Market Trends Commentary for April/May 2019

U.S. and the World

In the United States planters are rolling, but mainly still in the southern states of Texas, North Carolina and Tennessee. As of April 14, 3% of U.S. corn had been planted, with the five-year average being 5%. It’s early, for sure, as inclement spring weather has planters at bay. Planting progress is less of an issue as it used to be, as modern technology helps get this crop in quickly once the weather breaks. Also too, Mother’s Day in May is traditionally a litmus test for when the market might notice planting progress. With ending stocks onerous for both corn and soybeans, prices have been moving down. However, there is a world of production risk in front of us.

On April 9 the USDA chimed in with their latest World Agricultural Supply and Demand Estimates (WASDE) The April USDA report is often seen as more minor compared to the bigger impact coming from the prospective plantings report at the end of March. USDA pegged U.S. corn stocks to come in at 2.035 billion bushels, which was an increase of 199.91 million bushels from last month. The USDA left total corn production for this year at 14.420 billion bushels. Exports, ethanol and food and residual use all saw a drop in demand, which was reflected in higher ending stocks.

The USDA dropped U.S. ending stocks to 895 million bushels, which was below some trade expectations, but at variance with last month’s higher quarterly stocks. Needless to say, 895 million bushels of soybeans is still a very onerous number. Soybean domestic production is still set to come in at 4.544 billion bushels, reflecting the decrease in acres planted. USDA also raised their estimate of Brazil soybean production to 117 MMT, while keeping Argentina at 55 MMT. U.S. wheat stocks were raised by 31.53 million bushels up to 1.087 billion bushels.

On April 18, corn and wheat futures were higher than the last Market Trends report. Wheat futures were lower. May 2019 corn futures were at $3.58 a bushel. The May 2019 soybean futures were at $8.80 a bushel. The May 2019 Chicago wheat futures closed at $4.44 a bushel. The Minneapolis May 2019 wheat futures closed at $5.29 a bushel with the July 2019 contract closing at $5.36 a bushel.

The nearby oil futures as of April 18 closed at $60.04/barrel down from the nearby futures of last month of $61.14/barrel. The average price for ethanol on April 18th in the U.S. was $1.54, down from the $1.57 a U.S. gallon in the last Market Trends report.

The Canadian dollar noon rate on April 18 was .7473 U.S., less than the .7483 U.S. reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, much of the drama regarding whether some of the wheat will make it has disappeared. Much of the wheat on heavier clay soil in the deep southwest of Ontario will be replanted into something else this spring as tough fall and winter weather has exacted a high price. About 80% of the wheat on southern Lambton clay soils is no good. This likely will mean more soybeans as Ontario’s 900,000 acres of wheat get smaller.

Ontario basis levels are similar to what they were two weeks ago. The old crop corn basis has actually strengthened a little bit in southwestern Ontario compared to Eastern Ontario. The high DON situation continues to percolate throughout the Ontario corn market with premiums for good corn and discounts for higher DON levels. The Canadian dollar remains below $.75 U.S., which is helping these domestic grain prices. Canadian cash corn prices remain at export levels.

Old crop corn basis levels are $0.95 to $1.10 over the May 2019 corn futures on April 18 across the province. The new crop corn basis varied from $0.85 to $1.18 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.08 cents to $2.15 over the May 2019 futures. New crop soybeans range from $2.06-$2.15 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on April 18 were $5.94 for SWW, $6.01 for HRW, $5.81 for SRW and $6.06 for Red Spring Wheat. On April 18 the U.S. replacement price for corn was $5.37/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

As we prepare to plant our corn and soybeans, there is no question things are pretty bearish within our grain futures markets. However, sometimes it is darkest before the dawn, but then again when is the dawn? We have been in a long sideways trading range in grain corn futures since 2014 and seemingly everybody in farm country wants to break out of it. Only the Canadian dollar volatility has caused much excitement over that time.

However, it’s still no time to avoid talking about some of our market problems. One problem is with U.S. ethanol demand. The Trump administration EPA is eroding the RFS (Renewable Fuel Standards) for corn. They have done this since last October by granting SRE or small refining exemptions, which has the effect of handicapping or cutting the RFS dramatically. The SREs have been granted at a rate of 4 times what we had 3 years ago. This is destroying RIN values, ethanol prices and profit margins. This means the U.S. is not motivated as they once were to make ethanol from corn. This is a shame because ethanol has been a star of the corn supply and demand balance sheet. Each week, the U.S. has fallen short of hitting USDA ethanol demand expectations. Simply put, the RFS is broken and needs to be fixed.

That’s an incredibly tough scenario for corn farmers, with ethanol in such a politically made rut. As Canadians, we’ve always depended on our American friends to keep that RFS going. That has been a game changer. However, the new administration’s EPA has done the opposite. It’s meant cheaper corn, which unfortunately, may become even more synonymous when we use the word ethanol.

