US and the World
A Black Swan is an unforeseen event that comes out of nowhere to affect market prices. It’s been all about COVID-19 for several weeks now as most of the world has been locked down as we experience the first pandemic since 1918. It is not quite a Black Swan.
It’s more like a flock of Black Swans which keeps on giving, disrupting agricultural markets like we haven’t seen before. Across the great North American grain belt, farmers are either planting or about to plant, but they are doing it in a planting environment never seen before. The COVID-19 pandemic is breaking up our supply chains and helping to destroy grain demand. Amid all the calamity, farmers are headed into the fields, risking their lives for the food supply. It is truly a uniquely dark and difficult time.
Amid the uproar, USDA released their WASDE report on April 9th. The April USDA report is usually the poor cousin at this time of year, as the March 31st Prospective Plantings report usually gets all the attention.
Despite that, USDA had lots to say. The showstopper was the decrease in ethanol demand. Buffeted by the cratering in the oil and gas market, USDA cut ethanol demand 420 million bushels down from 5.425 billion bushels in March to 5.05 billion bushels (bbu) in their report. Thankfully, USDA raised feed and food and residual use by 150 million bushels. With total corn usage down to 13.865 bbu, the 2019-20 ending stocks were increased to 2.092 bbu. Global ending stocks were up, and USDA kept Argentinian corn production at 50 MMT and Brazil at 101 MMT. (million metric tonnes)
USDA increased US soybeans endings stocks at 480 million bushels, which was up 55 million bushels from the March report. Globally, soybean ending stocks were decreased. USDA cut South American soybean production, Argentina down by 2 MMT to 52 MMT and Brazil down 1.5 MMT to 124.5 MMT. USDA raised China’s total import numbers by 1 MMT to 89 MMT, a good reflection that Chinese demand is still robust even within a pandemic, but mostly satisfied by Brazilian supply. Global wheat supplies were raised by USDA, in fact they increased American wheat stocks by 30 million bushels to 970 million bushels from their March report.
On April 24, corn, soybean and wheat futures were lower than the last Market Trends report. May 2020 corn futures were at $3.15 a bushel. The May 2020 soybean futures were at $8.32 a bushel. The May 2020 Chicago wheat futures closed at $5.26 a bushel. The Minneapolis May 2020 wheat futures closed at $5.07 a bushel with the September 2020 contract closing at $5.30 a bushel.
The nearby oil futures as of April 24th closed at $16.94/barrel down hard from the nearby futures of recorded in the last Market Trends report of $28.34/barrel, but up big after going negative for the first time in history the week before. The average price for US ethanol on April 3rd in the US was $1.20 a US gallon the same as the $1.20 recorded in the last Market Trends report.
The Canadian dollar noon rate on April 24th was .7097 US, lower than the .7071 US reported here om the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
In Ontario, farmers are starting to plant corn as of April 24th. There is corn planted in many different areas of Ontario, but this will surely ramp up the week of April 27th if the weather cooperates. This is happening despite issues with the supply chain, as everything from Ontario feed to ethanol demand is being challenged.
As the price of Ontario corn has dropped during the pandemic, there may be switching out of corn into soybeans. However, as of April 24th, it’s too early to tell.
Across Canada and the United States, meat processors have closed or slowed down causing obvious problems for feed demand, which is showing up in Ontario too. Ontario ethanol demand had been cut and some delivery contracts have been deferred out in the future. On the old crop side of the ledger, the cut back in corn for ethanol demand may be in the 350000 metric tonne range, which translates to about 5% of total Ontario 2019 corn production. Thankfully, some of this has been picked up into increased Ontario exports into the EU, where Canadian corn has tariff free access vs American corn.
Looking ahead, how will this change for the new Ontario crop corn situation? Of course, as of April 24th, hardly any corn is planted, and nobody knows the weather ahead. Much will depend on the size and quality of the 2020 crop.
Also, too, much will depend on the Ontario demand equation how ethanol weathers the COVID-19 pandemic storm. Ditto for Ontario feed demand. As of now, it’s all an open question.
Old crop corn basis levels are $1.29 to $1.40 over the May 2020 corn futures on April 24th across the province. The new crop corn basis varied from $0.87 to $1.40 over the December 2020 corn futures. The old crop basis levels for soybeans range from $2.86 cents to $2.95 over the May 2020 futures. New crop soybeans range from $2.77-$2.90 over the November 2020 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on April 24th were $7.64 for SWW, $7.85 for HRW, $7.64 for SRW and $6.54 for Red Spring Wheat. On April 3rd the US replacement price for corn was $4.88/bushel. You can access all of these Ontario grain in the marketing section on the Daily Commodity Report.
The Bottom Line
This is sure a heap of pain. COVID-19 has changed our world and it will continue into the near future. In Ontario, there are 13,995 confirmed cases with 811 deaths as of April 24th. In the United States, there are 958,863 confirmed cases with 54,161 dead as of April 24th. It is horrific, impacting everyone and shifting the agricultural supply chain too. Moving ahead will be challenging for everyone, especially as some state and provincial governments move to open up the economy again.
Eventually, that will mean demand components will come back into our markets. The oil market went negative on April 20th partly because there was no way to store the oil which was “on the market”. With an opening of the economy, people will begin driving again, oil will be back, along with gasoline and ethanol to corn’s advantage. Ditto for soybeans and wheat. The question will be when this will happen and how gradual? The world might need to eat, but we’ve found out that food demand is so much more complex than we once thought.
