US and World
The August 12th USDA report was one of the biggest flashpoints of the year in grain markets. With the USDA seemingly shrugging off crop condition reports after heavy rains in the Eastern corn belt, grain futures succumbed to the bearish market environment. USDA numbers are the numbers that we trade and they will always be relevant, but surely they have caused much consternation in American farm country. As combines have begun to roll in both corn and soybean fields across the American Midwest, actual yields will surely be another telling sign about how right the USDA was in their August 12th report. Surely there was a lot of skepticism, but there always is. Measuring the factors that affect our prices still often proves a challenge.
On Friday, September 11th the USDA released their September report. In a nutshell, they reduced the projected US corn yield from their August report but increased soybean production. The USDA reduced corn yield down to 167.5 bushels per acre (13.585 bbu) but boosted the expected soybean yield to 47.1 bushels per acre (3.935 bbu) The old crop soybean ending stocks were pegged at 210 million bushels with the old crop corn ending stocks projected at 1.73 billion bushels. The USDA also set new crop ending stocks for corn at 1.59 billion bushels and for soybeans at 450 million bushels. Record yields for corn are expected in Arkansas, Georgia, Iowa, Kentucky, Michigan, Minnesota, Nebraska, South Dakota, Virginia and Wisconsin. Globally, the USDA increased wheat-ending stocks to 226.6 MMT, which reflected increase production in the EU and the Black Sea region. The global stocks to use ratio for wheat increased to 31.6%.
The computers at the CME initially stuttered on the new yield numbers, but soon corn was moving higher after soybeans initially dipped. At the end of the trading day corn was up $.12 a bushel, wheat was up 7 cents per bushel with soybeans rallying back to be unchanged at the end of the day. Even though crop ratings had never really changed significantly since June, the balance sheet for corn was seen tightening and prices responded accordingly. If the corn crop is realized it will be the second highest yield per acre and the third largest crop on record. The USDA left unchanged their forecast for Brazil and Argentinian soybean production at 97 MMT and 57 MMT respectively.
On September 11th, corn was higher but soybeans and wheat nearby futures prices were lower than the last report. The December corn 2015 futures was at $3.87 a bushel. The November 2015 soybean futures was at $8.74 a bushel. The December 2015 Chicago wheat futures closed at $4.85 a bushel. The Minneapolis December 2015 wheat futures closed at $5.11 a bushel with the September 2016 contract closing at $5.46 a bushel.
The nearby oil futures as of September 11th closed at $44.63/barrel up from the nearby futures of last month of $42.50/barrel. The average price for ethanol on September 11th in the US was $1.84 a US gallon vs. last month at $1.86 a US gallon.
The Canadian dollar noon rate on September 11th was .7532 US down from the .7646 US reported here last month. The Bank of Canada's lending rate remained to 0.50%.
In Ontario crops are maturing with harvest set to ramp up very soon as of September 13th. In more northern areas, wheat harvest is wrapping up with corn and soybeans almost set for a long harvest run. In SW Ontario there have been some soybeans fields taken off, but the main harvest is still two weeks away.
At this time of year, “frost” is always part of the equation. However, in Ontario crops were planted early and a warmer summer than 2014 has advanced the crop further. There is no widespread concern that the crop might be shut down early as in other years when the crop was behind. Having said that, we're still not out of the woods with regard to frost. The Ontario crop is advancing nicely into the fall harvest.
Basis values have actually improved from the August report. The Canadian dollar in the 75-cent range has had much to do with that. However, it's also the time of year when old crop and new crop basis values move together with crops coming out of the field. The old crop and new crop prices for soybeans have moved together and corn also will make that switch into October. Producers need to be cognizant of that change at this time of year.
Old crop corn basis levels are .80 to $1.75 over the December 2015 corn futures on September 11th across the province. The new crop corn basis varied from .50 to $1.10 over the December 2015 corn futures. The old and new crop basis levels for soybeans have moved together for harvest from $2.00 cents to $2.28 over the November 2015 futures. The GFO cash wheat prices for delivery to a terminal on September 11th was $8.55 for SWW, $6.56 for HRW, $6.30 for SRW and $5.92 for Red Spring Wheat. On September 11th the US replacement price for corn was $5.77/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
USDA reports always served as flashpoints for market action. However, in a grain futures marketing environment where computer algorithms trade all the grain and large investment funds chase the headlines volatility has become much more acute than it was even 10 years ago. Crop conditions in early September are about the same as they were in late June but the market has moved down considerably. The USDA played a large part in that on August 12th with a report the trade was not expecting. Their September report substantiated much of that in soybeans but offered some hope with regard to corn. Needless to say, there are still onerous supplies of grain around the world.
