91 million acres seemed solid, especially after the USDA had said 90 million acres of corn in February. 93.6 million acres in 2016 wasn't part of the discussion. However, it is now reality and if Mother Nature plays nice again in 2016 the outlook for price is not good.

Simply put, on the productivity front corn is resilient. The ground continually shifts underneath our cornfields. Yield increases are more substantial than soybeans and other grains. The 2016 acreage figure may reflect farmers' propensity to grow corn increasingly as time goes by. Lower corn prices, but more volume, still equal specific crop revenue targets in farmers' decision-making process. Modern genetics in corn continue to impact corn price projections.

If not for the big corn acreage number, which dominated the US report day, we would be talking about wheat. The average trade guess on wheat was 51.072 million acres. USDA came in at 49.6 million acres far below that. The USDA has taken out the large number of bushels from US wheat, which was already facing onerous supplies. Add some bad weather to the mix and maybe some below trend line yields and those supplies, at least in the United States may be cut substantially.

The USDA report dominated the market in the post March 31 week, but the value of the US dollar and the value of the Brazilian Real continue to play on grain markets. In Brazil, the turmoil surrounding possible impeachment proceedings and a possible change of government impacts the Real everyday. It's an unusual situation because political instability is usually bad for a currency. In the Brazil case, any time there is the possibility of a change in government the currency goes up. As a Brazil currency goes up in value that is negative for their domestic soybean cash prices. The soybean market has reacted to this over the last month. The same could be said for any movement in the US dollar. Needless to say, soybean prices have risen $.70 over the last month, a welcome trend for soybean farmers.

Commodity Specific Comments

Corn

The large corn acre projection from USDA may lead to some very big ending stocks at the end of this crop year. With this big acreage number of 93.6 M acres and with a yield range from 160 to 168 bushels per acre, would result in ending stocks from 2.044-2.729 billion bushels. Of course, this is a huge number, which can buffer any small weather scare the summer.

There will always be skeptics regarding this large US corn acreage number. At the present time there are wet conditions in the Delta hindering corn planting. This, along with any other weather-related spring delay may cut the acreage figure. However, if the past has proved anything, waiting for the USDA to make a major change in their March 31 acreage figure rarely happens.

The May 2016 July 2016 corn futures spread is -.0375 cents as of April 1st, which is considered neutral. Seasonally, corn futures tend to trend sideways through mid-May. The May corn contract is trading currently in the lower 5% of the five-year price distribution range.

Soybeans

Soybeans have been on a tear since their lows of March 2nd and the USDA report in some ways represented a speed bump versus the colossal stonewall, which was put up in front of corn prices. The quarterly ending stocks at 1.531 billion bushels still represents a lot of soybeans, but USDA has been notoriously bad for overestimating the stocks historically. Expect an accelerated disappearance of soybeans this year.

The soybean acreage figure of 82.24 is slightly less than last year and completely different for the psychology of the market versus the corn acreage figure. It may move toward spring based on weather, but it does reflect in many ways the American farmer's propensity to bypass soybeans for corn. The recent run-up in soybean prices may mitigate that to some extent, which will show up in the actual planted acreage report on June 30.

The May 2016 July 2016 soybean futures spread is .0775 cents as of April 1st, which is considered neutral. Soybean futures tend to trend up through early May. The May soybean contract is now priced in the lower 13% of the five-year price distribution range.

Wheat

Wheat almost had its day on March 31 with the lowest recorded wheat acreage in the United States since 1970 at 49.6 million acres. It was also the third lowest wheat acreage number since 1919. However, globally there is wheat everywhere and that does not change its bearish fundamental outlook. However, it may be the start of something better in the wheat market as producers in the United States are clearly making their intentions known about avoiding wheat acres.

In Ontario the slightly less than 1 million wheat acres will soon be the focus of intense management as nitrogen begins to be side dressed. The acreage figure is unlikely to change, as winterkill was minimal this year. Yield potential this year is higher because of the good condition of the crop after winter.

The Bottom Line (cont.)

Canadian Dollar remains a very important layer in our crop price management decisions. On March 31, the Canadian dollar almost touched $.78 US, which is a full dime above where it was on January 20th. This is a meteoric rise no matter how you describe it. In the last two weeks this has cooled to some extent. However, much will depend on the future comments of US Fed chairperson, Yellen, and the Bank of Canada. The cushion that Canadian producers had versus lower grain futures prices has been eroded substantially over this time.

The US dollar has been lower recently, which has been helpful to many commodities. The problem is it is always an inverse relationship to our Canadian dollar, which makes our grain marketing challenge that more complex. The US Federal Reserve Chairman has said rate increases will not be accelerated this year. However, the US economy is growing again and as it grows healthier the US dollar should too. The US dollar will always put the brakes on grain futures price upward mobility.

The March 31 USDA report certainly threw down some bearish grenades in an already bearish market environment. However, there is a long way to go before payday. There is much market risk ahead, which may produce some short-term marketing opportunities. Case in point was last year's heavy rains, which for a very short period in July created substantially higher futures prices. Looking back, we all needed to hedge futures and leave basis open. However, nobody knows these things. So, as we mount our tractors to plant our crops having standing marketing orders in place can be very helpful to capture those marketing opportunities. There is an incubation of bullish rally somewhere right now. The problem is we can't see it. Having a standing order ready helps cover that risk.

The March 31 USDA report is one of three major USDA market mover reports each year, with the others being the June 30 report and the final January report. This year, the March 31 report was significant. It has set the early tone for the crop year. Spring weather will weigh in next. The next USDA report of significance on June 30 will fine-tune everything. The challenge Ontario farmers have is to continue to balance grain futures price movement with Canadian dollar volatility. The 2016 crop is not made. There is much risk ahead and surely many marketing opportunities will emerge.

USDA Reports

The United States Department of Agriculture publishes monthly reports that may be of use to our members.

Report Released Link
Crop production July 12, 2017
World agricultural supply and demand estimates July 12, 2017

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