Market Trends Report for December 2014-January 2015

US and World

The corn and soybean harvest across the American corn belt has been effectively over for several weeks now. There is corn and some soybeans still to harvest in northern states, but the record harvest, which was born in their moderate summer has been locked in American bins for the time being. Interestingly enough, talk of record crops all year drove prices down to their lows in early October followed by an impressive rally into late October, November and December putting corn prices at 5 month highs as of Dec 14th. It just goes to show even in a year with record crops sometimes price has a mind of its own.

The USDA weighed in with their latest crop report on December 10th. In the report the USDA actually trimmed corn domestic stocks to just less than 2 billion bushels, while reducing soybean stocks to 410 million bushels. The corn stocks to use ratio was reduced to 14.6%. The soybean stocks to use ratio decreased to 11.2%.

On the global scale, the USDA increased corn-ending stocks to 192 MMT up slightly from last month because of a cut in Argentinian production. At the same time the USDA pegged a slight reduction of global ending soybean stocks to 89.9 MMT. This happened despite a very robust estimate in Brazil and Argentinian soybean production this coming growing season at 94 and 55 MMT respectfully. The USDA also boosted world wheat ending stocks, citing Kazakhstan and Western Canada with production increases.

On Dec 14th, corn, soybean and wheat nearby futures prices were higher than the last report. Corn futures as of Dec 14th had the March 2015 futures at $4.07 a bushel. The January 2015 soybeans were at $10.47 bushel. The March 2015 Chicago wheat futures closed at $6.06 a bushel on Dec 12th. The Minneapolis March 2015 wheat futures closed on December 14th at $6.28 a bushel with the July 2015 contract closing at 6.07 a bushel.

The nearby oil futures as of Dec 14th closed at $57.81/barrel down sharply from the nearby futures of last month of $75.82. The average price for ethanol on December 14th in the US was $2.47 a US gallon vs. last month at $2.57 a US gallon.

The Canadian dollar noon rate on December 12th was .8666 US down from the .8854 US reported here last month. The Bank of Canada's lending rate remained at 1.00%.

Ontario

In Ontario corn continues to be harvested into the middle of December in many parts of the province. Snow events in central and eastern Ontario have slowed this harvest, but generally early December weather has been very conducive to finishing much of the corn harvest in Ontario. 10 to 20% of Ontario corn may still be in the field with some areas in central Ontario having more. It has been a very difficult harvest season and one farmers would surely want to put behind them.

Corn has been harvested at very high moisture with quality issues across the province. While some areas may have quite a bit of grade 2 corn, there are many other areas that have had grades of 3, 4, 5 and sample. The Ontario corn basis has also been historically high rising through harvest to +55 over the March futures in southwestern Ontario and his highest plus $.85 in Eastern Ontario. Corn continues to be imported into the province. It is quite evident that the Ontario corn yield is down possibly at 140 bushels per acre. This combined with possibly a too optimistic outlook of planted acres at 1.9 million may be another reason why Ontario corn basis has exploded though harvest.

On farm bin space may also be a factor in this basis appreciation. More corn is stored on farm than ever before and some commercial space remains empty. This combined with a reduced crop has triggered basis. It's a change in market structure significant to Ontario grain pricing.

Underneath the difficult harvest this past fall has been a Canadian dollar falling down to the 86-point level. This has had an obvious effect on both the wheat and soybean basis and has put somewhat of a support under the corn basis. The lower dollar always translates into higher cash prices in Ontario and this has added to support throughout the fall season.

Ontario wheat acreage remains pegged at 600,000 acres. This is suspect based on the difficult fall, but there were a few more acres planted in December. It is all a theory now based on the extent and scope of this coming winter. The decrease in wheat acreage this fall will surely result in higher corn and soybean acreage in the spring of 2015.

Old crop corn basis levels are .55 to .85 over the March 2014 corn futures on Dec 14th across the province. The new crop corn basis varied from .05 to .15 over the December 2015 corn futures. The old crop basis levels for soybeans as of Dec 14th range from $1.00 cents to $1.56 over the January 2015 futures. New crop soybeans range from $0.50 to $1.20 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on Dec 14th were $7.71 for SWW, $7.31 for HRW, $6.84 for SRW and $6.60 for Red Spring Wheat. On Dec 14th the US replacement price for corn was $5.28/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

For Ontario farmers prices have changed much for the better. It is a very good thing of course and somewhat unexpected after a summer where our American friends produced both record corn and soybean crops. Of course, everything changed when futures prices started to rally in October as an American crop was coming off the fields and farmers tightly sealed their bins. The Canadian dollar also chimed in with another precipitous decline just like last year at this time. It just goes to show that even in the most bearish time, agricultural prices can sometimes rebound in the face of adversity.

