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%.
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 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.
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.
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.