Market Trends Commentary for May/ June

U.S and the World

Its that time of year when farmers are extremely busy in the fields.  However, this year Mother Nature did not follow that script.  As of May 5th only 23% of US corn has been planted compared to 36% last year and 46% over the last five years.  Wet weather in the Eastern Corn Belt has held planting up and of course this is extended into Ontario and Québec.  The market has not shown much concern regarding this as US producers have proved time and again how quickly they can get the crop in.  With Mother’s Day behind us, planting concerns will be an increasingly decisive factor within the grain market.

On May 10th the USDA released their latest WASDE report.  For corn, new crop production is projected at 15.3 billion bushels, which would be the second-largest crop on record.  This bearish projection was followed by an increase in projected corn ending stocks of 2.485 billion bushels, which is the largest since 1987/88.  The USDA is projecting 6.95 billion bushels of corn demand going into feed, residual use and industrial use and 5.5 billion bushels for ethanol.  The USDA is also projecting 2.275 billion bushels of corn to be exported in the new crop year, which is 25 million bushels less than last year.  It was a very bearish report for corn.

US soybean production is set to come in at 4.15 billion bushels, which is up 394 million bushels from last year.  New crop soybean ending stocks were pegged at 970 million bushels.  Old crop stocks were raised to 995 million bushels.  The USDA also raised China’s estimate for soybean imports up to 87 MMT, despite the fact almost all none of that will not come from the United States unless there is a trade deal.  The USDA also lowered the Brazil 2018/19 Brazil soybean production 117 MMT and raised Argentinian production to 56 MMT, much higher than last year’s 37.8 MMT.  USDA put the total US wheat production in 2019 at 1.897 billion bushels, which is up from 1.84 billion bushels last year.

On May 10th, corn, soybeans and wheat futures were lower than the last Market Trends report. July 2019 corn futures were at $3.51 a bushel.  The July 2019 soybean futures were at $8.09 a bushel. The July 2019 Chicago wheat futures closed at $4.24 a bushel. The Minneapolis July 2019 wheat futures closed at $5.12 a bushel with the September 2019 contract closing at $5.21 a bushel. 

The nearby oil futures as of May 10th closed at $61.66/barrel slightly up from the nearby futures of last month of $60.04/barrel.  The average price for ethanol on May 10th in the US was $1.52, down from the $1.54 a US gallon in the last Market Trends report.

The Canadian dollar noon rate on May 10th was .7453 US, less than the .7473 US reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario planting has been very sporadic.  Generally speaking wet weather has been so comprehensive across the province that planting had hardly started as of May 10th.  Although there was some corn and sugar beets in the ground in mid April in Ontario, there has been little planted since then and producers know the calendar grows long.  There has been some corn and soybeans planted in Eastern Ontario and on some of the lighter soils in Norfolk county.  However, generally speaking like much of the eastern Corn Belt Ontario and Québec have had delayed planting because of wet weather.

Ontario basis levels have been maintained in corn from the last Market Trends report, but fallen to some extent in soybeans.  The ongoing trade war between the United States and China has been all encompassing for soybean basis levels in the United States and that has drifted into Ontario.  The collateral damage that Canada has suffered with the Chinese backing off canola and pork purchases is similar for our export bids.  The situation does not warrant real good basis values for soybeans in Ontario.

The Ontario corn situation is a little bit different especially for new crop.  Increased corn competition from Brazil and Argentina will surely be impacting our business in Europe.  While last year we shipped quite a bit of Ontario corn into Europe, cheap will be the common denominator this year as corn from the Ukraine, Argentina and Brazil will surely be tough to beat.  Much will depend on how things develop toward the end of the year.  New crop basis values will be reflective of that, as well as potential for new crop corn, which for the most part now, is still in the bag.

Old crop corn basis levels are $0.95 to $1.10 over the July 2019 corn futures on May 10th across the province.  The new crop corn basis varied from $0.85 to $1.20 over the December 2019 corn futures.  The old crop basis levels for soybeans range from $1.80 cents to $1.99 over the July 2019 futures.  New crop soybeans range from $1.85-$1.95 over the November 2019 futures level.  The GFO cash wheat prices for delivery to a terminal on May 10th were $5.69 for SWW, $5.76 for HRW, $5.56 for SRW and $5.99 for Red Spring Wheat. On May 10th the US replacement price for corn was $5.36/bushel.  You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

If we ever needed fresh news, it is now.  Last month, it looked like we couldn’t get any more bearish than where we sat.  However, it is more so now partly because of the trade agreement not realized and partly because of USDA numbers that have more corn and soybeans on the ground in the United States.  In the meantime, the market is seemingly ignoring the lack of planting progress as farmer struggle to get anything in the ground.

What’s it going to take to change the red price tide?  A couple things come to mind, one being a trade agreement with China and renewed buying and the other is reduced acres and reduced yield in US fields this year.  Last year we had 176.4 bushels per acre of corn and this figure would likely have to be below 170 bushels per acre to chip away at the 2.4 billion bushels of ending stocks.  The trade agreement would be more of a long-term solution, as it is continually forbidden fruit for market bulls.  In essence, there’s lots of grain on the ground and everybody can see it.

