Market Trends Commentary for June/ July 2019

Planters have been rolling across the greater American corn belt, but with some major exceptions. The spring of 2019 will be characterized by extremely wet weather hindering planting progress in the Eastern corn belt. As of June 10th, 83% of American corn had been planted and 60% of American soybeans. In large parts of Illinois, Indiana, Ohio, and Michigan fields remain too wet to plant. At a certain point, as a calendar date turns, all farmers know it becomes increasingly difficult to make corn work. The market has reacted to these problems in the field. On June 11th, the USDA weighed in on these problems with their latest WASDE report.

On June 11th the USDA made an unprecedented cut in U.S. corn yield by 10 bushels per acre from there May report, which shocked the market. The corn yield is expected to be 166 bushels per acre, and corn acreage was cut by 3 million acres. This had the effect of approximately an 18-cent per bushel reverse on prices during the day as both acres and corn yield where significantly below the trade expectation. Resulting in a decrease in the U.S. ending stocks for 2019/20 of approximately 810 million bushels, which has redefined the corn complex. World corn stocks decreased 24.2 MMT, which reflected this new American situation.

On the soybean side of the ledger, the USDA kept things mostly the same. For instance, the U.S. soybean yield is still pegged at 49.5 bushels per acre. With acreage the same as the May report, this will result in a U.S. soybean crop of 4.15 billion bushels. Old crop stocks are incredibly onerous, which are now estimated at 1.045 billion bushels. The numbers are still incredibly bearish for soybeans, as there is still ample time to get a normal crop. Wheat production was raised both in the United States and on a world basis. With the problems in the corn complex, this does open the possibility for increased wheat feeding in the future.

On June 14th, corn, soybeans, and wheat futures were higher than the last Market Trends report. July 2019 corn futures were at $4.53 a bushel. The July 2019 soybean futures were at $8.96 a bushel. The July 2019 Chicago wheat futures closed at $5.38 a bushel. The Minneapolis July 2019 wheat futures closed at $5.63 a bushel with the September 2019 contract closing at $5.70 a bushel.

The nearby oil futures as of June 14th closed at $52.51/barrel slightly up from the nearby futures of last month of $61.66/barrel. The average price for ethanol on June 14th in the US was $1.74, up from the $1.52 a US gallon in the last Market Trends report.

The Canadian dollar noon rate on June 14th was .7471 US, slightly higher than the .7453 US reported here last month. The Bank of Canada’s lending rate remained at 1.75%.

Ontario

In Ontario, we are in the first stages of a grain supply disruption.  It has been incredibly difficult to get corn planted south of the 402 and into Niagara on the heavier soils.  This has been characteristic throughout Ontario, but it is centered in the South West.  Statistics Canada had earlier called for an Ontario corn crop of 2.2 million acres.  The question is how many acres did Ontario get planted and how much of those planted acres is viable going into fall.  1.7 million acres of Ontario corn might be the number. The Ontario corn basis has responded accordingly to the first vestiges of a perceived supply disruption.  With the Ontario corn crop insurance deadline changed to June 17th and increased basis bids were an attempt to get this corn planted.  This may cause a shortfall for our 2019 corn supply in Ontario.

Soybeans have different issues, as what is not planted in the corn is likely to go into soybeans, not only in Ontario but also the United States.  That is the reality of the market.  In Ontario, in late April the soybean export basis went up to $.30 a bushel, as some soybeans had been booked earlier into China.  American beans did come into Ontario and at the same time were going out to places like Europe.  South American soybean still have a premium going into China, and this helped Canadian soybeans sneak through the five hole into Europe.  It is a fluid situation, mostly caused by the U.S., China trade war, which shows no way of abating.  It’s still about getting the crop planted in Ontario, both corn and soybeans.  However, that Chinese business that arrived last fall is very much needed again this fall.

Clearly, we are in a situation of tight Ontario supply going ahead especially for corn but maybe soybeans as well.  This is the first vestige of it as we move ahead into 2019.  A complete Ontario planting by the July 5th crop insurance deadline for soybeans would be a welcome outcome.

Old crop corn basis levels are $1.35 to $1.38 over the July 2019 corn futures on June 15th across the province.  The new crop corn basis varied from $1.10 to $1.20 over the December 2019 corn futures.  The old crop basis levels for soybeans range from 2.15 cents to $2.25 over the July 2019 futures.  New crop soybeans range from $2.05-$2.10 over the November 2019 futures level.  The GFO cash wheat prices for delivery to a terminal on June 15th were $7.23 for SWW, $7.29 for HRW, $7.09 for SRW and $6.62 for Red Spring Wheat. On June 15th the U.S. replacement price for corn was $6.58/bushel.  You can access all of this information on Ontario Grains on the Daily Commodity Report

The Bottom Line

In agriculture the weather is always our constant.  When spring arrives, we go to the fields and plant our crops.  There are always nuances on that theme, but clearly, in 2019 it is different this time.  The degree of bad weather in the Eastern Corn-belt with constant rain has changed the paradigm once called a bearish grain market.  Three million acres of corn has already been cut out of the USDA production forecast.  Rain continues to fall as of June 15th; this figure will likely grow larger.