There are a myriad of reasons agricultural prices have rallied off their 1st week of October lows. However, as we sit on December 14th the world has changed to some extent compared to those long days last summer. The price of oil has plummeted, losing 40% of its value since June now below $60 a barrel. This not only caused uneasiness in the commodity world, but it also changed some of the geopolitics affecting the grain trade. Rumors of Russia holding grain exports as their ruble falls have permeated the market. There were even rumors of Ukraine defaulting on corn exports to China this past week. It is enough uncertainty to send a chill through grain markets, which currently is testing ways to get the American farmer to unlock those bin doors.

Soybeans have also held their own refusing to break down fully out of their sideways range. It is no secret that record crops are growing in the soils of Brazil and Argentina right now. Weather in South America has been benign and mountains of beans loom on the horizon. Needless to say, even in this bearish environment China continues to import beans from our American friends at record levels. Of course any semblance of a crop problem in South America over the next few weeks has the potential to cause explosive price movement. Chinese buyers will certainly be watching this to determine their buying preferences. The Brazil versus United States soybean buying decision for China always causes some intriguing market action in soybeans.

The run-up in agricultural futures prices has also been taking place in an environment with significant negative headwinds. This is mainly being caused by the appreciation in the US dollar. The US dollar always acts as the world's default currency and with commodities priced in US dollars any increase in its value reduces demand for the commodity. This should continue to temper agricultural price upward movement as the American economy is doing well and investors are flocking to it, especially at a time when oil prices are dropping.

Commodity Specific Comments

Corn

Corn likes to be king when it comes to our agricultural commodity markets. As of December 14th, March corn finds itself at a 5-month high, kind of a surprise especially with the record corn crop now in the bin across the United States. Corn is also benefiting from an increase in noncommercial demand getting into the corn market. There is also strong first quarter demand that surely will show up in the January 12th USDA report.

At a certain point you would think that we will be revisiting lower prices especially with that record crop in the bin and the 2015 calendar date almost here. However, there is even talk of March corn challenging the 200 day moving average of $4.24/bushel. This late fall rally going into winter certainly points toward the January 12th USDA report as a major market mover looking forward.

The March corn contract continues to trade in the lower 21% of the five-year distribution range. Seasonally, the March contract tends to trend upward through early March. The future spread outward toward July 2015 has narrowed recently and reflects a more neutral market structure.

Soybeans

Soybean meal and Chinese demand continue to support soybean prices even at a time of record crops and very high stocks. The December 10th USDA report reflected part of this as it reduced ending stocks 40 million bushels, but this is still 4 times the soybean ending stocks which we had a year ago. With our South American friends having what looks like record crops, one might be waiting for the shoe to drop. However, as we all know production issues might sneak into the South American forecast. Demand is very strong. This has helped keep soybeans in sideways movement and from free fall.

The January 12th USDA report may hold some surprises for soybeans. Will the USDA changed the yield figure of 47.5 bushels per acre? Will they change the acres harvested? Will we continue to see strong demand for US soybeans with reduced stock numbers coming later in January? These are all questions soybean farmer's want answered, as it will have a big effect on price.

The January soybean contract is trading in the lower 22% of five-year price distribution range. Seasonally, soybeans tend to trend up through the first week of May. Soybean futures have actually grown more neutral to bullish over the last few weeks. The next target on a weekly chart as of December 14th would be $10.98 bushel.

Wheat

Despite the variation of numbers coming out of the December 10th USDA report on wheat, prices have been somewhat resilient. This is being caused to some extent by rumors of Russia limiting wheat exports as well as dryness in both Russia and Ukraine going into winter. A lack of snow cover may shorten the crop in 2015. Of course wheat has 9 lives, so maybe we are grasping at straws, but strength in this market has been impressive as of late.

