US and World
The January USDA final crop production report is one of the three most important reports of the calendar year. While the March report gives the first indication of planted acreage and the June 30th report gives the actual planted acres, the January report is always the final estimate of US crops the year previous. It is always a widely anticipated report and in 2015 it was no different.
In the January 12th USDA report, the USDA estimated 2014 US corn production at 14.216 billion bushels, which was down from its November estimate. This total production came from 83.1 million acres with a record national average yield of 171 bushels per acre. It was actually less 2.4 bushels per acre from the USDA's November estimate. The corn ending stocks for 2014/15 were pegged at 1.877 billion bushels, down from the November estimate of 1.998 billion bushels. This was despite a somewhat mysterious cut in feed demand by 100 million bushels. The corn ending stocks to use ratio came in at 13.8% compared to 14.6% in December.
Soybeans were pegged at 3.969 billion bushels, which was slightly higher than their November forecast. They were produced on 83.1 million acres harvested, with the US national average of 47.8 bushels per acre. This was record production. The USDA also left soybean-ending stocks for 2014/15 at 410 million bushels. The soybean stocks to use ratio was unchanged at 11.2%. The USDA also increased Brazil's soybean production to 95.5 MMT, which is up 1.5 MMT from their December estimate. They left Argentinian production at 55 MMT unchanged from their December estimate. US farmers cut their wheat plantings with 40.45 million acres going into winter wheat.
On Jan 16th, corn, soybean and wheat nearby futures prices were lower than the last month. Corn futures as of Jan 16th had the March 2015 futures at $3.87 a bushel. The March 2015 soybeans were at $9.91 bushel. The March 2015 Chicago wheat futures closed at $5.32 a bushel on Jan 16th. The Minneapolis March 2015 wheat futures closed on Jan 16th at $5.81 a bushel with the July 2015 contract closing at 5.98 a bushel.
The nearby oil futures as of Jan 16th closed at $46.69/barrel down sharply from the nearby futures of last month of $57.81. The average price for ethanol on Jan 16th in the US was $1.74 a US gallon vs. last month at $2.47 a US gallon.
The Canadian dollar noon rate on January 16th was .8343 US down from the .8666 US reported here last month. The Bank of Canada's lending rate remained at 1.00%.
In Ontario there are only a few acres still left of corn after a December that was pretty wide open. Some of this corn has been left out by choice as growers are hoping for moisture reduction and possibly grade improvements. What many growers categorized as the harvest from hell in 2014 will be long remembered for the difficult harvest conditions.
Corn continues to be imported into parts of Ontario with rail shipments continuing into Quebec. This has been ongoing since July 2014 but has slowed in recent weeks. The Ontario corn crop, which had been projected at 160 bushels per acre by Statistics Canada earlier, is likely to be far lower especially when grade considerations are taken into account. This has been reflected in increased basis values over the last few months. However, underneath of those basis values has been a dropping loonie, which has formed somewhat of an artificial floor under cash prices.
The Canadian dollar in the $.83 range has certainly added to basis levels for all three grains. It is more significant to wheat and soybeans, with corn being slightly different. However, the gyrating value of the loonie will continue to support cash values to Ontario farmers.
Old crop corn basis levels are .55 to .95 over the March 2015 corn futures on Jan 16th across the province. The new crop corn basis varied from .15 to .55 over the December 2015 corn futures. The old crop basis levels for soybeans as of Jan 16th range from $1.25 cents to $1.85 over the March 2015 futures. New crop soybeans range from $1.00 to $1.61 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on Jan 16th were $7.11 for SWW, $6.69 for HRW, $6.33 for SRW and $6.41 for Red Spring Wheat. On Jan 16th the US replacement price for corn was $4.94/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The January USDA report isn't what it used to be. With live trading through the release of the report market volatility has been muted over the last few years. This year was no exception with soybeans dropping precipitously on the move, but still far from limit action. Corn fell on the news, but eventually finished the day a penny higher. So it is a benchmark for 2015 and beyond. Market structure is constantly changing and the January USDA report is reflecting that. Still, make no mistake, the January USDA reports represent record crops in the United States and prices are much less than last year.
Prices have weakened off the January USDA report, but they're also being hampered by the value of the US dollar currently at 92.9 on the index, which is acting like a parking brake left engaged on a moving car. Agricultural commodity prices have difficulty swimming upstream especially at a time of record crops. Any semblance of bullishness out of the USDA report like a smaller predicted corn yield gets washed over by a US dollar continually pounding it down. With the US economy growing rapidly and capital moving toward the US dollar because of problems in Europe and elsewhere, this trend may be a constant for 2015.
