US and World
Harvest continues in the United States. As of November 8th 93% of corn has been harvested and 95% of the soybeans. It has been a very bountiful harvest across the American Midwest. The crop size in the United States continues to grow. The Ground Zero area for wet spring weather has caused smaller harvests in some areas like Central Indiana, but crops have thrived in other growing areas giving the United States tremendous yield. The August USDA report had predicted this going forward and on November 10th the USDA chimed in once again with their latest crop estimates.
On November 10th, the USDA raised their corn estimate to 13.65 billion bushels, this was 99 million bushels more than their October report. The national corn yield was increased 1.3 bushels per acre to 169.3 bushels per acre. This will result in the second-highest average yield and the third largest production in US history. The harvested acreage was left unchanged at 80.7 million acres. Corn ending stocks were increased by 199 million bushels to 1.76 billion bushels. The ending stocks to use ratio for corn was increased 12.9%.
On soybeans the USDA increased total production to 3.98 billion bushels. This represented an increase of 1.1 bushels per acre versus the October report setting yielded 48.1 bushels per acre. The harvested soybean acreage remains at 82.4 million acres. The US domestic stocks to use ratio increased to 12.4%. For wheat, there were very few changes by USDA, cutting exports slightly. The ending stocks to use ratio in the United States climbed to 45.1%.
On November 13th, corn, soybeans and wheat nearby futures prices were lower than the last Market Trends report. The December corn 2015 futures was at $3.58 a bushel. The November 2015 soybean futures was at $8.55 a bushel. The December 2015 Chicago wheat futures closed at $4.95 a bushel. The Minneapolis December 2015 wheat futures closed at $5.04 a bushel with the September 2016 contract closing at $5.41 a bushel.
The nearby oil futures as of Nov 13th closed at $40.74/barrel up from the nearby futures of last month of $49.63 all/barrel. The average price for ethanol on Nov 13th in the US was $1.84 a US gallon vs. last month at $1.91 a US gallon.
The Canadian dollar noon rate on November 13th was .7501 US down from the .7724 US reported here last month. The Bank of Canada's lending rate remained at 0.50%
In Ontario harvest is reaching completion in many areas of the province. Soybean harvest is essentially finished with only a few rogue fields present. Corn harvest is near completion in southwestern Ontario, but there remains quite a bit of corn left in the field in Eastern and Central Ontario. Yields have been tremendous in southwestern Ontario and across the province with select areas having their challenges. Wet weather in some areas this past spring have come back to limit yield on some fields.
Basis levels have been surprising this fall. It has mainly been in corn. The corn basis has actually improved greatly through what is a record harvest for many people. However, it is uneven across the province. In deep southwestern Ontario the corn bases has moved from approximately $.50-$.90 above the nearby futures in a period of about three weeks into November. This is happening with corn all over the ground west of Toronto. On the other hand the Eastern Ontario basis has decreased reflecting big yields and a lack of storage and movement out. Of course, the Canadian dollar currently fluttering in the $.74-$.75 range has aided the situation. The US bases has also been very strong, which has raised Canadian basis levels. Farmers have also slammed the bin door shut. Farmer selling has been slow.
This has taken place at a time when the futures prices are near contract lows. End-users still need their corn and soybeans and basis values sometimes are an inverse of low futures levels. The Canadian dollar of course changes things greatly, totally obscuring the low-price reality that many producers in the United States face. There has been some export movement out of Ontario. Of course, the situation will remain fluid, especially with crop still in the field. Our low Canadian dollar may encourage further exports.
Old crop corn basis levels are .80 to .90 over the December 2015 corn futures on November 13th across the province. The new crop corn basis varied from .65 to $.85 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.16 cents to $2.26 over the January 2015 futures. New crop soybeans range from $1.80-$2.03 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on Nov 13th was $8.46 for SWW, $6.20 for HRW, $6.20 for SRW and $5.78 for Red Spring Wheat. On November 13th the US replacement price for corn was $5.23/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
Grain futures prices are moribund. There is not much other way of describing it. Since the August USDA report flummoxed the market with bigger crop numbers, it has never stopped. The November USDA report continues to document a big crop getting bigger. There are record crops and not by a little bit in places like Minnesota Nebraska and Iowa. The 169.3 bushels per acre of corn and 48.3 bushels per acre of soybeans from USDA don't lie. It should be expected that the final January USDA report might be even higher.
The saving grace for many in the United States has been basis. In fact, with futures at such low levels, often basis will shift the other way trying to get farmers to open the bin door after they have slammed it shut. This is taking place across the United States and is especially relevant for corn bids close to the Ontario border. In some places like Central Indiana, which took the brunt of the heavy rains this past spring; it is showing up with very high basis levels during this harvest season. Simply put, there is a heavy density of ethanol plants with a very poor crop. Corn is pouring in from across the Eastern corn belt with basis levels reflecting that. However, in the Western corn belt in many locales it can be the opposite.
