Market Trends Commentary – September/October

U.S. and the World

It is that time of year when harvest is starting up in the main US corn belt and in Ontario. With October clearly in the cross hairs, combines will surely start to roll soon. It has been a very uneven growing season especially coming out of a very late spring in the Eastern Corn Belt. That late start has defined much of the market narrative throughout the summer. As we careen into fall, the combines will surely tell the yield story, which has been so difficult to grasp coming out of June.

On September 12, the (United States Department of Agriculture) USDA dropped U.S. national corn production down to 13.799 billion bushels. This was based on a U.S. national yield of 168.2 bushels per acre. This was down from the 169.5 bushels per acres reported last month. USDA lowered ethanol demand and food and industrial use, while keeping export demand the same as last month. This put projected ending stocks for 2019 – 1920 at 2.19 billion bushels, which was up 9 million bushels from the August report.

The USDA dropped U.S. national soybean production down to 3.633 billion bushels, from 3.680 billion bushels last month. This was based on a U.S. national soybean yield of 47.9 bushels per acre, which was 0.6 bushels per acres vs. last month. Old crop ending stocks ended up at 1.01 billion bushels, but with the lower production and yield, 2019 – 1920 ending stocks are projected down to 640 million bushels. This is 115 million bushels less than projected last month. Global ending stocks for both old and new crop were lowered in the report. U.S. wheat production is set to come in at 1.980 billion bushels. Global wheat stocks, both old crop and new are at new record highs despite drought in some areas such as Australia. 

On September 13, corn futures were lower from the last Market Trends report. Soybean and wheat futures were higher. December 2019 corn futures were at $3.68 a bushel. The November 2019 soybean futures were at $8.98 a bushel. The December 2019 Chicago wheat futures closed at $4.80 a bushel. The Minneapolis December 2019 wheat futures closed at $5.02 a bushel with the September 2020 contract closing at $5.52 a bushel. 

The nearby oil futures as of September 13 closed at $54.85/barrel down from the nearby futures of last month of $54.87/barrel. The average price for U.S. ethanol on September 13 in the U.S. was $1.58 a U.S. gallon the same as the last Market Trends report.

The Canadian dollar noon rate on September 13 was .7543 U.S., slightly higher than the 0.7527 U.S. reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

Harvest will likely be ramping up shortly in parts of Ontario. It is hard to put a good face on harvest based on the tough spring planting conditions in much of the province. However, since the end of June weather has been conducive to crop development. There have been exceptions with drought conditions in Bruce County and other areas of the province. There is of course land not cropped this year throughout the deep southwest. Needless to say, we still need a wide-open fall, to get this entire crop to mature. September has been kind so far. 

Basis continues to hang in their for both corn and soybeans. The new crop corn basis has retreated to a small extent compared to last month. Both old crop and new crop soybean basis have decreased slightly since last month. Weather will be a key element to basis as we move forward. If there are frost issues in Ontario within the next 4 weeks, the crop will surely be compromised and basis should respond.  Coverage levels could also be an issue for industrial ethanol use in Ontario. Keeping abreast of weather reports and basis values will surely be key.

A wide open fall is what producers need to get the crop to maturity, but its also important for a renewal of winter wheat acres for 2020. Large acreages, which were unseeded this year in the deep southwest of Ontario, will surely get that September planting started. Getting back over that 1 million acres of Ontario wheat would surely be a good goal, especially with rotation taking a bath for some farms this year. 

Old crop corn basis levels are $1.90 to $2.00 over the December 2019 corn futures on September 13 across the province. The new crop corn basis varied from $1.20 to $1.40 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.00 cents to $2.07 over the November 2019 futures. New crop soybeans range from $2.00-$2.10 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on September 13 were $6.88 for SWW, $7.14 for HRW, $6.81 for SRW and $6.31 for Red Spring Wheat. On September 13 the U.S. replacement price for corn was $6.22/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 time will be the true litmus test of where yield is. We all know what its like when combines roll. Intuitive feelings about USDA predictions suddenly get adjusted when actual corn and beans fill up the combine tank. The 2019 crop has been compromised all year; we are about to find out by just how much.

The USDA report wasn’t overly neutral. For instance, corn stocks grew; soybean stocks were about as expected especially with the soybean crop shortfall with less acres and yield. However, it would seem geopolitics continue to matter. Any type of semblance of a trade deal between the U.S. and China raises prices, with hardly a reason to go there. With talks scheduled for October, it will continue.  Recent increases in the Pacific North West basis levels reflect initial Chinese soybean purchases.