It is a unique time. For instance in the wheat market the value of the US dollar is so important for wheat prices right now. It is true that wheat is grown and harvested everywhere in the world except February. With Ontario wheat being priced off American delivery points such as Toledo the value of the US dollar constantly acts as a hammer to American export sales. This is especially true in wheat, which is grown almost everywhere. This is unlike corn or soybeans, which has their major producing areas in the United States and South America.
Hope always springs eternal on the farm. It is true that we had the lows in grain prices in the first week of October. Since then we have watched prices and basis levels in Ontario go up. However, keep in mind that the January USDA report did substantiate the record crop yields we had this past summer. The ending stocks we need to dig out from are onerous and they will definitely affect futures prices as we go forward.
Commodity Specific Comments
There is no question that 171 bushels per acre was an extremely impressive US national corn yield. This came after last year's 158.1 bu/ac and the year before at 123.1 bushels per acre. It is a testament to genetics, management and a moderate summer in the US corn belt. While the Ontario summer was cold, it prevented +80° temperatures in the US corn belt giving them their record production. With that, you might think that the price of corn might be an even greater train wreck.
Demand for corn will not be easily tempered when the supply hiccup comes. It is true that the demand actually decreased 100 million bushels from December. This may be because it had been overstated before or it may be a mistake. Needless to say, demand has some question mark regarding feed and ethanol, but it will likely grow again to even greater levels.
The March to May corn futures spread is neutral at approximately .0725 cents on January 16th. The March corn contract is currently trading in the lower 20% of the last five-year price distribution range. Seasonally, the futures market trends up through early March.
The January 12 USDA report was somewhat bearish for soybeans. For instance USDA increased the soybean yield, the total crop and the carryover figure remain the same of 410 million bushels. This had the tendency on report day to send soybeans lower. In fact soybeans were $.60 lower on the report week.
Another factor that came into view on January 12th was USDA raising the Brazil soybean crop to 95.5 MMT. This was 1.5 MMT more than last year and 7.5 MMT more than the year before. It is hard to imagine a Brazil crop that big, but clearly the South American soybean monster is weighing on the horizon. Dryness creeping into top Brazilian fields is a concern as of January 16th and will certainly shape market action in the next few weeks.
Future spreads are reflecting a neutral position as of January 16th, a departure from last year and more a reflection of the record crop of soybeans in the United States this year. Seasonally the soybean market tends to trend up through the first week in May. The March contract is trading currently in the lower 18% of the last five-year price distribution range.
In the United States wheat production was actually cut in the January 12th USDA report. This may help the market as we go into 2015 especially in Ontario. However, the number of acres in Ontario was way down, especially in the southwest of the province. When wheat comes out of dormancy in the United States and in Russia and the Ukraine it will be very telling for wheat prices. Of course wheat conditions in Russia and Ukraine can be elusive. Futures values will be volatile on any rumors from there.
In Ontario there is finally some snow cover for the 600,000 acres of wheat that did get planted last fall. Producers will be hoping there are no heavy rain events in January and early February to compromise that crop further.
The Bottom Line (cont.)
The declining Canadian dollar has been the story of the last 18 months for Ontario grain prices. Going from $.94 in January 2014 into the 83 range as of January 16th has boosted cash grain values. With the March corn futures currently at $3.87, some may say it is an optical illusion regarding Canadian cash values at $4.50 a bushel. Regardless, the lower Canadian dollar always boosts Canadian cash values and remains an important part of our risk management strategy.
Looking ahead producers will need to measure and judge the Canadian dollar value for our new crop marketing plans. There has already been a precipitous drop and some might measure how much more the loonie can go. On the other hand if the US Federal Reserve does raise interest rates this year, the loonie will decline further. Capturing the right combination of futures prices and basis will continue to be our challenge.
Focus will surely turn to new crop projections as we move into February. Early projections from some private firms in the US have put corn acres at 88 million; cut from last year and soybean acres at 88 million as well, a boost up. In 2014 there was actually a record soybean planting of 83.7 million acres. This was a record at the time by a whopping 7 million over the previous record. It is hard to imagine in 2015 that we would see a jump in acres again to that degree.
That will surely depend on price going into spring. Those prices will surely depend in the next few weeks on whether South America gets the rains that they need. It is hard to imagine that their crop will get bigger, more likely smaller. In any case, the next few weeks will largely determine the price of soybeans in the short term and give us clues on some renewed estimates for US corn and soybean planting in 2015.
For Ontario farmers shivering in this cold January there is much to consider. Will the basis levels hold? Will the Canadian dollar continue on its trend down? How will the price of oil affect all of the above? Will the bearishness in the grain complex continue into spring? Or will there be an unexpected Tuesday event to come along to change everything? The road ahead is as complicated as ever and futures spreads may hold the key to understanding future price direction. South America is about to weigh in. Daily market intelligence is key. Selling where you are profitable and comfortable never grows old. The challenge is to be abreast of all the market factors.
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.