Post March 29 Special 2018

US and World

It might seem hard to believe, but the long winter is finally in the rearview mirror. Farmers across North America are busy making last-minute preparations to put crops in the ground. In fact, some corn is in the three and four leaf stage in southern states like Texas. There is also corn and soybeans going into the ground in southern Illinois. We are ramping up to another planting season. The March 29th USDA report always serves as a starting gun on the new crop year.

On March 29th USDA gave the market somewhat of a surprise with lower acreage projections for corn and soybeans than had been expected. The USDA pegged US soybean acreage for 2018 at 89 million acres and corn acres at 88 million. It was the first time since 1983 that the projected acres for soybeans were more than corn. Both the projections were less than expected and the market ran with that on report day. On the contrary, old crop stocks and projected new crop stocks are extremely onerous. Quarterly soybean stocks stood at 2.11 billion bushels, which is up 17% from March of 2017. Corn stocks as of March 1st, were a record 8.89 billion, up 2% from last year.

The USDA pegged wheat acreage and 47.3 million which is up 3% from last year, which makes it the second lowest since 1919. Cotton came in at 13.5 million acres, which was up 7% from a year ago and above trade expectations. The increased wheat and cotton acreage is partly responsible for less corn acres. There were large acreage reductions projections of over 300,000 in Kansas, Minnesota and North Dakota.

On March 29th, soybeans futures were higher than the last Market Trends report. Corn and wheat futures were slightly lower. May 2018 corn futures were at $3.87 a bushel. The May 2018 soybean futures were at $10.44 a bushel. The May 2018 Chicago wheat futures closed at $4.51 a bushel. The Minneapolis May 2018 wheat futures closed at $5.78 a bushel with the September 2018 contract closing at $5.94 a bushel.

The nearby oil futures as of March 29th closed at $64.94/barrel up from the nearby futures of last month of $62.04/barrel. The average price for ethanol on March 29th in the US was $1.63 a US gallon the same from last month at $1.63 a US gallon.

The Canadian dollar noon rate on March 29th was .7756 US down from .7788 US reported here March 9th. The Bank of Canada’s lending rate remained at 1.0%.

Ontario

As of April 1st, spring is knocking on the door for Ontario farmers. Weather into April will surely determine when corn gets to go into the ground. However, in late March there were several sugar beet fields planted in Chatham Kent and potatoes in the ground near Leamington. It is a harbinger of what is to come with corn planters getting set to roll.

Cash market conditions have slightly improved into April 1st in Ontario. The Canadian dollar continues in the $.77 range buffeted from some of the political machinations going on south of our border. This has put cash pricing opportunities for new crop corn close to $5 a bushel in some locales with soybeans approaching $12.70 a bushel. On the old crop corn side, ample supplies will likely continue throughout this year, although exports out of Hamilton have been very busy. Of course, this is partly due to the tariff free access for Canadian corn into Europe under the CETA agreement.

Farmers in Eastern Ontario continue to enjoy higher basis values for corn than their counterparts west of Toronto. This not only creates more revenue for corn producers, but it also creates somewhat more unique opportunities to take advantage of basis and futures. Of course, flat pricing is still king among Ontario growers and especially in Eastern Ontario as we approach the Québec border.

Old crop corn basis levels are $.75 to $1.03 over the May 2018 corn futures on March 29th across the province. The new crop corn basis varied from .75 to $1.09 over the December 2018 corn futures. The old crop basis levels for soybeans range from $2.20 cents to $2.27 over the May 2018 futures. New crop soybeans range from $2.15-$2.26 over the November 2018 futures level. The GFO cash wheat prices for delivery to a terminal on March 29th were $5.74 for SWW, $5.67 for HRW, $5.48 for SRW and $6.09 for Red Spring Wheat. On March 29th the US replacement price for corn was $5.35/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.

The Bottom Line

In many ways we are at a crossroads when it comes to grain prices in these markets. The March 29th USDA report is the latest in a long string of end of March USDA reports over the years, which impact markets. Futures prices took off post report mainly because the projected acreage figures were much less than expected. This was egged on by funds managing their long position. In the background, like a huge anchor in a rowboat were the old crop stocks, an incredibly bearish factor within this market.

While projected acres might be down, so is demand and old crop stocks especially for soybeans are growing. At current supply and demand levels projected old crop stocks for this marketing year are likely to be much higher than USDA projections, which currently stand at 2.127 billion bushels for corn (an actual reduction from last year) and 555 million bushels for soybeans. Some private estimates are taking soybean stocks up into the 700 million bushel range.

