Market Trends Commentary – July/August

U.S. and the World

The summer days are upon us and with that the summer heat.  What was one of the most difficult springs in memory for the Eastern Corn Belt is long in the rear view mirror.   However, vestiges of the number of acres left have reverberated within market circles over the last several weeks.  We know that the crop is compromised in the United States, but to what degree?  As of July 14th, USDA estimated that 70% of corn was silking which was 25 percentage points behind the 5 five-year average of 42%.   Clearly, it is been very difficult year for farmers and for those who measure crop progress.

On July 11th, the USDA chimed in with her latest crop production (WASDE) report.  Corn acres were kept at 91.7 million and the yield remained at 166 bushels per acre.  The USDA kept soybean acres at 80 million, but cut the yield by 1 bushel per acre to 48.5.  US corn production is set to come in now at 13.875 billion bushels. (166 bu/acre)  US soybean production is set to come in at 3.845 billion bushels.  2019/20 corn ending stocks are now projected just over 2 billion bushels.  On the soybean side of the ledger, the USDA trimmed 250 million bushels off last month’s soybean ending stock number taking it to 795 million bushels.  Old crop corn and soybean ending stocks came in at 2.01 billion bushels and 1.05 billion bushels respectively.  The USDA increased the 2019/20 wheat crop to 1.29 billion bushels, up from 1.184 billion last year. 

The USDA faced widespread criticism after the release of the July 11th report.  In many ways, the agency is caught between a rock and hard place.  The acreage numbers, which were in the July Report, were taking from the early June survey, which was widely pan based on the weather that we saw in the Eastern Corn Belt. It’s been a scramble for traders to imagine what the real numbers might be.  The USDA has promised an update in the August 12th USDA report.  In the meantime, the market is trading the elephant in the room.  These numbers should become clearer on August 12th when the USDA releases its next report.  However, it would not be a surprising if these acreage figures are changed into the September and October time period. 

On July 19th, corn futures were higher than the last Market Trends report; soybeans and wheat futures were lower. September 2019 corn futures were at $4.30 a bushel.  The August 2019 soybean futures were at $9.01 a bushel. The September 2019 Chicago wheat futures closed at $5.02 a bushel. The Minneapolis September 2019 wheat futures closed at $5.29 a bushel with the September 2020 contract closing at $5.78 a bushel. 

The nearby oil futures as of July 19th closed at $55.63/barrel down from the nearby futures of last month of $58.47/barrel.  The average price for ethanol on July 19th in the US was $1.70, down slightly from the $1.74 a US gallon in the last Market Trends report.

The Canadian dollar noon rate on July 19th was .7651 US, slightly lower than the .7641 US reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, wheat harvest has commenced in the Deep South west of province.   It is still too early to report on yields, but hot dry weather has accelerated crop development and provided an early window for harvest. Rain on July 20th may have slowed that to some extent, but the harvest of Ontario’s 656,000 acres of wheat should be in full swing in late July.   Many producers will be hoping to get wheat back in the rotation this fall.  Approximately one third of the wheat planted last fall did not make it to harvest.

Since Canada Day, the weather has been hot and dry across most of Ontario. This has facilitated rapid growth of the very late crops planted in June and July.  There has also being showers helping the progress of this crop. Essentially, the crop looks pretty good except for one big problem.  It is not June 20th, it is July 20th, which means the crop is approximately at least a month behind and will need summer rains and warm temperatures to mature.  A wide-open fall would be helpful.

Ontario corn basis has increased for both old and new crop corn since the last Market Trends report.  Old crop corn, which was inundated with DON last fall, seemingly now is gold, which is a reflection of the marketplace.  However, corn in general is seen to be more scarce than usual this year, which is reflected in the increased corn futures price as well as basis.  Depending on weather, this will likely be maintained or increased as we move through the growing season.  The soybean basis has remained about the same as the last Market Trends report and wheat prices are in flux during harvest.     

Old crop corn basis levels are $1.60 to $1.95 over the September 2019 corn futures on July 19th across the province.  The new crop corn basis varied from $1.20 to $1.28 over the December 2019 corn futures.  The old crop basis levels for soybeans range from $2.10 cents to $2.20 over the July 2019 futures.  New crop soybeans range from $1.90-$2.00 over the November 2019 futures level.  Wheat prices are in flux during this harvest season. On July 19th the US replacement price for corn was $6.85/bushel.  You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

It is been a complex year made more so by the difficult spring conditions across the Eastern corn belt and Ontario.  It is a tough place to be because of the lack of good information.   For instance, through the timing of USDA gathering, most of the assumptions go back to the 1st of June when farmers were surveyed about their actual planting.   Unfortunately, a large segment of the crop was not planted and this information was used for both the June 28th WASDE and July 11th WASDE report.  Presently, USDA is re-surveying farmers and this information is due on August 12th.  That should provide some type of clarity.

