Market Trends Commentary for June-July 2018

US and World

As we hit mid-June crops are growing actively across the North American corn belt. Crop weather has been benign throughout the American Midwest and Southern Ontario, although there are always pockets that are too dry or too wet. Needless to say, as we move into July market watchers will be cognizant of crop weather moving forward. Is that time of year, minus all the talk of tariff wars, where the crop is either made or compromised.

On June 12th, the USDA weighed in with their latest World Agricultural Supply and Demand Estimates. (WASDE) In this report the USDA reduced both the old crop and new crop corn and soybean ending stocks. USDA pegged corn production to remain at 14.040 billion bushels with an average yield projected of 174 bushels per acre. The new crop corn ending stocks were pegged at 1.577 billion bushels, which was down 105 million bushels from the May report. The old crop corn ending stocks were pegged at 2.1 billion bushels, down 80 million bushels from their May report. The USDA also trimmed Brazil corn production and global new crop ending stocks.

The USDA continues to place US soybean production at 4.280 billion bushels with an average yield of 48.5 bushels per acre. The old crop domestic soybean ending stocks were 505 million bushels, down 25 million bushels from the May report. The new crop soybean ending stocks came in below trade prediction set at 385 million bushels, 30 million less than the May report. The USDA increased the Brazilian soybean crop up 2 MMT to 119 MMT. The Argentinian crop remained the same at 37 MMT. This resulted in a slight increase in global ending stocks. The USDA said US farmers would produce 1.827 billion bushels of wheat in 2018/19, of that total; winter wheat represents 1.2 billion bushels, which will be down 6% from last year.

On June 15th, wheat futures were slightly higher than the last Market Trends report. Corn and soybean futures were lower. July 2018 corn futures were at $3.61 a bushel. The July 2018 soybean futures were at $9.06 a bushel. The July 2018 Chicago wheat futures closed at $4.99 a bushel. The Minneapolis July 2018 wheat futures closed at $5.70 a bushel with the September 2018 contract closing at $5.81 a bushel.

The nearby oil futures as of June 15th closed at $65.06/barrel down from the nearby futures of last month of $70.70/barrel. The average price for ethanol on June 15th in the US was $1.63 a US gallon slightly lower than where it was last month at $1.65 a US gallon.

The Canadian dollar noon rate on June 15th was .7589 US down from .7825 US reported here May 11th. The Bank of Canada’s lending rate remained at 1.25%.

Ontario

In Ontario it was a fairly placid planting season with crops getting into the ground in timely fashion. There were exceptions, especially Essex County where heavy rainfall on heavy clay led to a delay in planting to the last few days in May. Hot weather at that point helped things, getting the crop planted in short order. There were some replanting in the deep SW from a rainfall event, however, as we move into late June drought is stalking many crop areas in Ontario. Moisture is needed to keep this crop growing.

Basis levels for Ontario grains have been maintained even at a time of declining futures prices mostly because the Canadian dollar has also been declining rapidly over the last four weeks. In many ways, this is fortunate, as if the loonie had appreciated during this time, cash prices would be a lot lower for Ontario grains. Export basis remains the order of the day for Ontario corn, with US replacement value of $5.17 a bushel, while most cash elevator prices pegged at $4.45 to $4.60 as of June 15th.

Statistics Canada has pegged Ontario corn acreage at 2.2 million acres and Ontario soybean acreage at 3 million acres. With the spring weather that Ontario had, these figures seem very likely. Ontario soft red wheat is now headed into the home stretch, over 1 million acres going into the critical grain filling period. A widespread rain would be welcome across the province as of June 15.

Old crop corn basis levels are $.85 to $1.08 over the July 2018 corn futures on June 15th across the province. The new crop corn basis varied from .75 to $1.15 over the December 2018 corn futures. The old crop basis levels for soybeans range from $2.35 cents to $2.50 over the July 2018 futures. New crop soybeans range from $2.30-$2.41 over the November 2018 futures level. The GFO cash wheat prices for delivery to a terminal on June 15th were $6.48 for SWW, $6.41 for HRW, $6.21 for SRW and $6.07 for Red Spring Wheat. On June 15th the US replacement price for corn was $5.17/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/.

Bottom Line

Sometimes, geopolitics matters. Sometimes, you can see the train through the tunnel and you have to get out of the way. Simply put, over the last three weeks “tariff and trade” political rhetoric has spooked the grain market and soybeans specifically. It would seem the great global narrative of “open markets and freer trade” is being challenged like never before by one of its biggest players, the United States. The resultant trade tensions with China, the world’s largest soybean buyer has quickly brutalized soybean prices.

In approximately 14 trading sessions since May 24th, the old crop soybean contract has lost $1.25 a bushel. The new crop soybean contract has lost approximately $1.13 cents a bushel and the new crop corn contract has lost 47 cents a bushel. Demand has been weak for American soybeans, but with possible tariffs being applied, everybody was headed to the door. American farm groups have been incredulous.

