Market Trends Commentary for November-December 2018

US and World

It is a huge harvest coming off across the greater North American Corn Belt, but it is at a slow pace. The corn harvest is almost average, but in Iowa, Kansas Missouri, North Dakota and South Dakota farmers are lagging behind the average by 5%. The soybean harvest in the United States is still behind about 6% below the average. Yes, combines have been rolling for quite some time now, but wet weather and now snow has stopped field activity cold in many parts of the Corn Belt. Needless to say, grain is piled up almost everywhere.

On November 8th the USDA came out with their latest WASDE production reports. In their report the USDA actually lowered corn and soybean production. The USDA pegged US national corn production to come in at 14.626 billion bushels, which was down 152 million bushels from last month.

The yield was lowered to 178.9 bushels per acre, which was down 1.8 bushels per acre from last month. Despite these lower numbers the US corn yield remains on track for the highest on record with the second highest production on record with harvested acreage pegged at 81.8 million acres. Globally, there was a new projection for the Chinese corn crop going back more than a decade. This pushed global ending corn stocks to 307.51 MMT versus 159.35 MMT last month.

The USDA pegged soybean production at 4.6 billion bushels, which was down 90 million bushels from last month. This was based in a 1-bushel/ac reduction in yield now set at 52.1 bushels per acre. The soybean ending stocks number continued to balloon up now projected at 955 million bushels due to continued decrease in soybean exports. These lower export stats were due to 160 million bushels less soybean exports to China. The USDA also forecasted a lower protein consumption rate from China, which was partially taken in account with these lower export numbers. The USDA pegged domestic wheat ending stocks for 2018/2019 to be 949 million bushels, down about 7 million bushels from last month.

On November 9th, corn and wheat futures were lower than the last Market Trends report. Soybeans futures were slightly higher. December 2018 corn futures were at $3.69 a bushel. The November 2018 soybean futures were at $8.86 a bushel. The December 2018 Chicago wheat futures closed at $5.02 a bushel. The Minneapolis December 2018 wheat futures closed at $5.73 a bushel with the September 2019 contract closing at $6.00 a bushel.

The nearby oil futures as of Nov 9th closed at $60.19/barrel down from the nearby futures of last month of $71.34/barrel. The average price for ethanol on October 13th in the US was $1.45 a US gallon down from $1.50 last month.
The Canadian dollar noon rate on November 9th was .7572 US, less than the .7674 US reported here last month. The Bank of Canada’s lending rate was raised to 1.75%.

Ontario

In Ontario it has been one of the most challenging harvests. As of November 9th, corn harvest is ongoing as well as a smattering of soybeans throughout the province. Wet weather since September packed much of the soybean harvest into a period between October 12 and October 23 and there have been very few good days on either side of that. Winter wheat planted during that period is hardly showing in many areas of the province.

High DON levels have been an issue across the province and the GFO has been instrumental in helping farmers deal with the inherent problems, which it brings. The export bid in US terms as of Nov 9th in SW Ontario was -10 vs. a + 10 (US) for a domestic processor giving an outlet for some higher DON corn. These markets are coming and going as harvest continues. It is a tough problem for everyone who grows and processes corn.

Yields have been high for both corn and soybeans. Basis levels for soybeans have dropped since last month, corn remains about the same. If it weren’t for the high DON levels in corn and the tough weather, this harvest would be one for the ages. The hope is to get an opening in the weather in late November and early December to get this crop in the bin. A delay in Canadian winter would also be welcome.

Old crop corn basis levels are $0.65 to $1.30 over the December 2018 corn futures on November 9th across the province. The new crop corn basis varied from $0.75 to $1.00 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.15 cents to $2.45 over the January 2018 futures. New crop soybeans range from $1.95-$2.20 over the November 2019 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on November 9th were $6.16 for SWW, $6.36 for HRW, $6.16 for SRW and $6.38 for Red Spring Wheat. On November 9th the US replacement price for corn was $5.43/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

Harvest weather has been difficult across the greater part of the North American corn belt. The grain market seems to be ignoring that reality as big piles of both soybeans and corn dot the land. Needless to say, this bearishness has been with us for several months and a turning point may be coming. Is always darkest before the dawn and it seems to have been dark on the price front for a very long time.

For several years now China has been the elephant in the room with their insatiable appetite for soybeans. As we all know, that market default has gone, as soybean tariffs applied on July 6th have been very effective curtailing that business. It would seem that everybody is pointing their finger at the trade problem from a farm perspective and hoping for a solution.

President Trump sent the soybean market up $.30 in one day when he tweeted about a long and very good conversation he had with President Xi Jinping of China earlier in November. In fact, Brazil’s soybean price is down 81 cents from its October high, possibility reflecting a change in China’s intentions.

