Market Trends Commentary – October & November

It’s harvest time across the greater North American corn belt, albeit where the weather permits.  Good harvest weather in the northeastern corn belt has been countered by cold freezing weather in the northern US plains.  Needless to say, its still early, and combines will surely find their place over the next few weeks.  The crop, which was so difficult to get planted in the Eastern corn belt, has yet to give up the truth.

The USDA is the US government agency that constantly re-sets the goalposts.  On October 10th, the USDA weighed in with their latest W

ASDE report.  USDA pegged US national corn production to come in at 13.8 billion bushels, based on a US national yield of 168.4 bushel per acre.  This was based on harvested acreage of 81.8 million acres.  The USDA pegged beginning stocks for this year at 2.11 billion bushels and after adjustments for an increase in feed usage and decreasing ethanol use, ending stocks stood at 1.93 billion bushels.  The corn ending stocks to use ratio is now 13.8% compared to last month at 15.5%

USDA pegged national soybean production to come in at 3.55 billion bushels based on a US national yield of 46.9 bushels per acre.  This was 1 bushel lower than the September estimate, with harvested acreage also trimmed to 75.6 million acres.  New crop ending stocks were pegged at 460 million bushels.  This number is still huge, but about half of the 913 million bushel old crop number pegged in the report.  This was down from the 1.005 billion bushels in the September report.  The ending stocks to use ratio for soybeans dropped to 11.4% from 15.9% last month.  Wheat production was reduced to 1.962 billion bushels. 

On October 12th, corn, soybean and wheat futures were higher from the last Market Trends report. December 2019 corn futures were at $3.97 a bushel.  The November 2019 soybean futures were at $9.36 a bushel.  The December 2019 Chicago wheat futures closed at $5.08 a bushel. The Minneapolis December 2019 wheat futures closed at $5.32 a bushel with the September 2020 contract closing at $5.76 a bushel. 

The nearby oil futures as of October 11th closed at $54.70/barrel down from the nearby futures of last month of $54.85/barrel.  The average price for US ethanol on October 12th in the US was $1.79 a US gallon higher than the $1.58 recorded in the last Market Trends report.

The Canadian dollar noon rate on October 11th was .7577 US, slightly higher than the .7543 US reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, soybean harvest has started in earnest across the province.  Essex county is a bit behind, but after Thanksgiving should be in full overdrive.  Soybean yields are variable considering the late planting dates of this year’s crop. 

Frost earlier this month in parts of Eastern Ontario and the northern counties may surely impact corn quality come harvest.  Ontario corn has been later than normal and avoiding frost would still be the choice for many producers heading into November.  Black layer in corn this year has been an ongoing concern. 

The old crop basis new crop basis change has taken place.   It’s made quite a difference for corn, as the old crop stocks into summer became much more valuable based on futures appreciation.  VOM concerns dissipated, as well did the $1.90-$2.00 basis level we saw last month.  Old crop corn basis levels (for the crop about to be harvested) are current $1.25 over in southwestern Ontario.  Little corn has been harvested, but when it begins, farmers need to be vigilant of basis.  These opportunities may emerge depending on crop size and quality. 

Old crop corn basis levels are $1.25 to $1.40 over the December 2019 corn futures on October 11th across the province.  The new crop corn basis varied from $0.85 to $1.10 over the December 2020 corn futures.  The old crop basis levels for soybeans range from $2.22 cents to $2.28 over the November 2019 futures.  New crop soybeans range from $2.05-$2.26 over the November 2020 futures level.  The GFO cash wheat prices for delivery to a terminal on October 11th were $7.16 for SWW, $7.35 for HRW, $7.02 for SRW and $6.83 for Red Spring Wheat. On October 11th the US replacement price for corn was $6.05/bushel.  You can access all of these prices on the Daily Commodity Report.

The Bottom Line

Be careful what you wish for.  Sometimes the unexpected happens and prices move higher.  The October 11th USDA report was not necessarily friendly to corn soybeans and wheat, but there is a story to tell.  Along came freezing weather in the northern plains and western corn belt with an apparent partial US China trade deal.  Prices improved on the news.

