Market Trends Commentary for December 2018 – January 2019

US and World

December is a time where the crop is mostly in the bin. However, across both the US, Ontario and Quebec this year has been quite a challenge. As of November 25th, USDA estimates that 94% of US corn and soybeans have been harvested. Harvest rain and snow have been a challenge this year and it continues. As we move toward January, farmers will start to look forward to the new crop year and all its inherent challenges. The January 11th 2019 USDA “Final” crop report looms ahead and generally puts a stamp on the old crop year.

The December USDA report is usually a quiet influence on markets compared to the upcoming report in January 2019. On December 11th, the USDA released its December World Agricultural Supply and Demand Estimates. (WASDE) In the report, as expected USDA kept corn and soybean estimates unchanged from their November report, at 14.626 billion bushels of corn and 4.6 billion bushels of soybeans. The USDA adjusted corn-ending stocks to 1.78 billion bushels, 45 million bushels higher than last month’s estimates. The USDA reduced corn imports by 5 million bushels and reduced ethanol demand by 50 million bushels. The USDA pegged Brazil and Argentina corn production forecasts unchanged from 94.5 MMT and 42.5 MMT respectively.

The huge US soybean crop in the US is still there as we head into January. USDA ending stocks for soybeans remained at 955 million bushels despite pre report expectations, which were lower. USDA increased Brazil and Argentina crop estimates to 122 MMT and 55.5 MMT respectively. Brazil’s increased crop estimate was due to higher yields expected in the central west regions of the country where widespread rains have fallen. CONAB, Brazil’s crop food and agriculture agency, have Brazil’s soybean estimate pegged at 120.1 MMT. US wheat-ending stocks were increased by 25 million bushels to 974 million for 2018/19. Russia and the Black Sea suppliers continue to aggressively displace European and American wheat exports.

On December 15th, corn, soybean and wheat futures were higher than the last Market Trends report. March 2019 corn futures were at $3.84 a bushel. The January 2019 soybean futures were at $9.00 a bushel. The March 2019 Chicago wheat futures closed at $5.30 a bushel. The Minneapolis March 2019 wheat futures closed at $5.84 a bushel with the July 2019 contract closing at $5.42 a bushel.

The nearby oil futures as of Dec 15th closed at $51.20/barrel down from the nearby futures of last month of $60.19/barrel. The average price for ethanol on Dec 15th in the US was $1.52 a US gallon up from $1.45 last month.

The Canadian dollar noon rate on December 13th was .7474 US, less than the .7572 US reported here last month. The Bank of Canada’s lending rate remained at 1.75%.

Ontario

It has been one of the most difficult harvest falls in memory. There is still corn out in the field as of mid-December, but also still thousands of acres of soybeans, which have not been harvested across the province. From Essex County in the South to Bruce County and beyond there are many soybean fields that have not been harvested, made so much more difficult by constant poor weather. Some of these soybeans are in snow country, which will make it that much more difficult to get harvested. Cold, freezing, sunny weather without snow is needed for a last chance to get these soybeans out of the field.

Corn harvest continues and as everybody knows it has been difficult and frustrating especially with the high VOM levels in much of the corn in Southwestern Ontario. VOM levels are high from Windsor to London, northward into Huron County and toward Guelph. Some of these fields have been so high in VOM, that they had been destroyed. It is a very difficult situation for most. On the other hand, there are large parts of Ontario where there are no problems with high VOM in corn, such as Eastern Ontario, north of Listowel and selected other areas.

There are large discounts, which apply to the high VOM corn, but basis levels have increased over the last month in southwestern Ontario, but have decreased in Eastern Ontario. The soybean basis has also decreased to some extent as offshore bids have been tempered with the Chinese showing signals of a truce with American suppliers. The Canadian dollar fluttering in the $.74 US level continues to help sustain Ontario cash prices.

Old crop corn basis levels are $0.85 to $1.20 over the March 2018 corn futures on December 13th across the province. The new crop corn basis varied from $0.85 to $1.15 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.23 cents to $2.40 over the January 2018 futures. New crop soybeans range from $2.25-$2.43 over the November 2019 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on December 13th were $6.62 for SWW, $6.82 for HRW, $6.62 for SRW and $6.67 for Red Spring Wheat. On December 13th the US replacement price for corn was $5.65/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 agricultural trade war between China and the US might be drawing to a close. After a very difficult time post July 6th when Chinese tariffs were applied to American soybeans, on December 13th USDA announced US beans were flowing to China again. 1.13 MMT of US soybeans were confirmed with a further 300,000 MMT on Dec 14th. It was a small amount, but it was a welcome signal that may mean China’s insatiable appetite for American soybeans was coming back again.

However US farmers shouldn’t count their chickens before they hatch. The trade war between the United States and China, which started with the imposition of steel and aluminum tariffs this past summer, has been very damaging. Before this time United States in China would have annual trade of approximately 30 to 35 MMT of soybeans. (1.1-1.3 Billion bushels) With Brazil soybeans being harvested in January, China will be able to return to their South American suppliers. The American soybean mountain still looms large as a bearish fundamental problem for North American soybeans prices.

