Market Trends Commentary – August/September

U.S. and the World

With September in the near distance crops across the United States and Canada continue to tread their way toward harvest. It certainly has been a tumultuous production season with a very wet planting season in the east and a much more normal planting season in the western corn belt. Getting a handle on this crop size has been difficult because of the variability that came out of the spring. This uncertainty became almost institutionalized over the last eight weeks. It was partly perpetuated by published United States Department of Agriculture (USDA) numbers, which came out of the wet spring. On August 12 the USDA weighed in with their latest crop projections. 

The perpetual wisdom leading into the report was published corn acres were too high and that the crop in the field was much less than last year. The USDA shocked the market by pegging total U.S. domestic corn production of 13.9 billion bushels planted on 90 million acres. U.S. national yield was pegged at 169.5 bushels per acre. The market on hearing this news went down the $.25 limit on August 12. The USDA pegged soybean acres to go down to 76.7 million acres with a total production of 3.68 billion bushels. This is based on a U.S. national yield of 48.5 bushels per acre. 

Confusion reigned after the report because there had always been an assumption the prevent planting acres number would be incredibly large. In fact, it was with USDA pegging 11.21 million acres of corn in prevent plant and 4.35 million acres of soybeans.  Intuitively, such numbers don’t seem to add up, especially with original planting intentions. However, it has to do with the specifics of the prevent plant program and how these figures are reported and calculated by farmers. At the end of the day, the market now is trading these production numbers. Old crop corn stocks look to be 2.36 billion bushels. The new crop soybean stocks are projected to be 755 million bushels. 

On August 18, corn, soybeans and wheat futures were lower from the last Market Trends report. September 2019 corn futures were at $3.71 a bushel. The November 2019 soybean futures were at $8.71 a bushel. The September 2019 Chicago wheat futures closed at $4.70 a bushel. The Minneapolis September 2019 wheat futures closed at $5.02 a bushel with the September 2020 contract closing at $5.61 a bushel. 

The nearby oil futures as of August 18 closed at $54.87/barrel down from the nearby futures of last month of $55.63/barrel. The average price for ethanol on August 18 in the U.S. was $1.58, down from the $1.70 a U.S. gallon in the last Market Trends report.

The Canadian dollar noon rate on August 16 was 0.7527 U.S., slightly lower than the .7651 U.S. reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, rainfall has been variable across province with many areas being at a rain deficit. However, it is the nature of summer weather patterns to have intermittent thunderstorms. This means that some areas might have rain and others that are very close have none. This has meant that the already compromised crop in Ontario has become even more variable. Generally speaking, the crop in eastern Ontario looks to be about average and in parts of southwestern Ontario, the Canada Day planting dates are showing up.

As of August 18 most of the Ontario winter wheat has been harvested with some surprising yields. The wheat story was a very difficult one over the past eight months and producers will certainly be hoping to plant more wheat this fall. Much will depend on the lateness of this current crop and weather conditions going into September and October.

Basis levels for both corn and soybeans have increased in Ontario since last month. With the problems in the production fields in the Eastern corn belt these basis levels reflect the lack of supply both in old crop corn and in the prospects for new crop.  It would seem that the old crop corn basis is at its top for the moment, for both old crop and new crop basis. Going forward basis levels will likely be in flux. Will Ontario have enough corn in late September into early October? That’s an open question especially if weather goes south in the next five weeks. Ontario merchandisers can surely hope for renewed Chinese business for soybeans like last year, but with the political ramifications swirling around us, maybe that ship has sailed.

Old crop corn basis levels are $1.73 to $2.05 over the September 2019 corn futures on August 18th across the province. The new crop corn basis varied from $1.25 to $1.40 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.14 cents to $2.28 over the November 2019 futures. New crop soybeans range from $2.05-$2.20 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on August 18 were $6.71 for SWW, $6.97 for HRW, $6.64 for SRW and $6.32 for Red Spring Wheat. On August 18 the U.S. replacement price for corn was $6.22/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

The market bears are back in control after an exuberant run on grain futures earlier this spring. Sure, acres and yield are still up to conjecture, especially with August weather being so important, but the market has spoken. December corn reached $4.73 on June 17, only to hit $3.69 on August 15. That’s a take down for sure. The bulls have been chased. 

We can debate the corn supply picture seemingly forever, but corn demand continues to take a big hit too. Year over year corn demand continues to decline to the tune of 570 million bushels over the last year. Feed, ethanol and export demand continues to decline, buffeted by changing ethanol rules and trade tensions.  Needless to say, corn supplies are growing and usage is shrinking.  That’s not a story supportive of prices.

Clearly, there are differences in opinion on the crop growing in the field.  At this time of year, there are private estimates everywhere, which generally look lower than USDA. USDA did in fact, use satellite imagery this round to estimate yield along with talking to producers. Real in field survey results will come out in the September USDA report.

