Market Trends Commentary for April-May 2018

US and World

There is activity almost everywhere across the greater North American corn belt. The March 31st USDA report always serves as a starting gun on the crop year. In fact, row crops are up and growing in the American south. There are thousands of acres already planted in the southern Midwest. It is that time of year when markets crackle with uncertainty giving value to the risks yet to materialize. The April USDA report is usually a second thought to its bigger cousin on March 29th, but it does provide an updated opinion from the USDA with regard to foreign crops and US domestic stocks.

In the March 29th report, USDA cut back their estimates for the South American corn crop, but increased their estimate of the Brazilian crop to a record 115 MMTs. The Argentinian soybean crop was cut back further to 40 MMTs, with some private estimates even going lower. USDA actually also lowered the Argentine corn crop down to 33 MMT from 36 MMT previously. Brazilian corn production was decreased to 92 MMT, from 94.5 MMT in their previous report.

There were small adjustments made by the USDA in domestic ending stocks. The US corn ending stocks were adjusted upward to 2.182 billion bushels, which was within previous trade estimates. USDA also cut back US soybean-ending stocks in a small way by 5 million bushels to 550 million bushels. The lower corn production numbers in South America and the lower stocks in the US help reduce global ending stocks for corn to 197.8 MMT, 1.39 MMT lower than the March estimate.

On April 13th, soybeans and wheat futures were higher than the last Market Trends report. Corn futures were slightly lower. May 2018 corn futures were at $3.86 a bushel. The May 2018 soybean futures were at $10.54 a bushel. The May 2018 Chicago wheat futures closed at $4.72 a bushel. The Minneapolis May 2018 wheat futures closed at $6.17 a bushel with the September 2018 contract closing at $6.30 a bushel.

The nearby oil futures as of April 13th closed at $67.39/barrel up from the nearby futures of last month of $64.94/barrel. The average price for ethanol on April 13th in the US was $1.65 a US gallon slightly higher from last month at $1.63 a US gallon.

The Canadian dollar noon rate on April 13th was .7938 US down from .7756 US reported here March 29th. The Bank of Canada’s lending rate remained at 1.0%.

Ontario

In Ontario the weather has been brutal into April with cold temperatures the norm and precipitation of many forms across the province. Widespread freezing rain ice and snow hit the weekend of April 13th further delaying a spring, which seems far off for many. Despite this, there are some crops in the ground, sugar beets planted in Chatham Kent along with the small acreage of corn. Needless to say, producers are getting ready for the big push into planting at the end of April. Warm sunny weather would be welcome.

Cash markets in grains have hardly moved since the March 29th Market Trends report. This has happened despite the Canadian dollar gaining over the last couple of weeks. The US basis values have actually been more favorable in Ontario, but spot basis values for corn and soybeans have been maintained. Corn exports out of Ontario have been very healthy partly because of the tariff free access into the European market, something our American friends do not have.

The Eastern Ontario corn basis has narrowed somewhat against the southwestern Ontario corn basis over the last couple of weeks. This historic anomaly may be changing to some extent during certain times of the year, but it will always be something to watch. The dynamic market environment Eastern Ontario farmers find themselves in with the preponderance of livestock; export markets into Québec and ethanol present unique market conditions compared to the deep southwest of Ontario.

Old crop corn basis levels are $.70 to $1.00 over the May 2018 corn futures on April 13th across the province. The new crop corn basis varied from .65 to $1.10 over the December 2018 corn futures. The old crop basis levels for soybeans range from $1.98 cents to $2.20 over the May 2018 futures. New crop soybeans range from $2.00-$2.15 over the November 2018 futures level. The GFO cash wheat prices for delivery to a terminal on April 13th were $5.89 for SWW, $5.83 for HRW, $5.64 for SRW and $6.45 for Red Spring Wheat. On April 13th the US replacement price for corn was $5.24/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.

The Bottom Line

China is a big deal. With their announcement of a possible 25% tariff on American soybeans on April 4th, soybean futures plummeted over $.40 on the news. With China being the biggest consumer of soybeans in the world any hiccup in that demand equation can have very big ramifications. Soybean futures prices have since recovered, but the threat of reduced Chinese demand for American soybeans remains real. It will likely be manifested in increased soybean production over the long term in areas more friendly to China such as South America, the Black Sea region and even Africa.