Weather is still the great equalizer in the market, even during the pandemic. Before this started, there was big grain supplies almost everywhere. As of late April, Argentina and Brazil have gone through an extended dry period, which has cut their production. In fact, a recent estimate from the USDA’s attaché in Argentina has cut Argentina’s corn crop by 1.5 MMT down to 48.5 MMT. On the contrary wet weather forecasts in the US Eastern Corn Belt will surely challenge the start of corn planting there.
China continues to be somewhat of a wild card. They are committed to buy $40-$50 billion worth of US agricultural commodities during the phase one agreement in the United States. China’s soybean purchases from the US add up to 22.3 million bushels this crop year, which is on an earlier pace, than usual. This is somewhat surprising based on Brazil’s cheaper soybean discount compared to US gulf prices over the last few weeks. Needless to say, China’s soybean imports are expecting to break their own record levels this year, a positive for farmers amid a world of negativity.
Commodity Specific Comments
A crystal ball and a fortune teller are needed for corn prices. An argument can be made when the pandemic is over and society gets back to normal, we’ll start driving again and gasoline use will increase with the corresponding ethanol blend. If your crystal ball says we’re back to normal soon, so will corn demand, if not, it’s going to be a slow march back for corn.
May corn dipped to $3.01 on April 21st and of course many are asking if this is the pandemic low. Prices are low for sure, with most cash values in the United States having a $2 cash handle. Clearly with planters rolling all over US farm country, it’ll be telling if the switch is on to soybeans.
The May-July 2020 corn futures spread is currently -.0725 cent/bushel, which is considered bearish. Seasonally, corn prices tend to trade up through June, but COVID-19 has upset that turnip wagon. The May 2020 corn contract is currently priced in the 9th percentile of the past five-year price distribution range. These are very cheap corn prices.
In many ways, soybeans prices have been better off vs corn. However, the problem in the livestock sector impacts soybean meal too. It’s been difficult, especially at a time when Brazilian soybeans have been cheaper than American soybeans. Of course, there is also the spectre of a big switch in the US corn belt from corn to soybeans this spring.
China has been buying American soybean in the week previous to April 24th and why not at these cheap prices. In fact, much of this has been for August and September delivery. It’s a good sign and one that will need to be sustained for increased soybean prices. With China’s soybean imports actually projected to increase this year, it’s a small signal that their demand has been sustained, even amid all the problems with Covid-19 and African Swine Fever.
The May-July 2020 soybean futures spread is currently -0725 cents as of April 24th which is considered sideways. Seasonally, soybeans tend to trade up into July, which surely may be altered this year by the pandemic. The nearby May contract is currently in the 12th percentile of the past five-year price range.
Corn to some extent is holding wheat down. That’s a new one. With the cratering of the energy markets, ethanol and the lack of driving, it’s been terrible for corn demand. Wheat on the other hand has seen a bit of a renaissance as people stay home and consume more flour. Wheat prices have been more buoyant, because of that, as well as dryness in the production areas in Russia, Ukraine and northeastern Europe. As we move ahead, hopefully this “new wheat” demand spawned during the pandemic will become institutionalized.
In the meantime, there is a lot more wheat in Ontario vs last year. However, it’s not looking as good as of April 24th as it might have 3 weeks previous as a cold April has held it back. However, producers have had standing orders hit over $7, which is higher than the past few years.
The Bottom Line (cont.)
Cash basis for corn in the old days, like December 2019, was quite good and bullish arguments could be made. The same could be said for soybeans and wheat if you searched hard at the time. COVID-19 changed everything. What were the chances that a virus first reported in China would completely change our agricultural commodity outlook at that time? Nobody saw it coming quite like this and it serves as a bit of a lesson in hindsight how geopolitical events can change our world. Add in the Saudi/Russia dust up in the oil market, and we have unique conditions coming together to usurp markets. We got steamrolled. Now, if we could only get some bullish surprises.
The Canadian dollar has represented the bullish safety net for Ontario farmers. On March 19th, the Canadian dollar reached down to .6830 U.S., but as of April 24th, stands at .7097 U.S. Previous to March 1st, the loonie had been fluttering near 75 cents US for many months. This continues to provide a stimulus to soybean and wheat basis levels, which triggered $12 soybean orders and $7.40 wheat pricing orders. Corn is a bit different, but clearly, the loonie is providing marketing opportunities even at very low grain futures levels. Its back to that second layer of grain pricing in Ontario, the balance between foreign exchange and futures levels. Any future rate cut by the Bank of Canada will be negative for the loonie.
Needless to say, cutting the interest rate when its already at 0.25% seems extreme. However, keep in mind, these are extreme times.
The priority for Ontario grain farmers is first to keep themselves healthy and maintain that toward their employees and people working in our supply chain. Daily market intelligence will remain key. It’s dry in the Black Sea grain belt as well as northeastern Europe and southern Brazil. China is buying American soybeans.
We’ve gotten here in the most unusual and somewhat dangerous way. The challenge ahead is to not only to work safely, but to have those marketing price orders in place. The grain markets aren’t taking the day off, despite the extreme conditions and extreme volatility. There will be many marketing opportunities ahead.
Getting there will be the challenge.