Market Trends Commentary for May-June 2018

US and World

It is a time of year when grain farmers can’t get things done fast enough. Planters are rolling across US and Ontario farm country as farmers have hit the ground running. In the United States 29% of the American corn crop has been planted as a May 6th compared to 45% last year at the same time. About 15% of the American soybean crop has been planted compared to 13% at the same time last year. As farmers, we know that every year is different. Spring weather will certainly have an impact on this crop planting progress as we move ahead.

On May 10th the USDA released its latest WASDE (world agricultural supply and demand estimates) report. The May report always offers the first look at crop production and the ending stocks for the new crop 2018/19 year. USDA is projecting the US corn crop to come in at 14.04 billion bushels with the national yield than 174 bushels per acre. Soybeans are projected 4.28 billion bushels at a national projected yield of 48.5 bushels per acre.

The USDA actually decreased new crop corn ending stocks down to 1.682 billion bushels, which is down significantly, 500 million bushels from last year. New crop soybeans ending stocks are predicted to be 415 million bushels. Somewhat of a surprise was the decrease in the old crop soybean ending stocks number from 550 to 530 million bushels. The USDA also reduced the Brazilian corn crop down 5 MMT to 87 MMTs, while at the same time boosting their soybean crop to 117 MMT. The Argentinian soybean crop was further reduced to 39 MMT. Winter wheat production in the United States is projected at 1.19 billion bushels, down 6% from a year ago. This is a reflection of the different classes of wheat, some of which production is up and some which is down.

On May 11th, wheat futures were higher than the last Market Trends report. Corn and soybean futures were slightly lower. July 2018 corn futures were at $3.96 a bushel. The May 2018 soybean futures were at $10.03 a bushel. The May 2018 Chicago wheat futures closed at $4.98 a bushel. The Minneapolis July 2018 wheat futures closed at $6.03 a bushel with the September 2018 contract closing at $6.11 a bushel.

The nearby oil futures as of May 10th closed at $70.70/barrel up from the nearby futures of last month of $67.39/barrel. The average price for ethanol on May 10th in the US was $1.65 a US gallon the same place where it was last month at $1.65 a US gallon.
The Canadian dollar noon rate on May 11th was .7825 US down from .7938 US reported here April 13th. The Bank of Canada’s lending rate remained at 1.25%.

Ontario

Planters are rolling across Ontario despite the wet early start for some in Eastern Ontario. Heavy rain in the deep south west of the province on May 11th will surely delay quite a bit of planting in Chatham Kent and Essex counties. There may also be replanting as 5 inches of rain fell over that weekend in some of these areas. This came with cool temperatures, not ideal for emergence. As we head toward the end of May soybean planting will be pushing into high gear as temperatures rise and the ground dries out.

Old crop corn basis has softened slightly from last month and reflects the big old crop stocks still in Ontario. Despite the export of corn into Europe tariff free, Ontario basis values are reflective of the big production in Ontario fields of the past year. It is unlikely that the classic Ontario situation, where we go to an import basis this summer happens. However, that’s more a reflection of the changing Ontario cash corn market dynamic.

Increasingly Ontario is going to more of an import and export pricing structure all the time. Freight costs between Hamilton and Windsor or Sarnia often leads to a situation where corn is imported from New York or Michigan to satisfy local requirements, not having the classic effect on Ontario basis values. These basis changes have narrowed over the last few years and it is likely to continue. The Michigan market is much different than it used to be with much more corn processing done in state. As always, the situation is fluid and depends on other factors such as farmer selling and the size of the Ontario crop. Eastern Ontario corn basis remains an island of its own.

Old crop corn basis levels are $.75 to $.94 over the July 2018 corn futures on May 11th across the province. The new crop corn basis varied from .75 to $1.00 over the December 2018 corn futures. The old crop basis levels for soybeans range from $2.15 cents to $2.37 over the May 2018 futures. New crop soybeans range from $2.30-$2.40 over the November 2018 futures level. The GFO cash wheat prices for delivery to a terminal on May 10th were $6.27 for SWW, $6.21 for HRW, $6.02 for SRW and $6.33 for Red Spring Wheat. On May 11th the US replacement price for corn was $5.46/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.

The Bottom Line

This is a critical time for pricing grains across the greater North American corn belt. Although we have onerous old crop stocks still waiting on the market, the drought in Argentina did change quite a bit of the bearish narrative in the grain market. Argentina farm country was devastated pretty thoroughly over the last several months and crop projections may drop further with the finish of harvest.

This has led to some strange grain flow over the last several weeks as we have seen American soybeans going into Argentina. There has also been Chinese reticence to buy American soybeans. This has led to European demand for American soybeans and bigger premiums on Brazil cash prices even at a time when they have a record harvest. This has wracked the Argentinian economy and their peso continues to be devalued. If you are an Argentinian farmer, you hold your soybeans because they maintain value.

