Market Trends Commentary for April 2019

U.S. and the World

Planters are starting to roll in the southern U.S. American Midwest as it that time of year again.  Interestingly enough, its not all-full speed ahead with much of the western corn belt under water dealing with flooding. Inclement weather with heavy rains and snow in mid to late March led many rivers to flood in Nebraska and Iowa, causing much angst regarding planting dates. However, it is a long road to payday, one fraught with many pitfalls. The March 29 prospective plantings report is another benchmark always important in this planning window. 

On March 29, the USDA surprised the market with its release of the Grain Stocks and Prospective Plantings reports showing many more corn stocks and intended acres planted than the trade expected. Soybean and wheat stocks were also larger, but more within trade expectations. Soybean and wheat acreage fell more than trade expectations. 

U.S. corn acres were projected at 92.8 million acres, which was 1.7 million more than the average trade estimate. U.S. soybean acreage is pegged at 84.6 million acres, which was 1.6 million acres below the average trade expectation and a whopping 4.6 million acres below last year’s record of 89.2 million acres. All wheat acres came in at 45.8 million, which was down 2 million acres from last year. Corn stocks came in at 8.604 billion bushels, which was far above the trade estimate of 8.336 billion bushels.  That was a hugely bearish number for corn. Soybean quarterly stocks came in about as expected at 2.716 billion bushels, which is record large and ensures a very bearish soybean market outlook. 

On March 29, corn and soybeans futures were lower than the last Market Trends report.  Wheat futures were higher. May 2019 corn futures were at $3.56 a bushel. The May 2019 soybean futures were at $8.84 a bushel. The May 2019 Chicago wheat futures closed at $4.57 a bushel. The Minneapolis May 2019 wheat futures closed at $5.54 a bushel with the July 2019 contract closing at $5.62 a bushel. 

The nearby oil futures as of March 29 closed at $61.14/barrel up from the nearby futures of last month of $56.07/barrel. The average price for ethanol on March 29 in the U.S. was $1.57, up from the $1.49 a U.S. gallon in the last Market Trends report. The Canadian dollar noon rate on March 29 was .7483 U.S., more than the .7450 U.S. reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, farmers are getting ready to roll, with planters getting pulled out of the shed all across the province. However, it’s obviously still early, although some sugar beets and small grains have been planted in the deep south west of the province. There has also been some nitrogen applied to wheat as of late March on sandier soils. However, much of the wheat crop planted last fall needs a few warm days to give clues as to whether it’s going to make it. Much of this wheat will likely be switched to soybeans this spring. 

Ontario basis levels for grains has been maintained or even increased since the last Market Trends report. The Canadian dollar has wobbled vs. the U.S. dollar, but at .7483 is still helping domestic Ontario grain prices pass muster. Corn basis levels have increased slightly, but the soybean basis is nearly the same as the last Market Trends report. Ontario corn has been moving, into the export markets at higher DON levels.  Needless to say, there is still ample supply with the U.S. replacement price as of March 29 at $5.44 a bushel; we’re still a long way from import values. 

Old crop corn basis levels are $0.95 to $1.10 over the May 2019 corn futures on March 29 across the province. The new crop corn basis varied from $0.90 to $1.21 over the December 2019 corn futures.  The old crop basis levels for soybeans range from $2.10 cents to $2.15 over the May 2019 futures. New crop soybeans range from $2.15-$2.30 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on March 29 were $6.10 for SWW, $6.17 for HRW, $5.97 for SRW and $6.47 for Red Spring Wheat. On March 29 the U.S. replacement price for corn was $5.44/bushel.  You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

There has got to be a catalyst somewhere out there to change these bearish grain futures prices.  However, when that will come continues to elude us as the March 29 USDA report played us no favours.  However, in some ways, we’ve seen this before.  This March 29 USDA report resembled the 2016 March report especially for corn.  While the market fell 17 cents in one day on March 29, similarly in 2016, the corn market gained approximately 70 cents after going into June. 

Simply put, it’s easy to be pessimistic.  The increase in corn quarterly stocks of 270 million bushels was particularly damaging. Second quarter demand of 3.347 billion bushels is the smallest for a 2nd quarter since 2012-13.  Export demand has been down and ethanol demand is at risk as well.  While USDA estimate of demand for this year is 14.8, current disappearance levels are falling short, most like 14.2, which could push corn ending stocks way over 2.5 billion bushels.

