Market Trends Commentary for July-August 2018
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US and World
Every summer always presents challenges for the crop growing in the field. July weather is usually critical for corn production as we go through the very important pollination process. Generally speaking, the crop weather across United States corn belt has been benign setting up the possibility of very good crops in the United States. Parts of Missouri and southern Iowa are suffering from drought as of July 20th, but for the most part American crops are looking very good. The USDA weighed in on July 12th with their latest crop report.
On July 12th the USDA actually raised new crop corn production to 14.2 billion bushels. They also increased new crop soybean production to 4.3 billion bushels reflecting the very good conditions in the United States. The USDA actually raised the soybean yield to 48.5 bushels per acre, but kept corn at 174 bu/acre. As we look ahead, crop weather is always critical, but the August USDA reports could very likely raise these estimates further.
The situation was further complicated by the USDA, which took into account the soybean import tariffs, which have been applied to the market. This specifically meant the 250 million bushel reduction in soybean exports, which boosted new crop soybean ending stocks to a whopping 580 million bushels. This was an increase of 385 million bushels from the June report. USDA also increased new crop global ending stocks to 98.3 MMT, a substantial increase from the June report. The USDA pegged new crop ending stocks at 1.552 billion bushels, with old crop stocks being pegged at 2.027 billion bushels.
On July 20th, wheat futures were slightly higher than the last Market Trends report. Corn and soybean futures were lower. September 2018 corn futures were at $3.55 a bushel. The August 2018 soybean futures were at $8.49 a bushel. The September 2018 Chicago wheat futures closed at $5.16 a bushel. The Minneapolis September 2018 wheat futures closed at $5.55 a bushel with the September 2018 contract closing at $6.13 a bushel.
The nearby oil futures as of July 20th closed at $70.46/barrel down from the nearby futures of last month of $74.15/barrel. The average price for ethanol on July 20th in the US was $1.64 US gallon about the same as last month.
The Canadian dollar noon rate on July 20th was .7609 US, up slightly from the .7594 US reported here June 29th. The Bank of Canada’s lending rate remained at 1.25%.
In Ontario wheat harvest has been ongoing over the last several weeks. Yields have been generally a bit below expectations, as hot weather seemed to have a mitigating effect on the crop especially Southwestern Ontario. However, harvest continues, partly buoyed from some better wheat prices.
The wheat quality has been good, partly spurred by warm dry harvest weather. However, the dry weather has been a great thing for wheat harvest, but many producers have been hoping to have the heavens opened up as many production areas across Ontario are parched looking for rain. Corn is shriveling up under the stress in Bruce, Huron, Norfolk counties as well as other areas across the province. Ontario had widespread rain on the July 20th weekend partially alleviating this situation.
Ontario basis levels have moved up from their June 29th levels, reflecting higher US basis levels and the low Canadian dollar. For instance, $2.50 new crop soybean basis is traditionally quite strong. The challenge of course in Ontario is to marry our strong basis levels with strong futures values. Recently, those soybean futures values reached 9-year lows.
Old crop corn basis levels are $1.00 to $1.24 over the September 2018 corn futures on July 20th across the province. The new crop corn basis varied from .90 to $1.14 over the December 2018 corn futures. The old crop basis levels for soybeans range from $2.60 cents to $2.70 over the September 2018 futures. New crop soybeans range from $2.50-$2.60 over the November 2018 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on July 20th were $6.44 for SWW, $6.64 for HRW, $6.57 for SRW and $6.17 for Red Spring Wheat. On July 20th the US replacement price for corn was $5.10/bushel. You can access all of these Ontario grain prices in the marketing section.
The Bottom Line
It has certainly been a difficult July for grain prices as we head into August. Are the grain price lows in? Of course, nobody knows, but a July low in grain prices, tariff or no tariff, is very rare. This crop in the field is doing well and even though there is a lot of risk left in the field, the August USDA report could easily boost yields further.
Last year the harvest low in corn was $3.35 a bushel and the eight-year low is $3.18 a bushel. As of July 20th we are at least $.20 above that on the December futures with $3.74 being the next resistance level. This is happening despite having the lowest global corn stocks to use ratio since 1995/96. It is almost like something doesn’t add up. The trade war has been difficult on the psychology of the corn market.
Wheat is actually providing some unexpected bounce to commodities based on some of the weather-related problems around the world. At the present time wheat has weather-related issues in France and Russia with too much rain, Australia and the Ukraine. Global wheat stocks are still very onerous, but they are being whittled down incrementally from all these problems.