Having said that, supply is still in flux in the United States. Actual combine yields will soon be flooding into the headlines creating actual change in the supply and demand balance sheet. The October USDA report always serves as somewhat of a harbinger of the actual yield picture in the field and the January 2016 report closes the books on final 2015 yields. Both of these reports this year will have a major impact on price. Acreage and yield in the October report will serve as the next market flashpoint.
The USDA maintained Brazilian soybean production at 97 MMT and Argentina at 57 MMT for their upcoming year. Planting will begin in October and producers will need to keep abreast of planting progress and conditions. The Brazil number just keeps rising and is likely to top 100 MMT in the next few years, if not this year. The specter of this and planting in October will have an effect on the futures price of soybeans and it is likely to be bearish.
World wheat production remains at record levels. Globally, the USDA increased its ending stocks for wheat by 5.1 MMT or 226.6 MMT. Of course, prices are historically cheap at contract lows and it is likely that wheat will be competing with corn as a feed grain. Historically, this is common and moving ahead any increase in the value of corn will be checked by a corresponding cheap price for substituting wheat.
Commodity Specific Comments
Corn demand remains very robust and will not be easily tempered when the supply hiccup comes along. However, 13.585 billion bushels projected in the September 11th USDA report is not a hiccup. It is a huge crop. Demand stands at 13.755 billion bushels, which means that ending stocks will be decreasing once again. The September USDA report can't be construed as overly bullish but it opens up the possibilities for less corn supply in our future.
Key in the short term may be the next USDA report released on October 9th. In the September 12th report USDA reduced the yield 1.3 bushels per acre from their August estimate. Another reduction of that amount would no question send corn futures higher.
The December 2015 March 2016 corn futures spread is neutral at -.01125 on September 11th. Seasonally, corn futures tend to trend down through early October. The December contract is currently trading in the lower 17% of the five-year price distribution range
With the USDA raising US average yield to 47.1 bushels per acre, it does raise the spectre of another raise in October. This combined with the bigger Brazil plantings starting in October and it doesn't help the soybeans bulls. The US domestic stocks to use for soybean are 12.1% with global stocks to use at 27.4%, both robust solid figures.
The October 9th USDA report will also be key for soybean prices. Aside from a possible increase in yield, acreage may be adjusted as well.
The November 2015 January 2016 soybean futures spread is -.03 cents on September 11th. This is showing somewhat of a bullish tone. The soybean futures market tends to trend down through early October. The November soybean futures contract remains in the lower percentages of the five-year price distribution range.
Wheat seems to be always in bearish territory and the September 11th USDA report substantiated that. US domestic stocks were increased from 25 million bushels and world wheat stocks saw a 5.09 MMT increase as a result of increased world production. The Chicago wheat contract remains near its low.
In Ontario, wheat drills are set for a marathon of planting wheat this fall. In SW Ontario, much wheat was not planted last year. With an early harvest almost upon us, producers will be hoping to get all of that acreage planted plus more. Despite the low prices, I'd expect greater than 1 million acres in Ontario this year.
The Bottom Line (cont.)
There is always some skepticism about USDA numbers and market reports. Clearly though, they are the numbers we trade. Unfortunately, sometimes like in 2015 it doesn't all quite add up specifically the relative stable crop conditions over time but the huge volatility in price, this time negatively. Traders love the volatility because they trade both sides of it but when the USDA makes a somewhat illogical call, farmers lose big time. There is no fix for Canadian farmers. It is simply the reality that we have to keep in mind when hedging our grain.
We may see more of it in the next few USDA reports, specifically cutting back on production. However, while we have seen grain futures prices drop precipitously over the last several months the Canadian dollar continues to show weakness effectively mitigating much of this grain futures weakness in our cash prices. With a possible rate increase from US Federal Reserve chairman Janet Yellen in the offing, this bodes well for the value the US dollar and negative for the Canadian dollar. Balancing the trade-off between Canadian dollar weakness and possible grain futures rallies will continue to be our marketing challenge.
With harvest coming on quickly in Ontario, we should expect some temporary basis weakness at the height of harvest. Unlike last year, when corn harvest was delayed, it is more unlikely this year. Expect Canadian corn to be exported at harvest time and possibly imported back later, but that will much depend under Ontario crop size. Needless to say, 160 bushels per acre for Ontario corn is likely, setting up a possible scenario where import pricing doesn't happen in 2016.
There still is China and its so-called weak economy. That is affecting both soybeans and corn. China may also be changing their domestic pricing formula for corn, but it's only a theory now. That said it will remain key to grain demand. The challenge for Ontario farmers is to continue to work your marketing plan. Standing orders reflecting both basis and futures are always good. Market where you are profitable and comfortable. Market lows are often made in October. There will be many more grain-marketing opportunities ahead.
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.