The lowest hanging fruit in any trade tussle is always the easiest target and agricultural commodities certainly seem to be one of them.  In the United States, an easy target was American soybeans and we know what has happened there.  In Canada, in the crossfire of an American dispute with China over Huawei, we have lost market access for Canadian canola, soybeans, pork and now dairy semen.  This is happening at the same time where only six months ago Canadian soybean exporters were taking advantage of huge Chinese premiums for soybeans and replacing our own domestic requirements with cheaper American beans.  That was unforeseen, and it is increasingly getting complicated.

The complication lies in the fact that a trade agreement will likely be a very good thing but be careful what you wish for.  Trade agreement between United States and China might open the markets back up, but China likely will have a long memory, having gone to other suppliers, principally Brazil and Argentina.  These countries soybean sector has also been strengthened over the last year by their American competitors.  At the same time the complication might get worse if an American deal with China freezes out Canada.  In other words, an American reconciliation with China might not do a thing for our problems with China as a trade partner.  The Huawei issue might just live on. 

Corn

The May 10th USDA report added an extra layer of bearishness to the corn complex.  By projecting 2.485 billion bushels of corn for ending stocks at the end of the year when corn is hardly planted does not give solace to corn farmers.  Simply put, that is a lot of corn and there is only one way to reduce that projection.

That would be to have a reduction in yield this year in the United States as well as a reduction in acres planted.  However, the acreage planted is projected to rise this year and a reduction in yield is unlikely.  There is a world of production risk ahead and nobody can paint the future until it unfolds.

The May 2019, July 2019 corn futures spread is currently -9.25 cents as of May 10th.  This is considered sideways.  Seasonally corn prices tend to trend higher into early June, which makes this year such an anomaly so far.  The July contract is currently priced in the 28th percentile of the past five-year price distribution range. 

Soybeans

Soybeans continue to be dramatic.  For instance, they have been living on every nuance and tweet that been coming along over the last several weeks as prices have dropped.  The wet weather in the United States is not helping, because everybody knows if American farmers can’t get the corn in, those acres will likely get into soybeans.  With a 970 million bushel projected ending stocks, we don’t need that for good prices.

In the week leading up to May 10th, soybean futures prices were down $.33 a bushel, which reflected the failed attempts at trade talks, which are set now to be kicked down the road, possibly toward November 2020.  In short, soybeans need a great deal and if not a huge weather problem, both of which are unlikely.

The May 2019, July 2019 soybean futures spread as of May 10 is currently -12.25 cents a bushel, which is considered sideways to down.  The nearby spot contract is currently priced in the 2nd percentile of the past five-year price distribution range, which means we are about at the lowest point in the last 11 years.  Seasonally soybean prices tend to trade higher endured only July, but this means a 2019 is an outlier.

Wheat

Wheat has the same old problems as it always does, with too much of it around the world putting wheat at bearish price levels.  Wheat planting in the United States is at the lowest levels in over a century.  It is true that the United States is a residual supplier of wheat to the world.  It is also true that almost all-major wheat growing areas in 2019 are looking at increasing production.  It’s much more of the same almost each month.

In Ontario there will be a lot less wheat acreage once farmers get into the field.  In some areas like Lambton County, much of the crop is not viable, ditto for Chatham-Kent and Essex.  In fact, through much of southwestern Ontario the wheat crop is compromised.  It was simply not a good fall and winter for Ontario wheat.

The Bottom Line Cont.

It is a constant in the wheat market that supply exists almost everywhere and is supplemented at different times of the year keeping the world price at bay.  The higher US dollar has really hurt American wheat exports, but other production areas like the Black Sea are increasingly prominent in wheat production.  Eventually, crops will be planted here in Ontario and farmers will need to think about planting wheat this fall.  The hope will be for some type of light to shine on this market to give producers opportunity to price it profitably.

The Canadian dollar continues to salvage Ontario producers from even lower domestic prices.  The Canadian dollar hovering in the $.74 level US is one of the greatest stimuli we can have in these moribund grain futures markets.  Add 10 or 20 cents onto the loonie and Ontario cash prices would be much lower; in fact, a cash basis would be negative in many cases redefining our flat price marketing opportunities.  There is none of that on the horizon now, as the Bank of Canada has maintained the interest rate at the status quo.  With the American economy still growing over 3%, it’s unlikely a big move up in the loonie is in the short-term offing.

     Keep in mind US corn acres are still projected at 92.8 million acres and US soybean acreage as pegged at 84.6 million acres, which was a whopping 4.6 million acres below last year’s record of 89.2 million acres.  Those March production estimates are the theory, but increasingly the weather is not letting that happen, as corn planters are either stuck in the mud are not out of the shed yet.  The conventional wisdom is that planting delays will switch more acres to soybeans, something nobody really wants.  In any case, as we look ahead to the June 30th plantings reports, any major shift in the corn and soybean acreage projection will likely have a major effect on futures price movement.

The big test for Ontario farmers is to measure all of these market factors and attempt to continue to market profitably.  It is certainly not easy, especially in the year when geopolitics continues to boil.  Aside from the China trade talks, there are Brexit rumblings, North Korea projectiles and American sabre rattling with Iran.  All of those things could upset the apple cart.  Having said that, a priority for Ontario farmers is likely to get planters in the field.  2.2 million acres of corn and likely 3 million acres of soybeans will get planted.  Daily market intelligence will remain key.  Even in this bearish environment, there will likely be many marketing opportunities ahead.