Needless to say, the market has moved on assuming the crop is compromised and the acreage might be lower.   For instance, with the normal planting delay, we might expect 4-5 million acres to go into the Prevent Planting category at USDA.  However, it is highly likely this year it could be 8-10 million acres.   Vegetative maps show compromised crops in Illinois, Indiana and across much of the Eastern Corn Belt.  Some people have compared this to 1993, where crop potential was not truly realized until combines started to roll of the fall.  In the meantime, corn futures spreads help tell the story.  After reaching $4.68 on June 17th, December corn is now $4.35. 

Keep in mind it is very important to continue to consider the weather.  Corn is moving into pollination into late July and early August in United States.  Ditto for Ontario.  This is late by any measure, especially over the last five years so we continue to set up for issues if the weather doesn’t play nice.  Of course, we need those rains in August for soybeans along with ideal weather.   It’s a tall order.

Soybean demand in the United States remains without China. In fact, it is getting very old, as the USDA predicted earlier 434 million less bushels of soybean exports this year.  Farmers are growing tired of constant reminders that the two sides are talking by phone.  The soybean complex is unlikely to gain its bullishness back without some type of resolution in Chinese demand for American soybeans.

Commodity Specific Comments

Corn

The corn market has responded to the uncertainty that it faces.  Market players realize that 91.7 million acres is unlikely and have been trading accordingly.   Corn is also going into the most important time of the year at pollination.  A hot dry weather surrounding July 19th is not conducive to good corn pollination and weather will be a large determinant going forward.

Corn futures are likely to be volatile in this scenario.  For instance, on July 19th there was a large drop in open interest in the corn futures market, which is a reflection of tremendous uncertainty.  Needless to say, the December corn contract currently at $4.35 is much higher than it was earlier this year.

The September 2019 December 2019 corn future spread is currently $-.05, which is considered sideways. Corn prices tend to trend lower from early June to early October.  2019 is maybe the year to buck that trend. The nearby corn contract is currently in the 79th percentile of the past five-year price distribution range.

Soybeans

Soybeans have been the whipping boy for over a year now in the commodity markets.  The specter of a China United States trade deal still hangs above the market like forbidden fruit. It’s always there but never consummated. However, any deal that brings back some soybean demand from China would be a very good thing and positive to soybean futures prices.

The 80 million acre figure for soybeans still is in flux.  It was considered low when it was announced earlier in June and any deviation from that going forward will have an impact on prices. It is also true that the inclement weather this year has affected soybean yield.  The USDA cutting soybean yield by one bushel per acre in its last report may be only the start of ratcheting down.

The August 2019 September 2019 soybean future spread is currently -5.75 cents, which is considered sideways on the monthly trend.   Soybean prices tend to trade lower from early July to early October.  The current nearby spot contract is currently priced in the 20th percentile of the past five-year price distribution range.

Wheat

There continues to be lots of wheat in the world, which was substantiated by the latest USDA report.   The current spot Chicago wheat contract is priced in the 45th percentile the past five-year price distribution range.  The September contract is currently breaking down based on harvest pressure.

Ontario wheat harvest is ramping up and with that cash prices will become more distinct based on quality and local basis. Prices are in flux, but there was lots of $7 wheat contracted and cash prices in the $6.50 range.  It’s been a tough year for wheat production in Ontario.  Hopefully next year will be better from the start.

The Bottom Line (cont.)

The Canadian dollar continues to dance around the $.76 US level as of July 19th.   Much of this depends on its inverse relationship with the value of US dollar.  It’s also a reflection of the Canadian economy and our interest rate outlook.   Any musings about the Canadian dollar is speculation, and $.80 has been mentioned in that speculation over the last two weeks in the media.  The importance of the Canadian dollar with our domestic Ontario prices has made Ontario farmers’ flat price sellers.  $5 and $6 corn selling opportunities have accentuated that.

It is far from certain where the Ontario crop will go over the next six weeks into September.  In Ontario, as everybody knows we had an unprecedented difficult spring leaving tens of thousands of acres a month behind in development. There is also an unprecedented amount of land not planted.  It is likely that the crop will be down in yield in both corn and soybeans, which will ultimately be reflected in volatile basis values.   What are needed are heat, adequate moisture and a wide-open fall to get this Ontario crop to the finish line.  Any variation on that theme will force widespread crop insurance claims this fall.

Geopolitics remains important in 2019.  At the present time there is much tension in the world over the Strait of Hormuz between Iran, the UK and the United States.  This is making oil markets bubble to some extent.  Of course, there is a continuing trade problem between United States and China.  Canada is also on that list with China as they continue to eliminate buying of Canadian agricultural commodities like canola and pork.

It’s certainly has been a difficult year for Ontario farmers.  Looking at the crop in the field it’s hard to imagine we are looking at the end of July.  In many ways, in the agricultural world somebody has to suffer in order for grain prices to go higher.  That target seemingly was on Eastern Corn Belt this year, which includes Ontario.  Despite that, their remains a crop to market.   Selling into a market where there are attractive opportunities is always a good thing.   There will be many marketing opportunities ahead.  The challenge will be to balance all of these marketing variables together and make those decisions. In this very difficult year of 2019, daily market intelligence will remain key.