Wheat prices in Ontario have also benefited from the decline in the Canadian dollar. This has pushed wheat prices back up to levels over last summer. Wheat acreage in Ontario currently set at 600,000 is likely to decrease comes spring.

The Bottom Line (Cont.)

2014 will certainly go down as having a very difficult fall harvest season. For some of us crops were planted late, making the fall season so much more difficult. On top of that the bearish market environment, caused by record crops in the United States, just made it harder. However, the world seems different now as prices have rebounded and the Canadian dollar is changing the pricing game in Ontario. Oil is in free fall and geopolitics is affecting commodity prices around the world. Volatility has been redefined once more.

There is no question the drop in oil prices of over 40% since June is having an effect on agricultural prices around the world. In fact, commodity prices in general have a difficult time when oil is dropping. An argument can be made that the agricultural sector has held its own. An argument can also be made that high oil prices are good for agriculture because of the biofuel sector. As gasoline gets cheaper, the economics of ethanol gets a little bit more compromised. Ethanol demand is still very strong but gasoline and oil demand is not. How this will work out at the end of the day may depend on whether oil can stem its free fall. It certainly will happen; it is just a question of when.

Some call it the Petro-loonie. Of course, that is the Canadian dollar, which in times of oil price free fall tends to drop precipitously. Of course this is also taking place at a time when the US dollar is rising. The oil price is declining because of reduced demand and higher supply, but also because the US dollar is rising. The Canadian dollar in this environment drops and we have certainly seen that over the last few weeks. The result is higher cash prices to Ontario farmers. It also results in a very challenging marketing environment for Ontario farmers, as cash price risk in 2014 has been huge. Looking ahead the value of the Canadian dollar will remain a key factor in pricing grain in Ontario.

As we move ahead into January, we will certainly be seeing a shift in market mentality, not only in the trading pits but also in farmers' minds. The January 12th USDA report may put an exclamation point on the 2014 grain market production numbers causing a limit move. However, since USDA reports have been released during the live trading that is less likely. In any case, farmers are likely to turn the page looking toward the new year. Pricing of the 2015 crop will certainly begin in earnest.

In Ontario producers will certainly chip away at the remaining corn in the field. This tough fall has left more than we'd like. Whether US corn continues to be imported will surely depend on a myriad of factors, our production, US basis, Canadian dollar value and demand. It is very unusual. However, this is agriculture where change is our only constant. The challenge for Ontario farmers moving into January 2015 is to keep up with that daily market intelligence. If 2014 Ontario cash grain prices taught us anything, it was to expect the unexpected. Moving into 2015, it surely will be something different. Grain market structure is changing all across the world. Selling into opportunities never grows old.

Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications.

Market Trends Report for November-December 2014

US and World

What is a record crop is now coming off in the US corn belt. Where the old axiom has always been rain makes grain, the 2014 season might have redefined that. While we in Ontario had what we would consider a cold summer, delaying our crop maturity our friends in the United States cornbelt enjoyed moderate temperatures, especially nights that were below 80°F. This essentially boosted production substantially with the state of Illinois actually looking at a 200 bushel per acre corn statewide yield this year.

This was substantiated in the recent October 10 USDA report. In this report the USDA increased its corn production estimate to 14.5 billion bushels and it's soybean estimate to 3.9 billion bushels, both records. This is being done on 83.1 million acres of harvested corn and 83.4 million acres of harvested soybeans. We have been hearing about record crops for many weeks and months now and USDA has backed that up.

The demand is still very strong for both corn and soybeans. However, it is like a supply tsunami. The USDA increased new crop corn ending stocks to 2.081 billion bushels, which was less than what the trade had expected. The corn ending stocks to use ratio sits at 15.2%. The ending stocks for soybeans were reduced to 450 million bushels from 475, but almost 4 times higher than last year. The soybeans stocks to use ratio is at 12.6%. Wheat ending stocks in the USDA report were trimmed both for the US and world reports. The US wheat stocks to use ratio remains at 27.5%.

On October 10th, corn, soybean and wheat futures prices were lower than the last report. Corn futures as of October 10th had the December 2014 futures at $3.34 a bushel. The November 2014 soybeans were at $9.22 bushel. The December 2014 Chicago wheat futures closed at $4.98 a bushel on October 10th. The Minneapolis December 2014 wheat futures closed on October 10th at $5.53 a bushel with the July 2015 contract closing at 5.83 a bushel.

The nearby oil futures as of October 10th closed at $85.82/barrel down from the nearby futures of last month of $92.27barrel. The average price for ethanol on October 10th in the US was $2.03 a US gallon vs. last month at $2.36 a US gallon.

The Canadian dollar noon rate on October 10th was .8947 US down from the .9029 US reported here last month. The Bank of Canada's lending rate remained at 1.00%.

Ontario

In Ontario the fall is started in earnest across the province. Wet conditions in much of Ontario have delayed harvest. Some producers have struggled to get wheat in the ground. However, there is still time for this and producers are hoping for good harvest weather into the end of October and into mid-November to get things done.

Soybean yields have been quite healthy this harvest season. In some instances white mold has taken a toll on yield. Also too, as of October 11th the majority of soybeans are still in the field awaiting good harvest weather. A series of frost across the province on October 10 and 11th will likely make harvesting easier.

There has been some early corn taken off across the province. The cold summer is certainly causing issues in those harvest fields. There is a wide variability of grades with test weight issues being part of the problem. There has also been widespread frost in September in Eastern Ontario which is adding to some of the variability in quality. Some corn has not even reached black lawyer as of Canadian Thanksgiving weekend. As it is, the Ontario corn harvest this year is likely to be challenging because of the different planting dates and the cold summer making maturity such an issue. Producers need to be cognizant of this as they make their marketing plans.

We knew the crop was late and we knew that we were importing corn from the United States as we descended into October. We continue to import corn and it will remain that way until Ontario supply finally comes on stream. Basis levels will be fluid, especially if there are test weight issues in the offing.

Old crop corn (for the crop coming off now) basis levels are .30 to .55 over the December 2014 corn futures on October 10th across the province. The new crop corn basis varied from -.05 to -.10 under the December 2015 corn futures. The old crop basis levels for soybeans as of October 10th range from .38 cents to $1.14 over the November 2014 futures. New crop soybeans range from $0.15 to .62 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on October 10th were $5.71 for SWW, $5.82 for HRW, $5.32 for SRW and $5.71 for Red Spring Wheat. On October 10th the US replacement price for corn was $4.94/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

The rubber is hitting the road. The October USDA report reflected some of the very good harvest results that were finding in the United States. With the projected corn yield to be 174.2 bushels per acre and soybeans at 47.1 bushels per acre we are finally getting to the enormity of what is the 2014 crop. While the moderate summer has been tremendous for corn and soybean yields keep in mind that the October report was taken from surveys in late September and early October, when few actual yield results were in. It's never over till it's over and as combines are rolling we should have a better appreciation for what is coming out of US fields.

It is hard to spin a positive forecast from these big yields in the United States. For instance, in the October USDA report, there was actually a drop in harvested corn acreage down 700,000 acres of from September. The futures market reacted by its continual spiral down, not seeming to matter in this year when everything is coming up yield positive. There is also the issue of lower test weight corn, which surely may turn up in the northern US corn belt. This may reduce the US corn yield further as time goes on. However, it is unlikely that that will be realized for quite some time possibly after the January final USDA report.

The US dollar index has also been a detriment to futures prices for all commodities over the last few weeks, currently trading at 86.031. The US dollar index is a measurement against a basket of other world currencies and as its value goes up is more difficult to pay for these commodities in the world's default currency. This serves as a drag on demand and in this current price structure is not very positive. The global economic outlook is not very good, with the exception of the American economy, which is starting to really fire on all cylinders. This is good for the US dollar and a negative for commodities going forward.

The wheat market is always difficult to measure as production is everywhere and demand is everywhere. The USDA actually pegged the global wheat ending stocks down 192.6 MMT, which is down from their September estimate. However, production increases in places like Russia this past year have kept any price nervousness at bay. Wheat is simply adding to the bearish environment in grains.

Commodity Specific Concern

Corn

The October USDA report pushed yield much higher to 14.475 billion bushels and of course this is the story that makes headlines. However, it is pertinent to know that demand was also boosted to 13.655 billion bushels, a huge number. Feed and ethanol were both boosted up at 5.375 and 5.125 billion bushels respectively. Yes, the stocks to use ratio is also up at 15.2%, but this is always good in a bearish market environment to have great demand.