Keep in mind the world as it stands now, world production agriculture is not settled. For instance, Argentina has been devastated by drought. USDA predictions of their soybean crop in March were 47 MMT, down from 54 last month and 57 originally. Their corn crop is dropping too. Brazil on the other hand is projected to produce 113 MMT of soybeans, a huge crop. However, the problems in Argentina have boiled the soybean meal market as well as shifted grain in and around South America. This has made futures market nervous throughout the winter, which may have been part of the volatility on March 29th.

USDA increased the amount of spring wheat acres to be planted across the northern plains. However, this might be mitigated by early wet and cold weather across the region. With snow still on the ground in parts of Minnesota and North Dakota, some of these acres might be switched back into soybeans and even corn going forward.

Commodity Specific Comments

Corn

The corn market jumped on March 29th in response to the lower acreage coming out from USDA. However, it doesn’t mask the stock’s situation, which is completely onerous and bearish in the background. The export and shipments of US corn as of March 1st were down, which is reflective of the 25% reduction in corn exports this year compared to a year ago.

Basis values in the United States for corn retracted on the run up in old crop corn futures. For instance, the DTN National Corn Index closed at $3.37 on March 28th, which is the lowest close in a month. It almost seems if the one-day run-up in futures was a response to the funds being overtly long going into the report.

The May 2018 July 2018 corn futures spread is -8.5 cents as of March 29th. This is considered bearish. The May corn contract is currently priced in the lower 48% of the past five-year price distribution range. Seasonally, the corn market tends to trend up through early May.

Soybeans

In many ways soybeans continue to be elusive. Some people might refer to them as the great liars; you never know what they’re going to yield. The USDA report showed lesser than expected soybean acres at 89 million, which represented the first time since 1983 there have been more soybean acreage projected than corn.

Soybean exports have been a big problem from the United States. Soybean shipments are down 12% from a year ago and China has showed no propensity for a renewed appetite for American beans. That picture along with the onerous soybean stock situation pales in comparison with the effervescence of the soybean market rally on March 29th.

The May 2018 July 2018 soybean futures spread is -10.75 cents as of March 29th. This is considered bearish. The May soybean contract is currently priced at or near the midpoint of the past five-year price distribution range. Seasonally soybean futures tend to trend up through early June.

Wheat

There is still a lot of wheat in the world and a lot of wheat in the United States. Wheat acres are up 3% from last year, but that’s still the second lowest since 1919, with last year being the lowest. The dry conditions in Kansas have been mitigated to some extent, giving some hope to wheat in those desert like conditions. However, wheat futures prices have retreated based on rain falling in the southern Plains.

In Ontario, wheat is emerging from winter snows relatively intact across the province. Red clover has been applied in many cases and producers are hopeful it will green up in the next couple of weeks. It is unlikely that large tracts of wheat will be replaced with soybeans this year in Ontario

The Bottom Line (cont.)

The elephant in the room continues to be China and the ongoing relationship with United States. It is no secret that the American trade action (tariffs) with steel and aluminum has made for nervous speculation regarding Chinese retaliation. China is the master trader of soybeans. Official retaliation to American tariffs would be brutal if it was directed specifically at soybeans. However, it doesn’t have to be direct. Any nuance, or any public position from Chinese leadership or even twitter tweet from the American President can impact the soybean market nervous about trade.

Flat pricing of Ontario grain continues to be a mainstream strategy for pricing in an environment of heightened futures prices and a lower Canadian dollar. There have been years in the not so distant past where Canadian dollar appreciation into the cropping season has mitigated any grain futures rise into July. That’s one reason why flat pricing can be so attractive and standing orders so useful. It does not take away from hedging futures or basis on an individual account. However, it is simple and increasingly important for producers to consider.

It goes without saying that Mother Nature and weather conditions going into spring and into early summer are incredibly important to grain futures market behavior. History tells us that and as farmers it is completely obvious. Predictions are for a wetter than normal spring in the Eastern corn belt and across Ontario. The USDA report on March 29th simply gave us projections. Some critics might say they were simply wild guesses. Needless to say, it is still very early and there is so much risk ahead simply based on weather conditions. Remember, in Argentina only a few months ago, the devastating drought, which has impacted them, was only a theory. In the American corn belt, we’ve had five straight years of benign weather. That streak will eventually be broken, but of course nobody knows what will be.

As of March 29th, new crop elevator bids for corn and soybeans are approximately $4.90 a bushel and $12.63 a bushel respectively. These flat prices are much higher than harvest levels over the last few years and are somewhat reflective of early pricing opportunities available in Ontario over those years. Of course, every year is different. There are a myriad of market factors swirling in the grain complex as we head into mid April. The challenge for Ontario producers is to measure all of those marketing factors. Maintain some grain marketing orders. Work your plan. There will be many 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.