Market Trends Commentary for March-April 2019

US and World

It is that time of year again, where farmers are firmly fixated on the coming planting season. The growing of big crops of 2018 is somewhat of a distant memory, but the large supplies they created continue to weigh on grain prices. March is a month that typically ends with a bang for grain markets, as the United States Department of Agriculture (USDA) will announce their prospective planting acres on March 31. With large surpluses apparent across farm country and paralysis going on with U.S. China trade talks, prices continue to drift in the news vacuum.  However, on March 8 the USDA weighed in again with their latest world agricultural supply and demand estimates. (WASDE)

In the March 8 USDA report corn ending stocks were raised by 100 million bushels as export demand as well as ethanol demand were lowered. At the same time the USDA decreased the whopping soybean ending stocks number by 10 million bushels to 900 Million. The USDA corn ending stocks were pegged at 1.875 billion bushels. It is hard to put any type of bullish slant on grain fundamentals with these huge ending stocks.

The USDA projected Brazil’s corn crop to come in at 94.5 MMT.  The USDA actually lowered their estimate of Brazil soybean production to 116.5 MMT. Argentinian soybean production was maintained at 55 MMT. World wheat supplies are onerous with global stockpiles projected to be up to 267.5 MMT in March, which was above trade expectations.

On March 8, corn, soybeans and wheat futures were lower than the last Market Trends report.  May 2019 corn futures were at $3.64 a bushel.  The May 2019 soybean futures were at $8.95 a bushel. The March 2019 Chicago wheat futures closed at $4.39 a bushel. The Minneapolis May 2019 wheat futures closed at $5.48 a bushel with the July 2019 contract closing at $5.56 a bushel. 

The nearby oil futures as of March 8 closed at $56.07/barrel up from the nearby futures of last month of $52.72/barrel.  The average price for ethanol on March 8th in the U.S. was $1.49 a US gallon the same as last month. The Canadian dollar noon rate on March 8 was .7450 U.S. , more than the .7536 U.S. reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario March started off with very cold weather across the province. However, warmer milder weather is forecast into the middle of the month, which should give us better clues on the health of the wheat crop. There are still some isolated cornfields being taken off across the province.  Some of this has been by choice, and some of it has been due to the ongoing issues with DON in corn.

Ontario basis levels for grain have been maintained since last month. The lower Canadian dollar currently sitting at .7450 U.S. as of March 8 continues to be a stimulus for Ontario grain prices. The issues concerning DON in Ontario corn continue to percolate and low DON corn does fetch a premium. This almost goes without saying in a very difficult year. The corn basis in Eastern Ontario is still stronger than the rest of the province, but currently doesn’t reflect as wide a variance.

Old crop corn basis levels are $0.90 to $1.05 over the May 2019 corn futures on March 8th 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 $2.07 cents to $2.20 over the May 2019 futures. New crop soybeans range from $2.29-$2.35 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on March 8 were $5.89 for SWW, $5.96 for HRW, $5.76 for SRW and $6.42 for Red Spring Wheat. On March 8 the U.S. replacement price for corn was $5.47/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

Market conditions have really not changed. In fact, in many ways we have a doubling down of the bearish market conditions, which developed late last summer and fall. Nearby corn futures standing at $3.64 a bushel and soybeans at $8.95 tell the story. Futures prices are nothing to write home about, with corn caught in a six-year trading range and soybeans continuing to tread water under the weight of soybean mountain.

That doesn’t mean that things cannot change, because per usual grain prices are static and fluid at the same time. The Canadian dollar has helped with the price optics in Ontario, but these are low futures prices.  Seasonally, we all know the price patterns with these grain prices typically going up into June or July. This generally provides an opportunity to raise our grains profitably. There is no reason to believe it will not happen again in 2019, but there is some argument that the highs might already be in simply because of the preponderance of grain.

The soybean market has suffered the most from the ongoing trade war between the United States and China. During this time prices have declined approximately 25%, which is the value of the Chinese tariff enacted last summer. Since then, the market has continued to react to daily headlines regarding some new announcement that China and the United States are making peace and that soybean orders will follow. However, the March 1 deadline for a trade agreement between China and the United States has come and gone and there is nothing new except disagreement. 

No one can predict when this will end or if it will end. An argument can be made that even with a resolution soybean exports to China will never be the same. If we continue on this path in 2019 those soybean mountains in the Western corn belt will still be there going into next year. Shifting away U.S. acres from soybeans has already been documented. This current situation might mean the shift away from soybeans may be even greater in places like the U.S. Western corn belt.