The futures corn prices are low because there is too much corn and demand is fraying a bit at the seams. We are still at near record demand levels, but we have lost 100 million bushels of demand from last month. Ethanol demand is down 75 million bushels from last month with export demand down another 50 million bushels. The USDA actually increased by 25 million bushels the domestic feed and residual use category. Needless to say, in this market environment, corn did not need a cut in demand.
The elephant in the room is South America. Planting rates have increased in the center west and southeastern Brazil going into the first week in November. Mato Grosso has seen very good progress in soybean planting. Argentina as of November 13th is approximately 20% planted. All of this is happening in an environment where local currency is worth so much more because of the strong US dollar. Brazil is set to produce 101 MMT of soybeans, which will be another record. If the trend continues like it has for the last several years it would almost seem like there are no bounds. This type of production looms in the background of all grain futures trading.
Commodity Specific Comments
It has not been the best month for corn prices and that is largely due to the abundance in the fields. However, keep in mind market structure is also very important and with the ending stocks to use being increased to 12.9% from 11.3%, it shows just how much corn has fallen out of favor. The ending stocks to use figure has again gained credibility for market direction, as noncommercial demand seems to react acutely on USDA market report days. November 10th was an example of that. With computers now making the trades in Chicago, emotion is being left at home.
Corn is also suffering from increased competition from lots of feed wheat on the world market. There is also quite a bit of competition from Brazil and Ukraine further plugging the American grain pipeline. Corn continues in its lower to sideways pattern.
The December 2015 March 2016 corn spread is neutral at -.0725 cents as of November 13th. That is a reflection for just how much corn is on the ground in the United States. The December contract is trading in the lower 5% of the five-year price distribution range. Seasonally, futures prices for corn tend to trend down through November.
2015 US crops have been impressive, but the soybean yield number of 48.3 bushels per acre might be the most impressive of all. We are very used to the productivity gains in corn but this year's US soybeans have done quite well. That is reflected in the increase carryout in the November 10th report of 465 million bushels of soybeans. Soybeans are often portrayed as the great liars, but always come back to tell the truth.
In the November 10 USDA report, Chinese demand continues to grow for soybeans, now up to 80.1 million metric tons, which is always a good thing for soybean farmers. Brazil, Argentina and the United States will continually benefit from that seemingly insatiable soybean demand.
The January 2016 March 2016 soybeans future spread is currently at -.01 cents, which is considered bullish even at a time when both the short-term and long-term trends in the market are down. The January soybean contract remains in the lower percentages of the five-year price distribution range. Seasonally, it seems like we always see soybeans rise into May.
The wheat market is reflective of the greater commodity market with burdensome supplies. At the present time we are a 20-year global world stock highs in wheat. That is keeping prices low and with wheat produced almost everywhere, basis competition is very high. Domestically, the USDA pegged their domestic stocks to use ratio at 45.1% up from 41.6% reported here last month.
In Ontario wheat was planted with enthusiasm this fall as many producers especially in southwestern Ontario did not get any wheat planted in 2014. Expect about 1 million acres of wheat to head into the Ontario winter this fall. Finding a place for that wheat next summer will surely be a challenge.
The Bottom Line (Continued)
There is no question that once again basis is helping Ontario farmers. The corn basis has moved up substantially because of US basis, but it's also there because of the foreign exchange. Even with the low soybean futures that we have basis levels above $2 Canadian are helping out. If we had a par dollar like we had two years ago cash prices in Ontario would be sub $3 dollars for corn and in the $7 range for soybeans. The Canadian dollar is saving us or fooling us depending on how you look it. Needless to say, Ontario cash prices are much higher because of the Canadian dollar.
The double-edged sword is as the Canadian dollar is lower to some extent it is a reflection of the inverse of the US dollar which has been very strong. This has put a tremendous headwind on grain futures prices. It has been especially difficult in wheat and corn. If the US Federal Reserve decides to raise interest rates in the next few weeks, it is likely to keep demand for the US dollar growing. This will be a negative for grain futures prices.
In Ontario it is likely that we will have enough corn all year for our needs negating any import basis in the future. However, 2015/16 is different from other years. A strong basis at harvest is partly a reflection of the Canadian dollar, but also a reflection of the strong US basis in the Eastern corn belt. Ontario corn is moving into New York and depending on the value of the Canadian dollar and US basis moving forward may flow into the United States in greater amounts. Daily market intelligence will be key for Ontario farmers especially this late fall and winter to keep track of those trends. It is especially not straightforward this fall what will happen. With much corn still in the field in Central and Eastern Ontario and with a good crop in Western Québec basis opportunities may fade quickly.
We still have our potpourri of geopolitical factors that will and can affect our grain markets. Problems in Syria and terror strikes in Paris and other cities have all the big powers jockeying for position. This instability may impact trade flow at some point. However, for the moment it will not take away the big supplies that we had in the United States this year and the bigger supplies we are expecting from South America being planted now. The challenge for Ontario producers is to measure these different market factors and take advantage of the strong basis levels currently being seen for Ontario grain. Nobody knows with regard to prices what will happen next, but risk management never grows old. Managing that risk remains a constant task.
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.