US and World
July can be a very volatile time in agricultural commodity markets. Of course much of this is because of proverbial weather markets, which can send agricultural commodity prices into a volatile frenzy depending on weather headlines. That is where the agricultural commodity markets are after the always-seminal June 30th USDA report. The end of June report from the USDA, which gives us actual acres planted, can often be very explosive for agricultural prices. 2016 did not disappoint. The June 30th USDA report set the table for the year ahead.
On June 30th the USDA shocked the market by actually increasing US corn planted acres to 94.15 million from its estimate last March 31st of 93.6 million acres. Since March 31st many market observers have felt that this was too much corn. This, along with a rise in soybean futures prices led many market analysts to predict a switch away from corn. However, the 94.15 million acres number caught the market leaning the wrong way. Soybean acres were pegged at 83.7 million, which was about at the average trade estimate but less than many analysts had expected. This shocked the market sending soybeans nearby futures up 30 cents after the close of trading June 30th. Nearby corn futures dropped $.14 on the day.
US quarterly stocks were pegged at 4.722 billion bushels as of June 1st, which was up 6% from last year. Soybean quarterly stocks were pegged at 870 million bushels, which was 39% more than last year. All the wheat acreage came in higher than expected at 50.82 million bushels. The USDA report was definitely bearish for new crop corn and wheat and much more neutral for soybeans.
On July 2nd, corn, soybeans and wheat nearby futures prices were lower than in the last Market Trends report. The September corn 2016 futures were at $3.60 a bushel. December 2016 corn futures were at $3.67 bushel. The August 2016 soybean futures were at $11.64 a bushel. The November 2016 soybean futures were at $11.37 a bushel. The September 2016 Chicago wheat futures closed at $4.30 a bushel. The Minneapolis September 2016 wheat futures closed at $5.00 a bushel with the September 2017 contract closing at $5.58 a bushel.
The nearby oil futures as of July 1st closed at $48.99/barrel down from the nearby futures of last month of $49.07/barrel. The average price for ethanol on June 30th in the US was $1.86 a US gallon down from last month at $1.90 a US gallon.
The Canadian dollar noon rate on June 30th was .7687 US down from the .7852 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
Ontario had one of the driest June's on record. This meant that crops were parched in many parts of the province leading into the Canada Day/July 4th weekend. A rain event on the morning of Canada Day did offer some relief with less than a half an inch of rain falling across the province. This gives some type of relief to Ontario crops as we head into summer but there is still a considerable moisture deficit going into the first week of July.
The ramifications of an extreme dry year in Ontario may play out in new crop basis levels for corn. The last few years have seen record yield for Ontario corn across the province. However, if 2016 turns to be extremely dry, this provincial average could drop significantly setting up the specter for corn imports in 2017. At this point in early July that is a bit of a stretch, but a distinct possibility if we continue with a moisture deficit into July and August.
Weather will surely be key for the new crop corn basis, but the value the Canadian dollar will also remain very important. The Brexit vote was negative for the Canadian dollar mitigating some of the losses in futures prices over the last few weeks.
Wheat harvest has already started in Essex County as of the last week in June. It will be ramping up across the province in the next few weeks of July. Prices have retreated based mainly on wheat futures price depreciation post June 30th USDA report. However, quality does look good for the Ontario crop, which is always a challenge every year.
Old crop corn basis levels are .78 to $1.00 over the September 2016 corn futures on July 1st across the province. The new crop corn basis varied from .70 to $0.95 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.30 cents to $2.85 over the September 2016 futures. New crop soybeans range from $2.50-$2.69 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on July 1st was $4.78 for SWW, $4.71 for HRW, $4.71 for SRW and $5.68 for Red Spring Wheat. On July 1st the US replacement price for corn was $5.12/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The June 30th USDA report in many ways shocked the grain markets back into reality. The big run-up in soybean prices since winter was definitely skewing expectations for a drop in corn acres at a time when weather is becoming crucial for corn development. 94.15 million acres of corn estimated by USDA was a high outlier compared to many other estimates that were looking for a cut in corn acreage based on the perceived shift to soybeans. In a nutshell, the market was leaning the wrong way on June 30th in corn and the correction was violent.
The about-face in the grain market further accentuates the differences between corn and wheat versus soybeans. The June 30th USDA report projected 83.6 million acres of soybeans. This was 1.4 million acres than the March 31st estimate, but below expectations of 2 million more. The corn and soybean ratio continues to grow wider, while the December corn futures contract has retreated to contract lows. It is unusual, but it's a telling feature within the grain market in 2016.