In an unprecedented move the USDA cut deeply, something so unusual for the June WASDE report.  Taking 10 bushels per acre off projected yield and cutting intended planting acreage put an artificial stamp on the reality of many farms not being planted in 2019.  The market was somewhat slow to react, as most funds were short corn, wheat and soybeans.  However, the reality is, that all three of those grains gained over a dollar on the futures market because of the weather calamities that we are currently walking through.

What we are now in the early vestiges of a supply disruption.  We become accustomed to the crops over the last five years, both in the United States and in Ontario.  In both instances in 2019, it is now highly likely that we will have significant cuts to supply, and in some areas,  these will be severe.  It is still early, but the dominoes have begun to fall in the market.  This is the Black Swan nobody saw coming as we prepared our planters this past April.

Aside from the weather, which is the elephant in the room, we are still dealing with the problems from the trade war with the United States and China.  At the end of the month, the G20 will be meeting in Osaka, Japan.  There is faint hope that the United States and China might be signing a deal at that time, but the light grows dimmer every day.  The American president has threatened more tariffs on China if President Xi does not meet with him.

Commodity Specific Comments

Corn

The corn market has certainly been the star of the last few weeks blowing through resistance points of $4.45 and $4.55 and who knows where next?  There is much uncertainty ahead about crop size, planted acres, and crop conditions.

In the United States within the myriad of agricultural support programs there are also “prevent-plant” acres, which generally aren’t too significant on years when the crop goes in easily.  However, American farmers can enroll acres into this when they can’t get it planted.  No one knows at this point how many acres that will be, but 10 million acres have been discussed.  That will be huge going forward in our corn futures market.

The July September 2019 corn futures spread is currently -5.25 cents, which is considered bullish.  Seasonally corn prices tend to trade lower into October, but often top out in late June.  The July contract is currently priced in the 97th percentile in the past five-year price distribution range, a huge jump from where it was in May.

Soybeans

The unwritten truth about the soybean market is we could gain a lot more acres from the corn not being planted.  However, the increasing truth regarding the planting window in the United States is decreasing for soybeans as well.  If it does come to fruition, it would be another completely unexpected variable in the soybean market.  With over 1 billion bushels of old crop stocks sitting on the ground, the resultant decrease in supply wood trim that pile possibly by a quarter or a half.  It’s a unique time.

It is hard to paint this as bullish, especially with those ending stocks.  However, in the week ending June 15th, the new crop gained $.40 plus with both commercial and noncommercial buying.  The carry in November to July soybean futures also decreased.  The market is much more jittery based on the lack of planting a reality.

The July 2019 August 2019 soybean futures spread is currently -6.25 cents, which is considered sideways.  Seasonally soybean prices tend to trade higher into early July.  The nearby July contract is currently priced in the 16th percentile over the past five-year price distribution range.

Wheat

Wheat has also found itself caught up in the bullish nature of King Corn.  Prices have increased as wheat has gone up with corn, but there is also dryness in Australia and Russia.  The American dollar is still strong, and there is no shortage of wheat, so this will continue to play out. 

In Ontario, while there might have been 700 thousand acres of wheat planted last fall, it’s hard to know how much is left this late spring.  Half of that might be a good estimate, of which will be undergoing fungicide application in June.  Prices have rebounded with the Canadian dollar continuing to offer stimulus to cash prices.

The Bottom Line (cont.)

It has certainly been a difficult spring in the Eastern Corn Belt and by extension in Ontario and Quebec.  Corn prices have now exploded upward, and for those with corn, it is a very good thing.  Only a month to six weeks ago, this could not be envisioned, a testament to the risk management profile always in the background of every farm.  Are there 1.7 million acres of corn planted in Ontario?  Of that, what is viable with much of it planted in June?  Does this mean 90-100 million bushels of corn, which is usually there, goes wanting?  It will make cash trade in corn very challenging in Ontario as we move through 2019.

The Canadian dollar continues to cooperate for Ontario farmers as of June 14th at .7471 US, continuing to create an added stimulus for Ontario prices.  In fact, there has been much speculation that the Bank of Canada may again cut interest rates, which is negative for the Canadian dollar.  As last month has shown, none of this can be taken for granted.  However, it’s been standard for Ontario pricing since January of 2018.

The sky is not the limit here.  However, it sure feels that way at these price levels for corn.  The USDA will surely be recalculating acres and yield in the next few reports.  The June 29th th actual planting numbers released by USDA should be very telling, especially in a case, when planting intentions are so fluid.  Also,the USDA cut back US corn exports by 200 million in their June 10th report.  This pegged the 2018-19 ending stocks at 2.195 billion bushels, a still onerous figure.  It is what it is, albeit opportunity is knocking on the price front. 

In Ontario, planting continues as of June 15th.  For some on lighter soils, that’s been long over with crops out of the ground.  For others on heavier soils in the deep southwest and in Niagara, it’s a continuing challenge.  Needless to see, those same challenges in the U.S. Eastern corn belt have changed our price/supply equation.  We’re now into some supply disruption taking place amid raindrops and a trade war.  It has led to an ever-changing grain-marketing environment that continues to evolve.  Daily marketing intelligence will remain key.