Soybeans need help. That is reflected in the U.S. quarterly stocks, which show some of worst disappearance in several years, mainly because Chinese demand disappeared last July. The frenetic watch continues in the soybean market for some type of solution.  However, the March 29 USDA report didn’t lie. There are fewer soybeans being planted for sure, a lot less. That’s a good thing especially if we are looking at a U.S. 1.6 billion bushel ending stocks at the end of this growing season. Taking American acres off the table would help. However there is no set-aside or PIK program in the offing, which will get that done. With the flooding in the U.S., there is talk of more prevent plant acres this spring in the U.S. However, it’s all a theory now. Its going to take some production calamity somewhere in the world to get prices to surge higher.   

Commodity Specific Comments

Corn

With corn, the USDA in their March 29 report, provided a double negative, with more projected acres planted and more stocks.  With ethanol demand not good and export demand in flux, it all came as a bit of a surprise.  Who knows, maybe the increased stocks represent more yield found from last year.  The USDA has done that before; we’ll have to see if come old crop corn comes out of nowhere.

The flooding in the American Midwest saw many bins explode with old crops corn.  These emotional pictures were surely tough to see, but likely represented a very small portion of total ending stocks.  Corn prices may be affected in these local areas thru basis adjustments.  However, any musings about old crop stocks being washed down the river don’t pass muster when thinking about the big stocks USDA announced.  The May to July 2019 corn futures spread is currently -9.75 cents as of March 29, which is considered bearish.  Seasonally, the tend to trade higher into June.  The nearby spot corn contract is currently priced in the 25th percentile of the past five year price distribution range.

Soybeans

Soybeans continued to be whipped by bullish market sentiment.  The record soybean stocks numbers reflect this.  Looking ahead with normal yields and present demand its likely to continue with U.S. ending stocks possibly going way over the 1 billion ending stock benchmark, possibly 1.6 billion.  This does not bode well for pricing.

Of course the elephant in the room continues to be some type of trade agreement with China.  An argument could be made that there is a $1 move in soybeans depending on the success or failure of a Chinese U.S. agreement on agricultural commodities.  However, China holds most of the cards in this and has lots of other options.  As we move forward, we can hope for lightening in a bottle, for China to return to their insatiable thirst for U.S. soybeans, but that train is surely gone for a long time.

The May, July 2019 soybean futures spread as of March 29 is -13.5 cents, which is considered bearish.  Seasonally, the soybean market tends to trend higher into July.  The nearby spot soybean contract is currently priced in the 10th percentile of the past 5 year price distribution range. 

Wheat

Wheat continues to be what it is, a grain grown almost everywhere.  Of the three major grains, its fundamentals are bearish, but probably the least bearish among them. Unfortunately, for wheat, it is strongly tied to the U.S. dollar, which has been strong of late.  Higher wheat prices have higher domestically in Russia, which has helped lessen some Black Sea exports.

In Ontario, stronger wheat cash pries which reflect out Canadians dollar reality are only good if you have the wheat and that is a major question as we head into mid April.  Breaking dormancy this year in Ontario will largely determine how many acres make it to harvest, especially with the crop so compromised last fall.

The Bottom Line (cont.)

In Canada Ontario producers are very accustomed to the agricultural market power like China.  We saw what China did to the soybean market last year.  As we look west, we see a somewhat similar situation developing in Western Canada as China has stopped buying Canadian canola.  None of this is good and could surely continue as the weeks go on.  Although we don’t export many soybeans to China, it would be an easy target.  Market can work if politicians allow them.  In Canada, the United States and China, that water has been muddied.  We move on hoping for better things.

As futures prices have moved down, Canadian basis levels will surely follow especially if the loonie suddenly catches fire.  However, we’ve seen the opposite with the dollar floating in the 74 cent U.S. level over the last month.  The Bank of Canada has also given signals that rate cuts might be in our future instead of rate increases.  It continues to give stimulus to Ontario cash grain prices. 

Our geopolitics continues to affect these currency values.  A hard Brexit looms on April 12th as the British have so far failed to achieve any type of deal with the European Union.  This is positive news for the U.S. dollar, but really, its not too good news for anybody.  A major fracture in the European Union with a hard Brexit is in the cross hairs.  There may lead to some major problems for agricultural trade, aside from the foreign exchange implications.

Looking ahead, nothing lasts forever, even though the last 6 years have had some pretty consistently low grain futures prices.  That has seemingly lasted forever.  However, even with the bearish fundamentals so pronounced in today’s grain market, eventually change will happen.  In Ontario grain prices continue to be enhanced by a low Canadian dollar.  Despite the bearishness of the March 29 USDA report, our penchant for good risk management strategies needs to continue.  As we continue into April, Ontario planters will be poised to start the process culminating in a bountiful harvest.  There will be grain-marketing opportunities ahead.  Getting there is often the challenge.