Commodity Specific Comments

Corn

There is always being quite a bit of speculation that the corn market held potential for future price appreciation.  In this bearish market environment, it was almost said as an afterthought for nothing else to say. For instance, as long as there is enough corn in the pipeline, end-users are generally unconcerned. It is very hard to be bullish when we have more than adequate corn supplies.

At the present time in the Western corn belt it is inundated with snow and cold weather. It’s always difficult to tell with weather-related issues but this may either delay or cancel out some spring wheat acres that may ultimately go into corn. Of course, these acres may go to soybeans as well, but poor cash prices favor something else. Corn might capture some of these acres if we have a delayed planting situation.

The May 2019 July 2019 corn futures spread as of March 9 is -9.25 cents, which is considered sideways to down. Seasonally corn prices tend to trade higher into early June. The nearby spot corn contract is currently priced in the 25th percentile of the past five-year price distribution range.

Soybeans

Soybeans remain in a very difficult position. For instance, by this time of year many of the American soybeans have been moved through ports in the Pacific Northwest. However, with the problems between U.S. and China this has not happened and South American supplies are plentiful again. The 900 million bushel ending stocks figure from USDA does not lie. At a certain point, if the trade war doesn’t end these beans sitting in piles may even have quality issues going forward.

Wheat prices have also been lower, which is a problem for soybeans going forward. An argument can be made in the Western corn belt that no increased soybeans acres should see the light of day. However, with wheat prices being lower and snow still in the Western corn belt, in lieu of corn planting some of that may go to soybeans. It is hard to paint any type of bullish story for beans.

The May 2019 July 2019 soybean futures spread as of March 8 is -14 cents, which is considered sideways. Seasonally, soybeans prices tend to go up into July. The nearby spot contract is currently priced in the 10th percentile of the past five year price distribution range. 

Wheat

It is an old story, but it continues to ring true, there is lots of wheat in the world and prices reflect that. The USDA increased both U.S. ending stocks and world ending stocks for wheat. It is interesting that the price for Paris milling wheat has been going down over six consecutive weeks despite the Euro losing value down to June 2017 levels.

In Ontario, as of March 9 the wheat crop hasn’t given any more clues of how much will see the light of day. Wheat straw will surely be at a premium in some parts of the province. Wheat prices close to or over $6 also holds promise for wheat producers. Key will be to see what emerges when the weather warms up.    

The Bottom Line (cont.)

Despite the bearish market conditions, U.S. crop insurance prices were recently set at $4 for corn and $9.54 for soybeans. This is part of the planting equation that U.S. producers make in the United States. It is not terrible compared to cash prices that producers find on the ground and is not terrible historically. This may have a significant effect on planting intentions, which will be released by the USDA on March 31. Earlier in February, USDA had projected 82.5 million acres of soybeans and 92 million acres of corn.

Aside from all of our grain fundamentals, there are the usual geopolitical events, which may affect the grain markets. In Europe, the British are having real trouble getting a Brexit exit deal passed in Parliament. Currently, the UK is set to leave the EU in a hard Brexit March 29. This and strong U.S. economic performance has caused the U.S. dollar to gain in value significantly since the end of February. As always, a higher U.S. dollar makes grain prices higher to foreign buyers and is particularly tough on the U.S. wheat sales. The antithesis is its effect on the Canadian dollar, which it usually is negative for the loonie.

The Canadian dollar is currently in the $.74 range as of March 10, following its normal pattern of being an inverse to the U.S. dollar value. This continues to be a stimulus for Ontario grain prices. There was also a signal from the Bank of Canada recently that interest rates may not be consistently going up in 2019 as large parts of the Canadian economy are showing weakness. This is happening despite recent job numbers in Ontario, which were very good. However, large parts of the Canadian economy in the resource sector have been suffering. If the Bank of Canada actually cuts rates in 2019, this will encourage the loonie to go down further. This will further challenge our marketing plans as we look for the perfect mix of a good futures price with a lower Canadian dollar.

As we move toward April, there is much to consider, including the looming March 31 USDA reports, which generally is a flashpoint for grain markets, which like to chase headlines. There is always a continuing China and U.S. trade war, which produces incremental adrenaline on a daily basis for the soybean market. There will also be a warming sun, which hopefully will spur enthusiasm in Ontario farmers, not only in the field but also in recalibrating our marketing plans. In 2019, some of the marketing factors are the same as before, but as per usual there are some major different scenarios playing out. The challenge for Ontario farmers is to hone their risk management plan carefully. Markets work, especially if politicians allow them it. Looking ahead, daily market intelligence will be key. •