This big chill in China US relations is extremely significant to soybean cash prices and producers need to be cognizant of that in the days ahead in 2018. Despite this huge “fly in the ointment” within the soybean market, soybean futures prices did fight back in some very strange ways. In fact, at the height of a record harvest in Brazil, Brazilian soybean prices reached their highest level since July 2016. ($11.83 US)

This has happened because the Chinese are determined to buy soybeans from anybody other than the United States. However, Argentina is actually importing American soybeans. On the other hand, Brazil has a record crop, but their ending stocks are dwindling because of China’s insatiable demand. The USDA estimated their ending stocks would be 27 million bushels. The premium for Brazil soybeans has risen considerably, sending other Brazilian traditional buyers back to the Americans.

Of course, this is not over, far from it. It has put huge amounts of uncertainty back into the grain market and made for some very strange grain flows. It is not only soybeans, because any gyration in that complex affects the prices of corn and wheat, even with onerous stocks. That will likely only change going into July and August when there will be a lot better estimate of new crop production in North America.

Commodity Specific Comments

Corn

Argentina has definitely upset the apple cart this past winter with regard to their production problems. Soybeans are one thing, but corn is another. Their corn production is down and the Brazil second crop is coming on. US corn export numbers have been explosive lately and this is all due to the uncertainty that has been multiplied throughout the grain complex from Argentina.

With snow still on the ground across much of the northern plains spring wheat is being delayed getting into the ground. This may cause more corn and soybeans to go into the ground once weather breaks and of course depending on when that happens. Generally speaking, delayed planting in the US doesn’t get a lot of market reaction until after Mother’s Day.

The May 2018 July 2018 corn futures spread is -8.25 cents as of April 13th. This is considered bearish. Seasonally the corn futures market tends to trend up through early May. The May contract is currently priced in the upper 34% of the past five-year price distribution range.

Soybeans

Soybeans are a wildcard now. The threat of Chinese tariffs has certainly sent a chill through the soybean market. Despite that, soybean futures prices as of April 13th are higher than before that announcement from the Chinese. The Argentinian soybean production meltdown has helped cause much uncertainty in this market and the reverberations have added stimulus to the risk premium in soybean markets.

Cash arbitrage of grains can be a unique thing. With American soybeans apparently being shipped into Argentina that’s proof of that. However, will those soybeans reach Argentinian shores or will they change sides somewhere along the way? That is similar to American grain coming into Ontario. Does it all ultimately end up here? With global demand for soybeans continuing to be insatiable and with the trade rhetoric rising between China and US, we can expect some strange grain flow.

The May 2000 18 July 2018 soybean futures spread as of April 13th is -10.75 cents, which is considered bearish. The May soybean contract is currently priced in the upper 29% of the past five-year price distribution range. Seasonally, the soybean futures market tends to trend up through early June.

Wheat

The wheat market is a tale of three different growing areas in the United States. In the southern Plains, hot and dry weather have impacted the hard red winter crop. In the northern plains it’s more about whether the spring wheat (HSW) will get planted, while the Chicago market (SRW) is generally a follower. Of course, there is wheat almost everywhere around the world and lots of it.

In Ontario, there has not been much opportunity to side dress wheat with nitrogen, but that will surely be starting up as weather breaks. Most of Ontario wheat from the southwest is exported either to mills in the United States or overseas. Flat pricing opportunities with our lower Canadian dollar remain a stimulus for Ontario cash wheat prices.

The Bottom Line (cont.)

It is a time of hope as planters start to roll across the United States, Ontario and Québec. With so much political volatility affecting this market standing orders for grain will likely be a tremendous instrument to capture marketing opportunities while we plant. Even without this volatility, planting season always represents a time of uncertainty and risk in the new crop market.

It’s a time when market fundamentals are being jerked around by political machinations in the United States. For instance, after the last Presidential election, the Americans withdrew from TPP. The new CPTPP was signed without them, but now they want back in, less than a year after they gave their intentions that they would not sign. Twitter remains a very powerful social media tool for the American president as he drives the news cycle every day. This affects our grain markets greatly and it’s difficult to quantify against the fundamentals of grain.

How this will affect the American dollar is anybody’s guess. Of course, the Canadian dollar is generally speaking valued to the inverse of where the US dollar goes. It presently gained almost a couple cents in the last three weeks putting pressure on cash basis values in Ontario. Flat pricing of grains remains a good choice for Ontario producers especially in a time with higher futures prices and lower Canadian dollar values.

Of course, we can see clearly now. That is said in jest, because it is so untrue. It is hard to see clearly because everything up until the last several weeks has pointed to lower prices through ever bigger growing grain stocks. Then we got the Argentina drought debacle, which has changed the game. Add China’s intentions within the soybean market and you get even more risk premium. Then we have our own spring planting weather. The challenge for Ontario farmers is to keep abreast of these events on an hourly and daily basis as planters start to roll. It’s a new type of normal. Daily market intelligence will remain key.

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.