The big corn acreage number was a surprise, but corn was also under pressure from a change in weather forecast in late June, which showed more than adequate moisture coming into the American corn belt. The 94.15 million acres of corn is the third largest since 1944. Weather will remain key to the corn situation as we head into pollination in July.
June 23rd also represented a very key date for our agricultural commodity markets. The Brexit vote came as a surprise to world financial markets. With the UK voting to leave the European Union, financial markets were thrown into a turmoil, having fully expected the opposite leading up to the vote June 23rd. Investment money, which was in agricultural commodities, had reason to leave before, but June 23rd made for an easy target. The US dollar gained on this news, which is always negative for agricultural commodity futures prices. This uncertainty in Europe and the United Kingdom remains as others may follow. That will only be a negative wildcard for our agricultural prices in the short-term future.
Commodity Specific Comments
With the increase in acres it's hard to look at the corn markets as anything but bearish minus weather concerns in July. At 94.15 million bushels and a USDA pegged yield 168 bushels per acre that is possibly setting up for a big crop of 14.465 billion bushels, huge by any estimate.
The bearishness in corn doesn't end there with ending stock projected to be 2.27 billion bushels by the end of August, another huge number. The quarterly stocks of 4.722 were almost 200 million more bushels than expected. This only added to the bearish tone in the market.
The December 2016 March 2017 corn futures spread is neutral at -.09 cents of July 2nd. Seasonally, corn futures tend to trend up through late August. The December 2016 contract is currently trading in the lower 14% of the last five-year distribution range.
The June 30th USDA report was almost bullish to soybeans by default because it was so bearish for corn expectations. The 83.7 million acres of planted soybeans were a record in states such as Michigan, Minnesota, New York, North Dakota, Ohio, Pennsylvania and Wisconsin. There were also increases recorded in Kansas and Missouri. Despite that, many analysts were expecting much more than 83.7 million acres.
Soybean quarterly stocks came in at 870 million bushels, which was a bit higher than the average trade expectations. Soybean demand has been strong and we may have to wait a bit longer to see how the numbers change. It even might be a case that the soybean crop last year was bigger than once thought.
The November 2016 January 2017 soybean futures spread is bullish currently at .04 cents/bushel as of July 2nd. The November soybean contract is currently priced in the lower 38% of the past five-year price distribution range. Seasonally, the soybean futures market tends to trend down into early August.
The June 30 USDA report made the bearish wheat market even more so. The increased planting of wheat in the United States plus the very good anecdotal harvest reports of good wheat yields in the United States just added to the bearish tone. September wheat futures continue toward their contract lows. There are no significant weather problems for wheat in the production areas around the world.
This is not the greatest environment for Ontario wheat to be exported into. However, home will have to be found for the wheat crop, which is about to be harvested across the province. The Canadian dollar continues to be a tangible asset for Ontario producers in garnering higher cash prices.
The Bottom Line (cont.)
The Canadian dollar remains the constant positive for Ontario cash prices. The Brexit vote, which boiled world financial markets on June 23rd, was also a negative for the Canadian dollar sending it down to the 76-cent level from the 78-cent level. This is never a surprise when capital flows into the US dollar. As is, depending on the path taken by the UK and the European Union in the next few months, this uncertainty will likely continue in the Canadian dollar helping Ontario cash grain prices.
At the same time the June drought, which continues in many areas of Ontario has wide implications for Ontario corn pricing. We have become accustomed over the last several years to record corn Ontario corn yields setting up as a corn exporter almost exclusively. However, there isn't a long history of this, Ontario usually uses more corn than we produce, a smaller drought induced crop would mean import basis pricing returning in 2017. Provincial yields in the 130-bu/acre range do happen. Hopefully we don't go there, but basis will tell that story eventually.
Despite some of the negative tone in the grain futures market with corn and wheat, demand remains very high especially for corn. Based on updated numbers from USDA, corn demand will likely be approximately 14.170 billion bushels this year. With production set to grow to 14.465 billion bushels, ending stocks will grow also, possibly north of 2.5 billion bushels. Weather will certainly be the key to this moving forward. Demand is there. However, the supply is not there yet and the acreage number and average yield will surely change, right up to the final USDA report in January 2017.
It's about the weather now, both in the US and in Ontario and Quebec. Dry weather as of July 1st still characterizes much of Ontario. It is not so in large parts of the US corn belt, with forecasts friendly to crop development. It can change fast this time of the year. The June 30th USDA says there is much more corn and wheat than expected, with soybeans being big too. It's still a long way until combines' roll. There is lots of risk ahead. Standing marketing orders continue to be a valuable tool in such a market environment. The summer season can make or break these crops. The challenge for Ontario farmers is to market where you are profitable and comfortable. Daily market intelligence will remain very key.
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.