Market Trends

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

Post-March 31 Special 2015

US and World

The March 31st USDA prospective plantings report is one of three major USDA reports during the calendar year. In this report the USDA releases estimates of prospective US plantings based on surveys earlier in March. This is followed by the actual plantings report on June 30th with the January report always being the "final" USDA report. Needless to say, the March report always serves as a starting gun on the new crop year with new acreage estimates for 2015 US crops. The USDA quarterly stocks report released on March 31st is also an important measure for old crop demand.

On March 31st, USDA estimated 2015 corn acres would be 89.2 million acres, more than the trade expected and down from the 90.6 million acres planted in 2014. At the same time, USDA estimated total March 1st corn stocks at 7.745 billion bushels, which was more than the trade expected. The increase in projected 2015 acres plus the increased stocks sent corn sliding after the report was released. At the present pace of demand, US ending stocks estimates are close to on target of a projected ending stocks of 1.777 billion bushels.

The USDA issued somewhat of a surprise in soybeans, pegging US acreage at 84.6 million acres, which was less than the trade expected, but still a record high. Last year US soybean acreage was 83.70 million acres. The March 1st soybean quarterly stocks figure was pegged at 1.334 billion bushels, less than the trade expected. This represents about 67% of old crop soybean supplies have been used and implies a much lower ending stocks figure than the current 385 million bushels for this crop year. The US pegged all wheat plantings at 55.4 million acres and March 1st stocks at 1.124 billion bushels, less than expected, but with corn going down, wheat did too.

On April 1st, corn and soybean were higher and wheat nearby futures prices were lower than the last month. Corn futures as of April 1st had the May 2015 futures at $3.81 a bushel. The May 2015 soybeans were at $9.89 bushel. The March 2015 Chicago wheat futures closed at $5.06 a bushel on April 1st. The Minneapolis May 2015 wheat futures closed on April 1st at $5.90 a bushel with the September 2015 contract closing at $6.01 a bushel.

The nearby oil futures as of April 1st closed at $51.09/barrel up from the nearby futures of last month of $44.84. The average price for ethanol on April 1st in the US was $1.86 a US gallon vs. last month at $1.82 a US gallon.

The Canadian dollar noon rate on April 1st was .7929 US up from the .7811 US reported here last month. The Bank of Canada's lending rate remained at 0.75%.

Ontario

The snow is receding, almost gone as of April 1st. In fact, across the province corn planters are being pulled out and fine-tuned for the ultimate time when the ground is fit to go. Of course the question this year in Ontario farm country is what will be the crop mix? Will Ontario follow the United States with a little bit more corn than expected and little bit less soybeans than expected? Where one time over the last few months the specter of 1.5 million acres of corn and 3 million acres of soybeans seemed reasonable, with the precipitous drop of the Canadian dollar cash prices may now increase those corn acres. Spring weather will certainly help determine that.

Basis levels have been largely determined by the value of the Canadian dollar in the $.78-$.80 range over the last few weeks. However, old and new crop corn basis has been maintained over the last few weeks, with producers seemingly more happy to sell new corn versus old corn. Ample supplies of Ontario corn will likely keep our non-import pricing into summer.

The Ontario crop mix scenario will certainly also be altered by the health of the Ontario wheat crop coming out of dormancy. Although our wheat acres are down to approximately 600,000, much of that crop may be unviable having been planted into less than stellar conditions last fall. Producers will be determining that scenario within the next few weeks and some of those acres may likely end up into the corn and soybean column this spring.

Old crop corn basis levels are .80 to $1.00 over the May 2015 corn futures on April 1st across the province. The new crop corn basis varied from .40 to $.95 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $1.74 cents to $2.09 over the May 2015 futures. New crop soybeans range from $1.60 to $2.00 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on April 1st were $7.69 for SWW, $7.24 for HRW, $6.74 for SRW and $7.02 for Red Spring Wheat. On April 1st the US replacement price for corn was $5.12/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

Sometimes you have to be careful what you wish for. This past winter the bearishness in the grains market was palpable, as it seemed everybody was looking at the huge South American crop coming to market along with predictions of bigger crops in the United States in 2015. This was coupled with record production last year in the United States, which added to the bearish tone over the winter. How much less corn would the United States plant in 2015 and would there be any limit to the amount of soybeans American farmers would plant? Then, the March 31 USDA report comes along and squashes all that. It would seem the American farmer is going to grow a little bit more corn than the market was thinking.

Of course this 89.2 million acres of possible corn production in the United States could be easily reach 90 million with good weather. This was coupled with a much higher quarterly stocks report than was expected sending corn futures prices down on report day. It goes to show that sometimes we can be captive of the hype within the market. American farmers have always had a tendency to grow corn and the March 31 USDA report partially reflects that. Yield in 2015 will largely determine corn ending stocks. A yield of 159 bu/acre is likely to produce an ending stock of approximately 1.2 billion bushels and the yield of 175 (similar to 2014) would produce an ending stocks of approximately 2.5 billion bushels. Clearly, weather is key as we move ahead.

The hype in soybean projections had been unreal this past winter. There were even some analysts talking about 90 million acres of US soybeans. The March 31 USDA estimate of 84.6 million acres is a record, but far lower than the market had expected. With quarterly stocks coming in less than expected, it's almost like soybeans have turned the page. Insatiable demand from China helps. At a certain point there will be a switch to South American soybeans, but soybean prices have turned somewhat of a bullish page.