Typically in the commodity business, cheap always wins. In other words, whoever has the cheaper price generally gets the business. It is this way because most commodities are indistinguishable from each other. While the trade war with China will likely have long-term effects, it’s unlikely they will be satisfied with paying more money for Brazilian soybeans. Does China have the fortitude to keep those tariffs applied to US soybean to fulfill whatever their trade goals are with United States? This will likely be increasingly untenable. Clues will certainly come this month leading up to the G20 meeting in Argentina when Trump and Jinping meet.

Commodity Specific Comments

Corn

The US corn yield was decreased, but global stocks ballooned in an unprecedented move to 307.51 MMT from 159.35 MMT last month. This had to do with the Chinese reevaluating the last 10 years of their own data, where they changed acreage and tonnage. This resulted in a unprecedented move in global stocks, but did not affect the corn futures prices very much.

It is difficult to say why the Chinese did this, as there may have been an ulterior motive. For instance for many years some analysts have suspected the Chinese corn stocks were much higher. We do not know the condition of those corn stocks and some of this might have something to do with their move to more ethanol in 2020. At the present time China accounts for about 54% of total corn stocks in the world.

The December 2018 March 2019 corn futures spread is currently -11 1/2 cents, which is considered neutral to bullish. Seasonally corn prices tend to trend up in the late fall toward spring. The nearby futures contract is currently priced in the 31st percentile of the past five-year price distribution range.

Soybeans

Soybeans continue to be in the news partly because a trade solution is looked at as key to higher prices and political machinations concerning that are always swirling. The USDA report helped by actually reducing the soybean yield. This is largely attributed to decreasing weights in the crop.

However, you cannot put lipstick on a pig as USDA said soybean stocks even with the reduced yield will increase to 955 million bushels. Exports have been cut, mainly because of the Chinese market. In fact, at the present time soybean exports are 25% below the past five years average.

The November 2018 March 2019 soybean futures spread is currently -24.75 cents, which is considered sideways. Seasonally soybean prices tend to trade higher from November into next summer. The nearby January contract is currently priced at the 9th percentile of the past five-year price range. It is one of the lowest prices in the past nine years.

Wheat

In the Southwest plains of the United States where much of the wheat is grown, planting is way behind because of inclement weather. However, the wheat market has not moved very much for whatever reason. There are always lots of them in the wheat market and Russian exports might be one of the main reasons. After a short-lived episode earlier this year where export restrictions had been floated, the opposite has been the case.

In Ontario it is likely that 950,000 acres of wheat were planted after the break in the weather around October 13th. However, heavy rain and cold has inundated Ontario since and many wheat acres have not emerged. What is needed is some type of unusual warm spell in late November to help get this crop established.

The Bottom Line (cont.)

The Bank of Canada raised interest rates in November up to 1.75%, which is the fifth hike in 15 months. The Bank of Canada governor expects this to continue as he explained that the economy is still running at almost full capacity. He added that the interest rates are still negative in real terms when they are adjusted for the inflation rate. This usually is a little bit more supportive to the Canadian dollar, but it has been weaker lately settling back into the $.75 cent US level.

The value of the loonie continues to be one of the more supportive aspects of Ontario grain pricing. The Canadian dollar always has more of an effect on soybean and wheat basis levels than it does on corn in Ontario. With the higher DON levels this year, that is likely to remain the case. Discounts apply to much of the damaged crop. The situation is still evolving in mid November. Basis might become sloppy in the worst areas of the province. The Eastern Ontario corn basis is very strong, vs. southwestern Ontario.

Meanwhile, in Brazil planting progress is progressing at a record pace with 60% of Brazil’s soybeans planted versus 41% for the five-year average. It is estimated that the Brazil crop will balloon to almost 120 MMT this year and they are off to a good start. If it continues unabashed with good weather, it is likely to weigh on soybean prices. However, if it gets in trouble there could be some fireworks simply because of all that Chinese demand now redirected toward Brazil. The next six weeks will be critical to this Brazilian crop and all of us need to be cognizant of its development.

The challenge for Ontario producers is to balance all of these market factors together. It is a mixed bag especially when you consider our higher DON corn here vs. US corn exports being 16% ahead of last year. Hopefully over the next four weeks Ontario farmers can put a wrap on harvest 2018. With both corn and soybean still out, it’s testament to how challenging it has been. As we move ahead seasonal tendencies will help us in these grain markets. Of course, there are always those factors that we can’t see on both sides of the ledger. There will be profitable marketing opportunities ahead. Risk management never gets old and 2018 has helped redefine that.

Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications.