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US and World
Harvest time is in full swing across United States and Ontario. There have been delays, but as usual, farmers in 2017 like they have many times before are finding ways to get the crop in the bin. Yield monitors flickering on social media have been a harbinger of big yields in the United States as one of the biggest crops in American history gets closer to the finish line. How big that crop has become has been a great subject of debate over the last several months.
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On November 9th USDA chimed in with their latest crop production report. In a surprise move, which shocked the market the USDA raised 2017/2018-corn production to 14.58 billion bushels. This was on a projected yield of 175.4 bushels per acre, which was up from its October estimate of 171.8 bushels per acre. This was outside any pre-report estimates on the high side and the market responded accordingly by falling seven cents on the day. If this yield comes to fruition, it will be the largest US domestic corn yield in history. US domestic corn stocks are projected to increase to 2.49 billion bushels, a very onerous figure headed into next year.
It was a different story for soybeans. The USDA projected soybean production for 2017/2018 to be 4.425 billion bushels, which was actually down from their October estimate of 4.431 billion bushels. This was within range of pre-report estimates. It was based on a US final yield of 49.5 bushels per acre, which was the same as the October estimate. The US soybean ending stocks were reduced to 425 million bushels, which was down from their October estimate of 430 million bushels. The 2017/2018 US wheat-ending stocks were pegged at 935 million bushels, which was down from their October estimate of 960 million bushels.
On Nov 11th, corn soybeans and wheat futures were lower than the last Market Trends report. December corn 2017 futures were at $3.43 a bushel. The January 2018 soybean futures were at $9.87 a bushel. The December 2017 Chicago wheat futures closed at $4.31 a bushel. The Minneapolis December 2017 wheat futures closed at $6.47 a bushel with the September 2018 contract closing at $6.46 a bushel.
The nearby oil futures as of November 11th closed at $56.74/barrel up from the nearby futures of last month of $51.45/barrel. The average price for ethanol on November 11th in the US was $1.62 a US gallon down from last month at $1.65 a US gallon.
The Canadian dollar noon rate on November 11th was .7885 US down from .8008 US reported here last month. The Bank of Canada’s lending rate remained at 1.0%.
In Ontario, both soybeans and corn are being harvested in a fall, which has seen some uneven weather. For instance, a significant percentage of Ontario soybeans are still in the field as of November 11th as warm sunny days have been at a premium and soggy ground conditions are only adding to the difficulty. At the same time corn is being harvested across the province with some very high yields being reported in the Deep South West as well as many other parts of the province. It would seem that the Statistics Canada estimate of 169.5 bushels per acre might come to fruition. If this is true, it will be the largest Ontario corn yield ever reported. However, with difficult harvest weather and snow as we head to December, it is likely that in some areas, much of the corn crop will not be harvested until 2018.
The Canadian dollar has given back a couple cents since last month, which has been helpful for the Ontario soybean basis. The Ontario corn basis has held together during harvest so far, with the higher basis in Eastern Ontario still very evident. This is likely to be maintained throughout the year giving these producers some advantage over producers west of Toronto. It is very likely based on the volume of corn coming off in Ontario there will be enough corn to satisfy domestic demand for the rest of the year. However, harvest is not over yet, there is much more that could happen.
Ontario farmers will need to continue to watch the Canadian dollar and anticipate how that might affect the soybean and wheat basis. It is unlikely to affect the corn basis for the next few months. The major factor affecting the Canadian dollar is the value of the US dollar, which has been going up since September 8th. Generally speaking, the Canadian dollars value is inverse to the value of the US dollar. President Trump, NAFTA, US Federal Reserve News and the Bank of Canada monetary policy moves all have an effect on this foreign exchange puzzle. Flat cash pricing in Ontario is gaining favour because of this.
Old crop corn basis levels are $.70 to $1.25 over the December 2017 corn futures on November 11th across the province. The new crop corn basis varied from .70 to .90 over the December 2018 corn futures. The old crop basis levels for soybeans range from $1.75 cents to $2.00 over the January 2018 futures. New crop soybeans range from $1.85-$2.00 over the November 2018 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on November 11th were $5.09 for SWW, $5.34 for HRW, $5.22 for SRW and $7.07 for Red Spring Wheat. On November 11th the US replacement price for corn was $4.67/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
Over two decades of writing market commentary, I’ve seen the USDA provide many of a surprise when it comes to estimating actual yields. The November 9th USDA report counts as one of those reports that truly shocked the market. All summer we had heard about crop conditions reports coming from the USDA’s own NASS crop condition numbers, which were worse than 2016. However, there was room in the expectation window for higher yields, but it was a surprise to almost everybody that the USDA pushed corn yield to 175.4 bushels/acre from 172.3 bushels per acre last month. One explanation was ear weights, which were higher than projected.
How does this happen? Answering that question would probably take a PhD thesis, but clearly science, improved genetics and management are weighing into the corn yield equation. The USDA weighed in with their number in an already bearish market environment, where deferred corn futures spreads were giving us all the clues. We might not be in the 300 bushels per acre world yet, but it would seem that were getting closer every year.
The market is surely adjusting to this new market reality and the next few weeks in the futures market should tell us more about the strength of demand and whether these current low prices will be maintained. The January USDA “final” report is also in the distance and in this bearish market environment, it might not be too off-board by surmising US corn yield might go up again.
Soybeans held court after the November USDA report was announced, even though traders were expecting a reduction in yield. Needless to say, 4.425 billion bushels is a record US soybean crop. In many ways, if you think hard about that, maintaining a soybean futures price at $9.87 or $10.00 with that supply is hard to imagine. That is how strong demand is. Big supplies of soybeans are never guaranteed, even though on a global basis it continues to keep up with demand.
Commodity Specific Comments
The corn market is recoiling from the USDA’s big markets surprise of 175.4 bushels per acre. However, as of November 11th, corn is still about $.11 above last year’s lows, which happened in August. Therefore, we are not far away from those lows but from a calendar perspective it is completely different. If the US dollar cools a bit, it may help to keep from going down further.
At these prices, corn is the favored feed source over wheat and it is likely to continue if prices do not move. One could argue that the corn futures range from approximately $3.40 to $4.30 and producers have to find their way through that, especially in a market environment where we have US corn ending stocks of approximately 2.5 billion bushels.
The December 2017 March 2018 corn futures spread as of November 11th is currently -13.25 cents, which is considered bearish. Seasonally the corn futures markets five-year range shows that it trends up into the first week of December. The December contract is currently priced in the lower 7% of the corn futures market past five-year price distribution range.
Everybody it would seem is thinking that soybeans might hold the key to higher prices in the grains complex. There is certainly good demand for soybeans, which is continually growing and always depends on an ever-expanding supply from both the United States and South America. A record production in the United States this year will again satisfy that requirement.
Clearly, with soybeans still to be harvested and South American soybeans in all stages of development from planting there is much risk within this market. However, numbers do not lie and there are lots of beans at the moment. Any hiccup in the South American weather forecast in the next two months will cause some excitement in the soybean futures market.
The January 2018 March 2018 soybean futures spread is $-.11 as of November 11th. This is considered bearish. Seasonally the soybean futures market over the last five years shows it nearby futures tend to trend up through the first week of December. The January soybean futures contract is currently priced at the lower 42% of the past five-year price distribution range.
There is lots of wheat in the world and that means that Chicago wheat futures remain in a low range where they finished on November 9th at $4.31. 91% of US winter wheat has been planted in the latest USDA crop progress report. This acreage will likely be at risk considering that soybeans again look like a better bet versus other grains. These futures prices are likely to remain in a roughly sideways pattern throughout the winter.
Winter wheat acreage in Ontario had a staggered planting progress throughout the month of October. Much of the wheat planted in the October 18-21 range went into the ground in good shape but got heavy rain after that. It is difficult to know exactly how many acres were planted but it is likely to be the same or more has 2017. Of course, along Canadian winter is in the offing and it will have much to say with regard to 2018 wheat acreage.
The Bottom Line (cont.)
In this bearish market environment there is hope, even though that is not a marketing plan. It comes again from China, which announced recently a new government policy to implement a 10% ethanol blend nationwide by 2020. At the present time ethanol added gasoline is only available in approximately 11 provinces and represents only 20% of gasoline consumed in China. According to DTN, at the present time there are 205 million cars in China, which consumed 3.8 billion gallons of gasoline. At 10% ethanol blend would ultimately result in corn demand of 1.4 billion bushels.
Keep in mind that not all ethanol in China is produced from corn and that the total ethanol demand figure might be less. However, this is not a reality yet, only a policy goal. It represents future demand that is not there yet, but it is on the way. It represents hope for the future of commodity demand. With China’s burgeoning population and increasing economic growth, there is a great need. However, getting there is never smooth. Putting the infrastructure together in China to satisfy this ethanol goal will take time, patience and probably a little luck from a North American farmer’s perspective.
Of course, our world is in a bit of an uneven state at the moment with the Americans aggressively redefining trade agreements such as NAFTA and the TPP. Believing that American grain can seamlessly trade into these markets without trade agreements seems fanciful, but it is what it is. Mexico has significantly reduced their corn buying from the United States in July and August of the past year.
In Ontario, the Canadian dollar continues to cushion the effects of low futures prices with cash prices of approximately $4.17 for corn and $11.75 for soybeans. With the Canadian dollar inversely related to the value of the US dollar, much focus will be on the new future US Federal Reserve Chairman Jerome Powell, who President Trump has named as his replacement of Chairwomen Janet Yellen. Flat pricing of cash grain in a volatile foreign exchange market could continue to find acceptance with Ontario farmers. Balancing foreign exchange with futures continues to challenge.
As harvest continues, daily market intelligence will remain key. The last bushel may not be harvested in Ontario until 2018 as snowy weather has moved into some parts of the province. The focus is shifting away from the big crop in North America to South American weather, which so far has been benign. The challenge remains for Ontario farmers to work their marketing plans and immerse themselves in all of these different marketing factors.
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.