The direction of prices and grain fundamentals is not inspiring; in fact, it’s just the opposite. However, it is not unusual especially in the period before the great ethanol boom. At some point weather will change things in some part of the world to give us more marketing opportunity. Like in the past two years, often these marketing opportunities arise very rarely during the calendar year. That’s one reason why having standing price marketing orders ready really helps.

Commodity Specific Comments

Corn

In Ontario farmers are flat marketers of corn at $5 a bushel or $200/tonne. Lots of people like to sell at those levels, as it is a big round number. However, since 2014 corn has been in the sideways range between $3.15 and $4.55 U.S. per bushel. As long as the Canadian dollar stays low, we get some good Ontario pricing opportunities. In the spring of 2019, we continue to look, especially as we consider the seasonality of corn futures leading in to June and July.

Rabobank has given the figure of 200 million hogs that may be lost from the Chinese hog herd because of African swine fever. This is three times the total number of hogs in the United States. There is almost no way to construe this as positive for corn demand in China. In fact, as you might surmise is just the opposite for corn on a worldwide basis.

The May 2019-July 2019 corn futures spread is currently -8.75 cents as of April 18. This is considered sideways. Seasonally corn prices tend to trade higher into early June. The nearby spot corn contract is currently priced in the 27th percentile of the past five-year price distribution range.

Soybeans

The USDA report on April 9 didn’t really do anything for soybeans, there are simply still too many of them. The on again and off-again trade talks are on again with U.S. officials getting together with the Chinese in the week of April 29, hoping for a deal in May. It is such noise. The soybean futures market has become numb to it.

China of course has been absent for the most part since last July. The USDA has set a goal of 1.875 billion bushels of soybean exports by the end of August. At the present time, those exports are not even close to satisfying that requirement. Yes, soybean acreage is projected to be down, but what would happen to market prices if for some reason it didn’t go down as much as expected?

The May 2019 July 2019 soybean futures spread is currently -13.75 cents, which is considered sideways to bearish. Seasonally, soybean prices tend to trade higher into early July. The nearby spot soybean contract is currently priced in the 12th percentile of the past five-year price distribution range.

Wheat

With the tough conditions in Ontario for wheat, we need to remember that there is lots of wheat in the world. At the present time in the United States the crop ratings for soft red winter wheat is 60% good to excellent. This is adding to the bearish market conditions and the poor export situation out of the United States. An ascendant U.S. dollar is always a problem for U.S. wheat futures prices.

In Ontario the compromised wheat crop has led to some discussion about increased basis levels for wheat in Ontario. However, it is unlikely as Ontario always has more wheat than it needs and will continue to export. We also have a few months left in the growing season to see how this crop performs. The market for wheat straw in some parts of the province might garner more excitement.

The Bottom Line (cont.)

The U.S. economy continues its resilient pace even though the trade war has softened some of the economic numbers. This has resulted with that continuing strong U.S. dollar to the detriment of the Canadian dollar. In fact, there is even some speculation now that the Bank of Canada could cut interest rates, which would have the effect of weakening the Canadian dollar.

In Ontario the 74/$.75 U.S. Canadian dollar continues to put some air under our cash grain prices. Another way of looking at it would be the Canadian dollar is creating price optics much more appealing than our American friends to the south. This marketing anomaly is a constant on Ontario farms and to a large extent has made us flat price sellers of grain. For instance, $5/bu corn or $200/tonne corn are partially derived through the assistance of foreign exchange and our Canadian dollar. It goes without saying that as the dollar falls more, these cash prices will likely increase. On the other hand, someday when grain futures take off, cash basis levels will go up exponentially. It’s something that we have seen before and it can work both ways.

Our foreign exchange challenge is a constant, but so is the seasonality of grain prices. It’s no secret that seasonally, grain prices tend to trend up in spring toward July. For instance, corn futures topped out last year on May 29, in 2017 it was in early July and in 2016 it was on June 18. Soybeans are not totally along that script, but they are close. That being said, along with our challenges with the Canadian dollar, it is pertinent for growers to have those price marketing standing orders ready to capture some of these historical seasonality patterns. Of course, daily marketing intelligence will remain important.

As we move into planting, weather will be increasingly important to capture some of these pricing opportunities. As it is, we are expecting a lot less acres of soybeans and more acres of corn in the United States this year. From a marketing perspective, the June 30 planted acreage report will serve as a litmus test for the headlines, which may drive market prices into the summer. Along the way, the test will be for Ontario producers to keep abreast of all of these events to capture what will likely be some rare pricing opportunities. All of the geopolitical events such as Brexit and the U.S. China trade agreement are all still on the docket. That will only add to the risk premium. We’ve been here before. However, every year is different. The challenge will be to balance all of these marketing factors to your advantage.