Soybeans are into some very strange grain flow. We are all aware that premiums at Brazilian soybean ports are at record highs. This difference at the moment between US and Brazilian ports represents approximately the same value as the Chinese tariff. So you could argue that the Chinese are helping themselves. However, that is a stretch. Needless to say, the Americans are seeing other buyers from places like Columbia, Spain and Pakistan, taking American beans at bargain basement prices. Chinese tariffs on US soybeans are a large reason for this.
Commodity Specific Comments
World corn stocks are expected to be lower in the new crop year, but also to have the lowest stocks to use ratio since 1995/96, which was a very bullish corn year. Needless to say, with December corn at $3.55 a bushel it is down 17% over the last seven weeks and not too far from the harvest low last year of $3.35 and the eight year low of $3.18 a bushel.
It’s important to remember that the first field-based yield estimate for US corn will come August 10th, which the market is watching awfully close. Keep in mind that we had 176.6 bushels per acre last year when conditions were less than ideal. So far this year it seems ideal weather for corn.
The December 2018 March 2019 corn futures spread is currently $-.11 per bushel, which is considered bearish. Corn futures prices often tend lower until early October with harvest lows. The nearby corn futures contract is currently priced in the 24th percentile of the past by 5 year price distribution range.
Soybeans have been a tough movie to watch over the last seven weeks. Soybean futures are down about 25% from their highs in May. In fact, there is a difference in cash price between US soybeans in Brazil soybeans (respective ports) of approximately $1.90 US a bushel. This represents about 25% of the current soybean futures price, which mirrors the Chinese tariff on US soybeans.
It would seem some type of buying opportunity in soybeans. In fact, total open interest in the soybean futures market has been rising, despite the lack of any type of bullish story. The Chinese and the Americans continue to posture on trade. That makes the soybean market uneven in spades. A timely tweet could change everything.
The November 2018 March 2019 soybean futures spread is currently $-.19 a bushel, which is considered neutral. Seasonally, soybean futures prices tend to trend lower into October. The top this year was earlier than usual.
Wheat futures have benefited in the last couple of weeks from concern over dry weather in Europe and Australia. There is also concern about a damaged harvest in Russia because of wet weather. There is also been some concern about crop damage in the Pacific Northwest. This has caused Chicago wheat futures to come off their lows from July 11th.
In Ontario, wheat harvest is progressing, as it has been quite staggered across the province. There has been some better yields in specific areas, but generally less than a year ago. It is likely that the Ontario winter wheat yield will be 10% less than a year ago or greater. Is likely that the hot June weather had a detrimental effect on Ontario yields.
The Bottom Line (cont.)
It is difficult to know when the trade war will cool. In fact, there have been manifestations from the American President in and around July 20th that even more Chinese goods would be subject to tariffs. We are in the early stages of this and the effects have been most damaging to farmers. Keep in mind that government actions usually move at glacial speed, but in the age of Twitter, these American policies could be changed very quickly. We are only a tweet way from a possible bilateral agreement between China and the United States, which would buoy soybeans. Unfortunately, that doesn’t help the market get back, what has been lost.
In Ontario we continue to benefit from a Canadian dollar fluttering around the $.76 level US. This is translated into cash wheat prices at approximately $6 plus during harvest time, when wheat futures had been low. The American dollar has been strong, currently 94.226 on the US dollar Index. The value of the Canadian dollar generally speaking is the inverse of that US dollar value. If the US dollar starts to lose value, a higher loonie in 2018 will surely erode our cash grain prices. It’s always a double-edged sword, but Ontario grain farmers need to keep abreast of how these currencies interact and position themselves with grain marketing orders accordingly.
The USDA will again weigh in with their field-based estimations on August 10th. This may be an explosive day on the grain markets if there are any surprises. Three weeks from that date everything is pointing to higher crop yields in the United States, which will mean higher ending stocks. Keep in mind; there is quite a bit of time ahead where crop weather related maladies change everything. However, at this time of year, every day forward makes it less likely that a major crop production calamity is in the offing. However, soybeans need rain in August.
Whether it rains in August, nobody knows. At the present time there is drought in parts of Ontario, Missouri and southern Iowa, but beautiful crops almost everywhere else. It is almost like we’ve seen this movie before, but that does not negate the need to be vigilant with regard to standing orders for grain and future marketing plans. That simply never ends. As we move into August, there is much production and marketing risk and opportunity ahead.