Corn and wheat had been hit, but not as much and there may still be hope for some type of price recovery on a widespread weather event. It is true with corn that approximately 75% of the time we see the market change around July 4th. Sometimes that represents a high and sometimes that represents a low. As of June 15th, weather forecasts are benign for US crops. As we head into the next two weeks those weather forecast will be critical looking at pollination period for corn in July.

Aside from the “twitter tariff war” narrative, the June 12th USDA report should have been neutral to bullish for corn, neutral for soybeans and bearish for wheat. In fact, is still true that fundamentals matter and they will continue to matter as we go through this cropping year. The June 29th USDA report, one of the big three of the year looms. This will give us updated actual planted acres, stocks and a whole host of other crop numbers, which could affect prices.

Commodity Specific Comments

Corn

As of June 15th, it looks like the high in December 2018 corn came on May 24th when the December futures got to $4.29 bushel. Of course, nobody knows, but a 47 cent drop since then has been very telling. The December corn futures high in 2017 came in early July, it came on June 18th in 2016, and if $4.29 holds true, that critical pricing period came early this year in May.

Simply put, Argentina problems this past winter, made things a bit different from 2016 in 2017. We need a major weather event going forward to change the production paradigm to affect prices. The June 29th USDA acreage report may also shift that debate, especially if American farmers decided to grow a lot more than 88 million acres. Needless to say, crop weather for the next month still key.

The July 2018 September 2018 corn futures spread is currently -9.5 cents as of June 15th, which is considered bearish. Seasonally, corn futures tend to trend lower from now on going into October. The July contract is currently priced in the 14th percentile of the past five-year price range.

Soybeans

Soybeans have definitely been the whipping boy of all the political tariff talk between the Trump administration and China. In fact, you might categorize it as “tariff trade terror” factors, which make the soybean trade nervous. With July 6th being the date for possible American tariffs on Chinese products, there is still a ray of hope cooler heads might prevail. Needless to say, any whiff of trouble between the world’s biggest soybean buyer (China) and the United States spooks the market.

n the other hand, could an argument be made that these tariff implications are already factored in to a $9.05 July futures prices as of June 15th? Generally speaking, soybean futures over the last 3 to 4 years spend very little time under $9.00. Soybean demand though battered, can still be resilient.

The July 2018 August 2018 soybean futures spread is -.06 cents as of June 15th, which is considered bearish. The November futures represent new crop continue their bearish commercial view. Seasonally, the soybean high comes in July, but looks to be early this year.

Wheat

Hot temperatures and dry conditions have damaged the American wheat crop. There is also being somewhat of a ratcheting decline in wheat production estimates in places like Russia and the Ukraine. Wheat is special because it is grown everywhere and all the time, but even still, 2018/19 global ending stock are set to decline slightly.

$6 wheat prices for Ontario wheat don’t lie. Historically, that’s quite good compared over time. Ontario wheat producers can thanks to some extent the low Canadian dollar and the volatility in the wheat market. Ontario winter wheat will start to be harvested in Essex County in the first week of July. Producers are certainly hoping for some moisture to help wheat grain fill.

The Bottom Line (cont.)

It is true that the geopolitics have upset the grain complex pricing applecart to some extent. However, the June 29th USDA report is always one of the biggest of the year and it will likely help set direction for pricing. For instance, will American corn and soybean acreage change from the 88 million and 89 million acres previously predicted by USDA? Will old crop stocks be affected significantly? Will an increase in acreage for either crop put the prices scenario to rest during this critical time? There is much to measure and USDA will likely reset the goalposts on this crop year that day.

Amid the calamity in the grain price meltdown over the last three weeks, the declining value in the Canadian dollar has helped mitigate further cash price risk for Ontario producers. The unprecedented trade tension between the United States and Canada has been very difficult on the value of the Canadian loonie pushing it down approximately 3 cents into the $.75 range US over the last three weeks. This has maintained good cash basis levels and certainly helped the cash price of Ontario wheat going into harvest.

As of June 15th, the Americans are going ahead on July 6th with $34 billion of tariffs against Chinese technology products with a further $16 billion this summer. The Chinese have responded with the list of tariffs totaling $50 billion, which includes $16 billion for US agricultural products, which includes soybeans. The road ahead with regard to this is unknown, but we know that markets do not like it and it is almost impossible to predict. Daily market diligence will remain key.

There are still a myriad of other concerns in production areas in Western Europe, Russia, Ukraine and South America. Of course, crop weather in North America is top drawer for the next several weeks. July is key to corn production and August rains makes soybeans. Standing pricing orders this spring in Ontario garnered $5 corn, $13 soybeans and $7 wheat for those who had them placed. Nobody knows how this will look come fall, but its one tool, which needs consideration. The challenge for Ontario grain farmers is to measure their risk going forward and to utilize all the tools and marketing intelligence available. June 29th USDA looms. It should be an interesting time.

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.