The USDA made huge cuts in corn acres in states, which had very low basis levels over the last year. For instance, South Dakota projections for corn acres was cut 600,000 acres. There were 100,000 acre declines expected in Indiana, Iowa, Michigan and North Dakota, as well as 200,000 acre cuts in Illinois Missouri and Ohio. There was also a 3.2 million acre cut in total acres used by the USDA. So going forward it is completely obvious there is much in play with acres depending on weather. On April 1st there is even a concern now about dryness in the American Midwest. Needless to say, these types of weather pronouncements will almost be a daily occurrence until the crop is made.

Commodity Specific Comments

Corn

With the increase in acreage expectations for 2015 along with increased quarterly stocks the corn market took a bit of a psychological blow on report day. However, corn demand is still incredibly strong, now pegged at 13.695 billion bushels in the March 31 USDA report. It is completely obvious that when the supply hiccup comes someday through a weather event, that demand will not be easily tempered. Price will need to go up to ration that demand at a certain point.

A caveat to that synopsis is that USDA may have overestimated feed demand by at least 100 to 150 million bushels. On April 9th, USDA will release another stocks report and may possibly take away some of this feed demand. This will add to the corn ending stocks, which may knock corn further.

The corn futures spreads between the May 2015 and July 2015 are neutral as of April 1st at .0825 cents. The May contract is trading in the lower 18% of the five-year distribution range. This is an indication, that compared to the last five years corn is still cheap. Seasonally, corn futures tend to trend up through the first week in May.

Soybeans

The soybean market was the clear winner from the USDA planting projections on March 31st. Of course, headlines often drive noncommercial investment interests in the futures market and the hype over even bigger acres had added to the bearishness in the soybean complex. Despite, that, a record soybean crop projection, prices gained after the report. Spring weather may also affect these acres, especially if planting is good for corn.

The market is almost become numb to the huge South American crop currently finishing up in the southern hemisphere. However, these soybeans our reaching port slowly and will be filling Chinese orders accordingly. There may also be Brazilian soybeans landing in the United States at a certain point. This should serve as a reminder to us all about the record supply produced this past year. It will continue to keep a lid on prices for the time being.

The soybean futures spread between the May 2015 and July 2015 futures is at -.0475 cents US as of April 1st. There is weak carry in both the old crop and new crop futures months and this reflects a somewhat bullish commercial outlook. Seasonally the market tends to rally through May. Presently, the May soybean contract is trading in the lower 7% of the five-year price distribution range.

Wheat

The USDA pegged the winter wheat acreage in the United States at 40.8 million, which is down from last year. All the wheat planted for 2015 was estimated at 55.4 million acres, down 3% from 2014. Wheat prices are usually not determined by US wheat projections. It is grown on four different continents, planted and harvested almost all year.

The Ontario crop went in the ground very tough last fall and its viability will have to be determined in the next few weeks. Ontario spring wheat acres could see an increase this year in Eastern Ontario reflecting the demand from livestock producers for straw. The next 30 days will largely determine the Ontario wheat outlook.

The Bottom Line (cont.)

For Ontario farmers, futures prices are very important as they reflect the futures price of grain at any particular month. However, in the later part of 2013, all of 2014 and into 2015 the precipitous drop in the Canadian dollar has been the story for cash grain prices in Ontario. Late in March, Bank of Canada governor Stephen Poloz warned Canadians that our first quarter economic performance in Canada was atrocious! That is not the greatest news for the Canadian dollar.

Simply put, hedging the Canadian dollar is not always the answer, but daily market intelligence must include it always. The Ontario corn basis does not follow the Canadian dollar to the same degree as soybeans and wheat. With that in mind, farmers need to be ready for sharp volatility in the Canadian dollar and to take advantage of it when cash prices are right, not necessarily futures. However, sometimes both can be favorable. Our grain marketing management needs to encompass these very important foreign exchange factors. It is a very important "extra layer" always present in Canadian grain marketing management.

Having said that, it is always important to be aware of our Ontario market dynamics. A 2 million acre corn yield at 165-170 bushels per acre, which we achieved last year puts Ontario in a position where our corn prices are some of the cheapest in North America, especially at harvest time. If we achieve that in 2015 our basis levels will be correspondingly low. On the other hand if yield and quality are poor, US imports will be part of that equation raising our cash prices. On the other hand for soybeans and wheat, we export large amounts out of the province. Those factors are key to combine with your grain futures management.

Geopolitics are still very important. The Black Sea region, which has been so unstable will remain so. The energy market will likely continue to be weak. Oil prices are almost 1/3 of what they were five years ago. All of these factors could produce a black swan event or unexpected Tuesday event at any one moment.

The challenge ahead is in our fields. Our American friends are already there in the South. In Ontario, corn planters will be rolling this month. The March 31st USDA report readjusted market expectations. Daily market intelligence will be key over the next three months leading up to the June 30th USDA actual plantings report. Standing orders for selling grain are one tool, which help in this environment. The grain market works days and night. Work safe out there and remember, risk management never gets old.

USDA Reports

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

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World agricultural supply and demand estimates Monthly

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