The soybean mountain continues to go down, but it is a huge mountain, mainly built by the Chinese backing away from American soybeans. At the same time, Brazil’s soybean economy has expanded with China looking for a more consistent friendly supplier. Brazil soybean premiums are not what they were last year, but they are the supplier of choice.  The poison pill in the soybean trade might be that proverbial U.S. China trade agreement that has been juggled around for over a year now. Any type of agreement would spike this soybean market, but the spectre of one has grown elusive. Clearly, long-term damage to the American soybean markets has been done. The U.S. soybean market is likely to only benefit if in the future a Brazil crop got in trouble. 

Commodity Specific Comments

Corn

The USDA was beyond shocking for corn. The acres were lower than those recorded in June but not as much as was projected. However, raising yield to 169.5 bushels per acre versus 166 might’ve been a bigger part of it. There was also a loss of demand of approximately 125 million bushels among ethanol, exports and food and residual use.

You cannot discount the production problems in places like Illinois, Indiana and Ohio. There was also approximately 40 million corn acres planted in June. This has left parts of that area, with incredibly high basis levels for corn. As we go forward this will likely be sustained.

The September 2019 December 2019 corn future spread as of August 18, is -9.75 cents, which is considered sideways. The nearby spot corn contract is now in the 43rd percentile of the past five year priced distribution range. Seasonally corn prices tend to trade lower into October. 

Soybeans

Corn seemed to take all the oxygen out of the room on August 12 report today. That’s deflected the fact that 76.7 million acres of soybeans is a bullish acreage number. That is a cut from the 80 million acres reported in June. The 48.5-bushel per acre USDA figure is surely in flux, as we won’t know until combines start to roll.

Interestingly enough new crop ending stocks were at 755 million bushels, which in this new post China age, is almost considered bullish. In fact, if yield is cut further, that number might drop below half a billion. However, those stocks numbers are still overly bearish. It is August, and for soybeans, it’s a critical weather production month.

The September November soybean futures spread as of August 18 is -12.5 cents, which is considered sideways to down. Seasonally, soybeans tend to trade lower into early October. The November contract is currently priced at the 18th percentile of the past five-year price distribution range.

Wheat

It is hard to get excited about wheat at the best of times, but in the August 12 USDA report, demand was improved although production has increased. Global ending stocks were also increased, which doesn’t set any bullish tone. It also has the spectre of lower corn prices, which will compete with wheat in some markets. Unfortunately, wheat futures are at historically cheap levels.  In Ontario, the prospects of more wheat planted this fall are certainly in the cross hairs. This is despite a late spring, which may translate to late wheat plantings this October. Flat contract prices for wheat in the $6-$7 can spur plantings. However, it is no secret a wide-open fall, preferably better than last year, will be the greatest aid to increased Ontario wheat planting. 

The Bottom Line (cont.)

In Ontario, farmers continue to be buffeted from all of these factors. With our prices derived through the futures markets, American and Chinese trade policies continue to impact. Increased domestic utilization of all our grain needs to be a goal to keep that value added at home. However, merchandisers will continue to want to export corn to Ireland like last year and soybeans to China. However, on the open seas, price is the common denominator so Brazil and the Ukraine are competitors. Who knew last year when Ontario and Quebec shipped soybeans to China, Huawei tensions would get in the way this year?

Ontario farmers continue to be flat prices sellers, partly because of the value of the Canadian dollar hovering near and around 75 and 76 cents U.S. The loonie has been below 80 cents for the most part since 2017 and this has been somewhat of a saving grace for Ontario cash soybean and wheat prices. It is not so much for corn. However, at a certain point, it is likely to move back up over 80 and beyond, which will challenge Ontario farmers. As always, the value of the Canadian dollar moves at an inverse to the U.S. dollar. Weekly market intelligence looking at the U.S. dollar gives clues to Canadian dollar value.

As we move ahead the September 12 USDA report will serve as somewhat of a benchmark for U.S. crop yield. That report will be coming out of field surveys and likely yield will go down. However, that’s a huge assumption in 2019. It’s been a year of big surprises. Hot and dry weather is still very possible affecting soybean yields. Ditto for all crop weather. We have a corn futures market, but maybe we could do somewhat the same thing with a weather derivatives futures market. It is key, per usual.

There is expanded soybean crushing capacity in Michigan and New York state this summer. It would be good to have that in Ontario, but grain utilization anywhere close to our borders is a good thing. In Ontario, the crop will need good rains and that wide open September and October to get to full potential. The challenge for Ontario farmers is to continue to work their marketing plans especially in our flat pricing environment. It has been a challenging year for sure. Daily market intelligence will remain a constant. There will be marketing opportunities ahead.