The October 11th USDA report was not friendly for corn and wheat, but soybeans took a yield hit down to 46.9 bushels per acres and a reduced harvested acreage figure of 75.6 million acres.  Where once new crop ending stocks were expected over 1 billion bushels, it’s projected now to be 460 million.  This has partly resulted in an 85-cent appreciation of soybeans since September 9th

Some of this USDA action was scripted, as crop size is always up to debate.  However, what can’t be scripted as much is freezing weather that is forecast into much of the central corn belt extending into the Texas panhandle and into northwestern Illinois and Wisconsin over the Canadian Thanksgiving.  Much of this crop cannot take a freeze that is forecasted.  This has had much to do with the price rally into October 11th.  Ditto into the later part of October.

We may have become numb to the China US on going trade talks, but there was an announcement of a partial agreement on October 11th.  On that day, China agreed to buy $40 to $50 billion more agricultural goods in exchange for the Americans holding off future tariffs on other Chinese goods.  Pork will certainly be part of that deal, but its unclear how many soybeans will be the mix.  In 2017-2019 the US exported 27.7 MMT of soybeans to China. So far this year China has purchased 4.79 MMT.  There is a long way to go.

Commodity Specific Comments

Corn

It’s been no secret this year that corn demand has been a problem.  The focus always seems to be on supply, but corn exports have been off and ethanol has been a problem.  Ukraine and South American have been strong competitors to American corn.  Only recently have US Gulf FOB bids been slightly cheaper than Brazilian offers.

It would be nice to put the less corn demand genie back in the bottle with a China US trade deal.  However, keep in mind, that China doesn’t need to buy US corn and has not been a significant buyer in the past.  They might buy a few more DDG’s and maybe even some ethanol, but this is not the answer.  On the contrary supply side, there are still many that think USDA may be overestimating this year’s crop.

The December 2019 March 2020 corn futures spread is currently -10 cents, which is considered bullish.  Seasonally corn prices usually tend to increase from fall harvest all the way into June.  The current Dec 2019 corn contract is in the 59th percentile of the past five-year price distribution range. 

Soybeans

Soybean futures have rallied approximately 85 cents since September 9th and of course, we want more, more, more.  Keep in mind that’s an emotional reaction.  The 85 cents is real and Brazilian farmers have been selling into it.  That may lead to even more soybeans being planted in Brazil.  Rewarding a rally might be a better way for North American farmers to deal with it.

Soybeans are dealing with the weather too.  There are still immature soybeans in the northern plains, some under snow in Manitoba.  It’s another bullish factor landing on soybeans in mid October to go along with less production and an impending trade deal.

The November 2019 March 2020 soybean futures spread is currently -25 cents, which is considered bullish.  Seasonally, soybeans tend to bottom out in October (September this year) and then slowly rise into July.  The November contract is currently priced in the 35th percentile of the past five-year price range. 

Wheat

Wheat production was reduced in the latest USDA report, but futures have showed recent strength.  This is partly based on freezing weather in the US northern plains as well as dry weather in Argentina and Australia.  It’s not like the world is going to run out of wheat, as it’s grown almost everywhere. 

In Ontario wheat has been going into the ground at a fast pace over the first part of October.  Good weather is needed to get more acres in the ground and hopefully bring Ontario back into the 1 million acres range.  There is much “pent up” demand to get wheat into the ground after last fall’s terrible conditions. 

The Bottom Line (cont.)

The Canadian dollar continues to add stimulus to Ontario grain prices.  The loonie has been gyrating near the 75 and 76 cent US level for several months now, but hasn’t been over 80 cents since the first part of 2018.  That has softened the optics of prices.  Needless to say, the dollar could easily head to 80 cents with an interest rate hike or a weakening of the American dollar. Both of these realities seem distant now. 

In Ontario, we are flat price sellers partly because of our loonie variability.  Things likely will change post the Canadian election.  The Canadian economy is strong and the American economy seems even stronger.  However, there are lots of geopolitical problems apparent in the Middle East, Hong Kong, North Korea and Brexit.   Peace is always good for grain prices. 

The grain price rally of the last month came at a strange time, as usually harvest lows happen in October.  This year, it would seem more like September.  However, what happens next?  The soybean carryout of 460 million seems so low compared to over a billion we had last year, but it still is the second highest on record.  The market is constantly flexing and it continues. 

The weather is bullish for grains as of October 12th.  It’s not necessarily about rain as it is about freezing weather in the US plains.  Eastern and central Brazil is dry at planting time.  The challenge for Ontario farmers is to immerse themselves in these different market factors.  With Ontario corn yet to be touched and soybeans coming off the field, there is still potential for local market surprises.  Daily market intelligence will remain key.  Stay safe during this harvest season.