The US corn price fundamental situation is better than soybeans. For instance, US export sales are 16% above where they were a year ago. There are also some weather issues causing problems in Brazil and Argentina, which could weigh on prices. Corn planting in Argentina may fall behind based on wet weather. Dry weather is impacting large parts of Brazil. There was even a hint recently that China might be interested in buying US corn. Of course, nothing is confirmed as of yet, but with stiff competition from the Black Sea region and Brazil, it will be interesting to see if Chinese corn purchases from the US comes to fruition.

Corn demand remains close to record levels with usage this year predicted to be 15.03 billion bushels. Clearly, if there is any supply hiccup in the future, prices will need to go up to ration that record demand. With December corn fluttering around $4.05 level as of December 14th it is also fluid. The December USDA report actually decreased ethanol demand by 50 million bushels. Ethanol margins have been mainly negative and the United States will have to increase ethanol exports, as US consumption will not take care of that.

Commodity Specific Comments

Corn

Corn futures continue in a sideways pattern over the last several months, if not years. March corn for instance has pretty rough resistance at $3.90 and July corn has tough resistance at approximately $4.05 a bushel. However, buying picks up when March corn is at approximately $3.75. Needless to say, corn has some of the better fundamentals going into 2019.

The January 11th 2019 USDA report will be the official “final” number from USDA and for corn this could be interesting. For instance, much of the crop is still out in Northern Iowa and southern Minnesota, where yields were poorer than expected. One surprise we might see on January 11 is a reduction in US national corn yield. This might make the market pop, post January 11th, typically a historically explosive market day.

The March 2019 May 2019 corn futures spread is currently -7.5 cents, which is considered neutral. The nearby March contract in corn is currently priced in the 34th percentile of the past five-year price distribution range. Seasonally, corn prices tend to trend up from October to June.

Soybeans

One of the problems for soybeans is their bad fundamentals. No matter how we pretend soybeans might rally on pent up voracious insatiable Chinese soybean demand, it’s not happening in any big way. With 955 million bushels of soybeans on the ground in the United States it will take a huge swing in supply to whittle down. That whittling down doesn’t look to take place anytime soon.

Many market observers are looking to get that started next year in 2019 with the 3 to 4 million acres reduction in US soybean acreage. Of course, we are a few months away from seeing any of that happening. What might be more interesting for farmers is to keep a keen eye on South America growing conditions. Last week hot and dry condition continued to damage Brazilian soybean crops. However, rains were predicted for the week of December 17th.

The January 2019 March 2019 soybean futures spread is currently -13.25 cents, which is considered neutral to bearish. The nearby January soybean contract is currently priced in the 12th percentile of the past five-year price distribution range. Seasonally, soybeans tend to bottom out in October and trend up through July.

Wheat

There have been problems in the wheat market on a global scale. For instance, there was drought last season in Europe and Australia. There are also wet conditions in Argentina with the wheat coming off. However, in Russia they continue to export wheat with ever increasing supplies. There are always machinations within Russia about withholding wheat exports, but as we end the year those exports are continuing.

In Ontario, the wheat is highly suspect in some areas especially southwestern Ontario. An unusually warm Christmas time might be helpful to get some of this wheat to show above ground. However, it is hard to say and many acres might be replaced in the spring with soybeans. However, it is difficult to tell at this point. Warm weather in early spring will give a much better indication on the health of the Ontario winter wheat crop.

The Bottom Line (cont.)

There might be some tempered enthusiasm regarding the new Chinese purchases of American soybeans, but we have to be realistic about our new market reality as we move ahead. Market signals are telling us we need fewer soybeans especially in the American hinterland. This means as we go forward there will need to be a tremendous shift in acreage in the United States away from soybeans and into corn and other crops. It is likely not going back to the way it used to be especially with Chinese demand being tempered. Chinese soybean processors have been working with difficult margins partly because of a drive to include less protein in Chinese feed rations as well as African Swine Fever.

Preliminary USDA numbers on the 2019 crop mix in the United States has pegged corn acres at 92 million and soybean acres at 82.5 million. Last year, both of these commodities were approximately at 89.1 million acres, with corn actually being slightly higher than soybeans. Of course, planting weather in the springtime will have much to do with these new crop acreage realities.

In Ontario the Canadian dollar continues to be a stimulus for our cash grain prices. The loonie has been fluttering within the $.74 US level over the past few weeks as the Bank of Canada has maintained its interest rate policy. The Canadian dollar generally behaves in an inverse fashion to the US dollar. These price optics have created 2019 cash price possibilities of $5 for corn and $12 for soybeans for fall harvest. This is consistent with the past three years. Eventually, if futures prices ever rally significantly and our dollar stays low, Ontario cash prices will be so much higher. As it is, we’ve become used to a cash price ranges within Ontario shaped largely by a sub 80-cent Canadian dollar.

For the Ontario grain farmer, the challenge continues. The 2018 fall harvest will go down as one of the most difficult in many years with soybeans and corn still in the field as of December 15th. There are also the difficult problems we have had with the VOM outbreak in parts of southwestern Ontario. However, January 2019 represents a new year and new possibilities. We might even have a wide-open 2019 fall where sunny and mild temperatures may be the norm. We can only hope. Needless to say, hope is not a marketing plan. As we move forward, there will be many marketing opportunities ahead. 2019 and 2020 standing pricing orders for grain are always apparent. Risk management never gets old.