Of course we all want to know if the lows are in and of course the answer to that question is nobody knows. However, seasonally and the corn price usually reaches a low in the 1st week of October, something now which is in the rearview mirror. Yes, ending stocks are projected at 2.081 billion bushels, so price will have a fight on its hands. Needless to say, if history proves out, maybe it's uphill from here. Of course the smart bet is sideways.

The future spread in the December 2014 to March 2015 corn contract is bearish at -12.75 cents. The December contract is trading in the lower 4% of the 5 year distribution range reflecting just how cheap corn is now compared to the last 5 years. Yes, commercials are bearish as there is lots of market carry into the summer. However, sometimes that carry disappears as time moves on.

Soybeans

Soybeans aren't the wildcard they used to be. The October USDA report pegged soybean production at a record 3.927 billion bushels. There are even private estimates out there over 4 billion bushels. Of course ending stocks are projected at 450 million bushels, over 4 times bigger than what we had this past year. So it's easy to be bearish with soybeans and there is likely underside to the current price.

The underside to the current price has to do with the ending stocks as well as possible future yield increases by USDA. There are also projected planting increases in places like Argentina and Brazil, which is starting planting now. This all adds to the nervousness in the soybean complex. With corn prices being low, there is also the realization there might be even more soybean acres next year in the United States. It's all a theory now, but everything is pointing at least for the moment as negative for soybeans.

The November 2014 January 2015 soybean futures spread is now somewhat neutral at -.0 $.08. The soybean market tends to trend up in the month of October possibly reflecting this neutral position. However, just like the other grains soybeans are bearish with the November contract currently trading in the lower 5% of the five-year price distribution range.

Wheat

Of all the grains in the October USDA report, wheat was the most bullish in a very bearish market situation. Cuts in the global wheat ending stocks are always welcome from a price perspective. However, the carry in the future spreads continues to weaken looking out into 2015. The Chicago wheat market usually trends up through the end of October. So maybe there is hope for a more bullish situation to develop in wheat.

Of course the question on the minds of everybody in Ontario is getting wheat in the ground. A late start to harvesting in many areas has delayed wheat planting and ground conditions continue to be a challenge. Weather into the end of October will certainly determine whether Ontario wheat acreage gets back over 1 million.

The Bottom Line (cont.)

The rubber might have hit the road, but as we all know in the farming business changes are only constant. It's the same for agricultural commodity prices. Yes, this is a very bearish market environment. The coolish summer has been the prescription for record grain production, but keep in mind it will not stay this way. The agricultural economics inherent in the grain complex will determine shifts in plantings and production. Then add weather to the mix, and marketing opportunities will surely come along. Stay positive, don't let short term price projections cloud your long-term future.

As a huge mitigating factor in grain price projections in Ontario this year continues to be the Canadian dollar trading under $.90 US. This essentially is cushioning some of the optics behind the price decline and it actually may continue raising cash price bids in Ontario. This is also a big factor when determining hedging strategies and price goals. With the US dollar surging, pressure will continue on the Canadian loonie.

The cash price environment in Ontario will also surely be affected by the quality of this year's corn crop. For instance with frost hitting much of Eastern Ontario's corn early the vestiges of low test weight corn are very real. With the lateness of the crop in southwestern Ontario, some of the same test weight issues may surely result in lower grades. In this market environment there may be cash price anomalies offered for corn and on the flipside discounts applied. Producers need to have a strategy to deal with cash bids. A strong warm month of weather would mitigate much of this. However, this is Canada and although it's happened before, its unlikely.

It surely is a fluid market environment, but different in one significant way, that is the anchor of corn and soybean ending stocks. They are so significant, we can't “demand” our way out of them. There will be no war for acres next year because end users know the supply will be there unless there is a drought tsunami. Normal years will begat normal years. It'll take an act of God on the weather front to lower supply. Eventually, that will happen.

The immediate challenge ahead in Ontario is to get our crop in the bin and wheat in the ground. In many parts of Ontario, its been a late start to harvest and with that comes many marketing opportunities. Early corn harvest has been one of them. It's not easy this fall, its been several years since we've seen these lower prices. Precision focus on cash bids and futures markets on a daily basis will help give context to our marketing decisions. There will be opportunities ahead. The hard part is measuring the market factors to capture those moments. We got here with our eyes wide open and its no time to shut them now.

Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications.