Market Trends

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

Post-June 20 Special 2015

US and World

It has been a time of changing dynamics in both the United States and Ontario farm country. Heavy rainfall across the southern and eastern corn belt in the United States has completely changed the psychology and the grain market as we head into July. Parts of Illinois, Indiana, Missouri, Iowa and Ohio received more than 10 inches of rain in June throwing into doubt the record crop potential in those very important states. The grain market started to react to this threat to supply in late June, just in time for the very important June 30th USDA report.

The very wet weather in the United States trumped the impact of the June 30th USDA report early. For instance, corn in the top 18 producing states was 68% good to excellent on June 29th having dropped from 75% on June 8th. In Indiana, the corn was rated 46% fair to poor. Soft red winter wheat was also being blasted by wet weather causing serious quality concerns. With the release of the USDA report on June 30th of actual planted numbers based on a June 1st survey and quarterly stocks, the stage was set for explosive market action.

On June 30th, USDA pegged corn acreage at 88.9 million acres, which is the lowest corn acreage figure since 2010. The USDA put quarterly corn stocks as of June 1st at 4.45 billion bushels with soybeans pegged at 625 million bushels. Soybean acreage was set at 85.1 million acres, which represents a record acreage. The lower corn and soybean stocks were seen as bullish for the market and with the new crop seemingly underwater across the American corn belt it led to explosive market action on report day. Corn finished up the $.30 limit, while soybeans were up $.53 and wheat was up $.34 on the day, one of the biggest days in a few years.

On June 30th, corn, soybean and wheat nearby futures prices were higher than the last report. Corn futures had the August 2015 futures at $4.22 a bushel. The December 2015 corn futures were $4.31/bushel. The August 2015 soybean futures were at $10.49 bushel. The September 2015 Chicago wheat futures closed at $6.15 a bushel. The Minneapolis September 2015 wheat futures closed at $6.37 a bushel with the September 2016 contract closing at $6.54 a bushel.

The nearby oil futures as of June 30th closed at $58.56/barrel down slightly from the nearby futures of last month of $59.96/. The average price for ethanol on June 30th in the US was $1.91 a US gallon vs. last month at $1.88 a US gallon.

The Canadian dollar noon rate on June 30th was .8017 US down from the .8127 US reported here June 12th. The Bank of Canada's lending rate remained at 0.75%.

Ontario

In Ontario heavy rains have damaged crops throughout the province. The crosshairs for this heavy rain has been in Essex County where record rainfall in May and June has thousands of acres not planted as of June 30th. Agricorp has extended the crop insurance deadline for planting crops there until July 7th. Across the rest of southern Ontario heavy rains have hurt crops, but of course there is still a long season ahead of us. Producers as of June 30th are certainly hoping for summer heat and the moderation of heavy rainfall events.

Statistics Canada has weighed in pegging Ontario corn acreage at 2.055 million acres. Soybean production is pegged at 2.93 million acres with Quebec corn production at 920,00 acres and soybeans at 778, 000 acres. At this early stage it is difficult to tell how basis will be affected with that large corn acreage figure in Ontario. With the crop somewhat damaged from wet weather it would be difficult to achieve the same yields as 2014. July and August weather will surely be key.

For the 600,000 acres of wheat in Ontario, July will be the month when harvest will commence. Unfortunately, the soft winter wheat crop has taken unusually high punishment from heavy rains across Ontario. This will surely have an impact on quality. In fact, across the Eastern corn belt, much of the soft red wheat has been heavily damaged from excessive rainfall. Wheat prices have spiked much higher under these concerns. Ontario producers will surely be poised to take advantage of this.

Old crop corn basis levels are .50 to $1.05 over the September 2015 corn futures on June 30th across the province. The new crop corn basis varied from .25 to .90 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $1.78 cents to $2.30 over the August 2015 futures. New crop soybeans range from $1.50 to $1.97 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on June 30th was $9.32 for SWW, $8.26 for HRW, $7.60 for SRW and $7.78 for Red Spring Wheat. On June 30th the US replacement price for corn was $5.47/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

Oh, how things change! For most of the spring grain futures prices have been going down or sideways and only two weeks ago it looked like more of the same unless there was fresh news. Of course, the fresh news came in copious amounts of rainfall slamming into young crops in the American Midwest causing much damage. Two weeks ago the wet weather had not turned into a flood as yet, but clearly is caught the market's attention. Leading into the June 30th report, this new psychology was threatening to trump the USDA numbers. It did that in spades and when USDA cut their quarterly stocks, the world for grain is a different place now.

The road ahead of course involves two of the biggest production months of the crop year, July and August. It's often said that July makes corn prices and August makes soybean prices as pollination takes place in July and soybean set their pods in August. It is the same this year, except for the fact that much of the crop is damaged in the big "I" states of Indiana, Illinois and Iowa. Add to the fact that only 62% of Missouri's 5.65 million acre soybean crop had been planted as of June 29th, we've got a big problem in our production fields. The bears that controlled the day in the grain market over the last several months have been knocked down a peg. This crop is going into July and August with one or two hands tied behind its back.

Of course, it wasn't supposed to be this way. Everything was leading up to benign weather boosting supply to unprecedented levels masking the record demand that continued unabated. US Corn demand is currently at 13.760 billion bushels, a record. It all great as long as you have record corn crops produced. Now, there's been a bit of a production hiccup and that demand will not be easily tempered. Noncommercial players in the grain market are dropping their short positions and getting long.

There are still a myriad of other factors affecting our grain markets such as the value of the US dollar, the softening in the Chinese economy and of course the macro economic problems that our European friends are having with Greece. These are important factors for grain demand, but at the moment with the 2015/16 crop in a bit of trouble in the United States it's taking the backstage. Acreage, yield projections and weather in the United States will certainly trump those concerns in the next several weeks.

Commodity Specific Comments

Corn

It is difficult to project how excessive rainfall does affect corn production in the United States. Yes, we've all seen the optics of too much rain making for yellow streaks in corn. However, wet weather is usually not as damaging as "hot and dry". USDA predictions of a 166.8 bu/acre corn crop now seem a bit dated. However, is 163 bu/acre more like it, 160 or 155 bushels/acre? This will certainly be top drawer in the next few weeks.

Will the 88.9 million acre figure released by USDA on June 30th hold true or will it be cut in future reports. This combined with the continued record demand has the potential to cut ending stocks down to the 1.5 billion bushel figure. This old crop ending stocks figure will become the beginning stocks figure for the following year so it is incredibly important what happens. As of now, it looks like supply is disappearing much more than expected.

The carry in the December 2015, March 2016 corn futures spread is at -.0925 cents, which reflects a neutral to bullish position in corn. Seasonally, the five-year seasonal index generally shows corn trades down through early July. The December contract is currently trading in the lower 20% of the five-year price distribution range.

Soybeans

We all know that soybeans don't like wet feet, especially when they are young. Missouri, Arkansas, Kansas and several other states have many soybean acres yet to get in and weather will determine whether that happens. Certainly, final planted acreage in soybeans will be important this year with the crop damaged. Demand remains very high.

This demand is certainly having an impact on any cut in soybean stocks. With 625 million bushels left as of June 1st, a normal fourth-quarter demand could easily send ending stocks below 300 million bushels or farther. Much will depend on whether all the soybeans get planted and of course that weather in August.

The November 2015 January 2016 soybean futures spread is bullish at -.05 cents. Noncommercial demand for soybeans has turned up. Seasonally, soybean futures tend to tread down through early July. The August contract is trading in the lower 11% of the past five-year price distribution range.

Wheat

Wheat has been somewhat of the poster boy with regard to market bullishness. Of course, it is a bit of a double edge sword as the extremely wet conditions at the time of pre-harvest in the United States has likely damaged the wheat crop. This is put much skittishness into the wheat market complex and for those who have good wheat the price spike is very good news.

Soft red winter wheat will likely be taken off in Ontario within the next 10 days. It will continue into July and Ontario producers are certainly hoping any disease concern is no different than any other year. We can expect much higher acreage of Ontario wheat this fall as spring crops got off to an earlier start in 2014. This should provide a window for a plus 1 million acres winter wheat crop this fall.

The Bottom Line (Cont.)

There has definitely been a change in psychology for the grain markets coming out of the June 30th USDA report. However, this time around in 2015 it was more about crop damaging weather than it was acreage and quarterly stocks. Simply put, any hiccup in supply in 2015 was going to send prices higher. Throughout the last several months there has been no hint of that in production fields but the monsoon in the corn belt over the last month has changed all that. The challenge now will be to understand just how that will manifest itself in future price action.

We have in place all of the older factors in the grain markets that are still in play. As of June 30th, Greece has defaulted on their debt to the international monetary fund putting them in the same category as Zimbabwe, Sudan and Argentina. This certainly is bad for the Euro and good for the US dollar and who knows what else for the greater European economy. The bottom line is this instability in Europe will have an effect on currencies and the demand for commodities.

In Ontario, this demand for currencies manifests itself in the value of the Canadian dollar, which is incredibly important for our cash grain prices. Where the US dollar goes, our Canadian loonie usually goes the opposite. As futures prices go up in a bullish market environment the foreign exchange calculation in our cash prices is accentuated. We should be concerned about grain futures prices, but also about the value of the Canadian dollar. Yes, this is the default criterion for Canadian grain growers. In a rising bullish market, it gets even more important.

It brings us back to volatility. We know there has been a change in our grain markets, but how much of a change in what will happen going forward? For instance, the USDA has pegged corn production at 166.8 and soybean production at 46 bushels per acre. On July 10th, we may get our first indication of how USDA thinks that may be changing. At the same time, market weather is so important and even more accentuated under the current circumstances. This will lead to much more violent price movements up-and-down. It will surely challenge your marketing acumen.

In Ontario we are headed into July and August with hope for very good wheat harvest and some weather kindness for corn and soybeans. It would also be good to see Essex County get planted. Fresh market news of damaging Midwest rains has certainly spurred prices to higher levels over the last few weeks. That said there are never any guarantees in this agriculture business. Daily market intelligence will remain key especially with our two-pronged look at grain futures and Canadian dollar values. The challenge will remain for Ontario farmers to market where they are comfortable and profitable. Standing orders for grain will remain key during this critical time.

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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The Market Trends report is also available as a podcast.

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