Is everything, as it seems? Well, not really. African Swine Fever continues to decimate the Chinese pork sector with domestic pork prices rising sharply. This is surely pressuring the Chinese, but what might be doing it even more so is parched dry Brazil. It’s historically dry as soybean planting gets set to go. Fewer soybeans grown in Brazil have not been part of the Chinese narrative.  Everybody needs to cover their bases. Simply put, soybeans have been a whipping boy for a long time, but some optics has changed. Brazil dryness is what it is, but non-commercial traders are starting to grow uneasy on their net short futures position in early September. That was part of the wild swing on September 13, one-day post USDA. With geopolitics fickle at the best of times, re that proverbial trade war, no one can be sure of their position. 

Commodity Specific Comments

Corn

U.S. corn yield is more than many had expected earlier, and it might still be up to interpretation up until the time when combines roll. For instance, USDA measurement had corn ear counts the lowest since the drought year of 2012. Corn ear weights have not been measured yet by USDA, which could change the narrative.

About 23 U.S. ethanol plants have been closed down or idled in the last several months, but ethanol production remains somewhat stable. However, U.S. producers wait for the President’s announcement on ethanol. His public statements have pointed to a more farm friendly change in policy.

The December 2019 March 2020 corn futures spread is currently -$.1275 cents US, which is considered bearish. Seasonally, corn prices tend to trade lower into October. The December corn futures contract is currently in the 42 percentile of the past five-year price distribution range. 

Soybeans

The focus for soybeans is still on yield. USDA dropped yields in the September 12 USDA report and may again in October. Pod counts have been down in surveys this past August and in private estimates as well as USDA. However, pod weights have been up, so yield is still in the mix. 

Soybean crush margins remain good in the United States.  Cheaper prices are always good for crush. It surely is helping reduce the ending stocks figure down to 640 million bushels from over a billion. It is likely to fall further this fall, with a further reduction in U.S. yield.

The November 2019 March 2020 soybean futures spread is currently -0.2525, which is considered sideways. The November contract is currently priced in the 26 percentile of the past five-year price distribution range. Seasonally, soybeans tend to trade lower into October. 

Wheat

Wheat has been a follower of the row crops, with hardly a reason to feel wind at its back. The trend remains down in all wheat classes, as world stocks are higher despite drought in Australia. As always with wheat, it’s planted or harvested somewhere in the world every month, so supply is usually robust. Needless to say, top growing regions still need to be watched for production issues.

In Ontario, wheat will soon be planted. After a couple tough years with wheat survival through the fall and winter, many producers are looking forward to better conditions.  That wide-open fall anticipated for row crops, will surely help wheat planting. The Canadian dollar in the 75-cent range will continue to be the one market factor, which helps cash wheat prices. 

The Bottom Line (continued)

We had become accustomed to robust agricultural commodity demand before the Chinese tariffs were applied to soybeans last year. Corn was always the commodity somewhat immune from that, as the United States was still the dominant world supplier. However, demand has been a problem, with feed and ethanol showing weakening fundamentals. Corn exports have fallen further. A year-to-year drop of 500 million bushels could be possible based on a continuation of lost demand over the last half of 2018/19. It has led the long-term outlook for corn to be bearish. The demand issue needs to be stemmed.

In Ontario and Quebec, the crop continues to march toward maturity. As advertised since last spring, we need that wide-open fall to reach maturity for a lot of June planted corn. The jury is still out on that, as private crop estimates have pegged Ontario corn yield in the 164 bushels per acre range. Statistics Canada is currently pegging the Ontario crop at 156.1 bushels per acre. They have pegged the soybean crop at 43.5 bushels per acre. 

These yield estimates are down compared to last year. The 2019 spring season was one of the most challenging on record, with constant rain and cold conditions badly delaying corn and soybean planting. Ontario corn basis levels have reflected this since spring and it’s likely to continue into fall. This means basis much be watched closely especially if Ontario runs short, or frost impacts the crop. The value of the Canadian dollar will continue, as always to have a direct impact on soybeans basis values. 

It is an uneven time for markets for sure. Both the U.S. and Ontario crop yield is in flux as we careen toward harvest. Geopolitics continue to boil between the U.S. and China among other hot beds like Saudi Arabia and Hong Kong. Moving ahead on the grain price front will be multi-faceted. Brazil soybean planting is commencing amid the driest planting conditions on record. The challenge for Ontario farmers is to measure all of these variables. As flat price sellers, know where you want to go and know your carrying costs for grain. There will be many marketing opportunities ahead. Daily marketing intelligence will remain key to success.