It goes without saying that during this critical time in the market calendar spring weather holds many of the clues on what will happen. Keep in mind that despite a lowering of new crop corn ending stocks from the USDA down to 1.682 billion bushels, we been here before. From 2014-2016 these ending stocks figures were common for corn and the futures price range from $3.25 to $4.25. To break out of that range we need significant crop problems and possibly a drop in corn yield of 4 to 6 bushels per acre down from the 174 bushels per acre the USDA is basing their prediction on.

Acreage still might come into play over the next several weeks during this critical time for pricing our crops. For instance, the USDA is sitting at 89 million acres for soybeans, but this could surely move higher throughout the spring. American export shipments of soybeans are down 12% on the year and it is unlikely to improve over the next four months of the crop year. In the week ending May 11th, soybeans futures had dropped 33 cents.

Commodity Specific Comments

Corn

Dry weather is still a concern in Brazil for their second crop corn. USDA is reflecting this as they have reduced the Brazil corn output. However, it may drop further depending on whether the Safrinha crop gets more moisture. As we move ahead the July futures month will be sensitive to this.

Keep in mind; the world stocks for corn have decreased, which is partly a reflection of the reduction in American new crop stocks currently pegged at 1.682 billion bushels. This was also caused by questions about Chinese stocks, which always serve as a mysterious supply lever on that world number. US corn exports are up and acreages down, December corn as a result will be unlikely to tread a lot lower (under $4) until a point where the crop is made.

The July 2018 September 2018 corn futures spread is currently -8.5 cents as of May 11th, which is considered bearish. The July corn contract is currently priced in the upper 34% of the past five-year restitution range seasonally the corn market tends to trend up through early June.

Soybeans

USDA actually raised new crop soybean exports 225 million bushels, which turned heads in the trade. There has been all kinds of debate regarding the soybean trade reticence between China and United States. Putting out a number much higher than expected on the export side seemed not to make a lot of sense. It seems incredibly unlikely.

US exports of American soybeans are suspect, but the crush has been very good and meal demand has been tremendous. Keep in mind that Argentina exports vast amounts of soybean meal and with their drought this year that has been compromised. There has even been American soybeans land in Argentina. Soybean meal demand has been tremendous, which has put pressure on the soybean oil market. Needless to say, crush demand for soybeans remains solid.

The July 2018 August 2018 soybean futures spread is -4 cents as of May 11th, which is considered neutral. The July soybean contract is currently priced in the upper 48% of the past five-year price distribution range. Seasonally, the soybean futures market tends to turn up through early June.

Wheat

The July contract for Chicago wheat closed under $5 on May 11th. The USDA had all wheat production down, but SRW wheat production was pegged as 8% bigger than last year. Wheat demand remains weak out of the United States especially compared to their foreign competition, like Russia, which is pricing wheat much lower. There will be some dalliance on the wheat numbers going forward by USDA especially with the spring wheat acres in flux because of some late planting conditions.

The 900,000 acres of Ontario wheat is benefiting from nitrogen and fungicide application over the last few weeks. There’s been some wheat acres abandon on heavier ground in Southwest Ontario. Weather forward will surely determine the yield and quality of this crop. The Canadian dollar below $.80 will continue to benefit cash wheat prices in Ontario.

The Bottom Line (cont.)

Aside from the major factor of crop weather going into July 1st, there are still many geopolitical concerns that are affecting this market. The continued reticence of the Chinese to buy American soybeans is the new elephant in the room. Currently, there is a huge opening on the geopolitical stage as the American President is set to meet the North Korean leader in Singapore regarding the denuclearization of the Korean Peninsula. This is happening at the same time with ongoing trade talks between the US and China. It may provide the opening to settle any possibility of Chinese tariffs on American soybeans in the future.

These geopolitical concerns also have an effect on the value of the American dollar, which has a direct relationship on where the Canadian dollar goes. It is still the best litmus test to determining the Canadian dollar value and its subsequent effect on the soybean and wheat basis in Ontario. It has a lesser effect on the corn basis in Ontario mainly because of the overabundance of domestic supply here and the oligopolistic market behavior of corn end users in Ontario.

Of course, in many ways all of these market factors are circling the wagons on the biggest factor that will affect market prices going forward and that is our crop weather going into July. Over the last several years market prices have topped out in June and July based on the market risk perceived in May and June and then alleviated in July and subsequently August. Clearly, from a farmer’s perspective, pricing grain during this time period can be critical. Daily market intelligence and a scouring of North American weather predictions are key to helping those standing grain-marketing orders hit.

As of May 11th Ontario farmers can garner approximately $5 for new crop corn and $12.50 for new crop soybeans. Both of these prices are in the higher range of those offered during harvest time periods over the last several years. The challenge for everyone is to measure that against their current marketing plans and the many marketing factors that are swirling in our grain complex today. Do not negate the critical pricing time period we are in for the next six weeks. Nobody knows where prices will go, but managing that price risk is an ongoing task. As we head into June, keep those standing grain orders fine-tuned.

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.