Market Trends for February & March

US and the World

It’s February, a month where winter is still with us and spring still seems so far away.  However, across the greater American corn belt plans are being made to plant.  In some areas of the Dakotas and Minnesota, some of the 2019 corn crop remains out.  It’s a reminder of the year that was 2019, but 2020 represents a clean slate.  Needless to say, market fundamentals continue to form, which will surely challenge farmers in the months to come.

On February 11th, the USDA weighed in with their latest WASDE report.  The February report is not usually a market mover, based on the time of year and being sandwiched between January and March reports, which tend to be more explosive.  USDA increased soybean exports by 50 million bushels and pegged soybean ending stocks at 425 million bushels.  At the same time, USDA decreased corn exports 50 million bushels pegging corn ending stocks to come in at 1.892 billion bushels. 

Wheat exports were also boosted 25 million bushels from the January report.  USDA increased corn for ethanol by 50 million bushels, pushing it up to 5.425 billion bushels.  Corn stocks to use ratio stands at 13.4%.  Production levels remained the same for corn and soybeans from the January report at 13.691 and 3.558 billion bushels respectively.  Global soybean ending stocks showed a 2.19 MMT increase as the Brazilian soybean crop was boosted to 125 MMT.  Argentinian production was maintained at 53 MMT. 

On February 14th, corn, soybean and wheat futures were lower than the last Market Trends report.  March 2020 corn futures were at $3.77 a bushel.  The March 2020 soybean futures were at $8.93 a bushel.  The March 2020 Chicago wheat futures closed at $5.42 a bushel. The Minneapolis March 2020 wheat futures closed at $5.25 a bushel with the September 2020 contract closing at $5.52 a bushel.

The nearby oil futures as of February 14th closed at $52.05/barrel down from the nearby futures of last month of $59.04/barrel.  The average price for US ethanol on February 14th in the US was $1.56 a US gallon lower than the $1.50 recorded in the last Market Trends report.

The Canadian dollar noon rate on February 14th was .7548 US, lower than the .7662 US reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario corn basis remains historically strong versus past years.  This is partly because US corn basis levels are stronger vs past years, but also because of the variable nature of corn quality especially in Eastern Ontario and Quebec.  In fact, US corn has been imported by train into Quebec to satisfy some of the feed mill requirements specifically for poultry.  Basis is doing its work. 

As it is, Eastern Canadian corn is being replaced on the global market by American and Ukraine corn, which is largely a function of price.  Cheap is the great equalizer in global commodity trade and this year Eastern Canadian corn is too expensive.  As we move ahead thru 2020 that is unlikely to change.  However, in late summer, it could be a different world.  

In Ontario this year, that different world will probably involve a lot more wheat and corn acres than soybean acres.  With over a million acres of wheat planted, the majority of the increase will likely come from 2020 soybean acres.  This will affect grain movement later this year. 

Eastern Ontario is faring better than Quebec on quality corn.  However, in Quebec, US corn is pouring in from Illinois and Iowa on very competitive bids.  There has even been competition from western feed wheat displacing corn.  All of this affects demand for corn in Eastern Ontario.

Old crop corn basis levels are $1.38 to $1.50 over the March 2020 corn futures on February 14th across the province.  The new crop corn basis varied from $0.90 to $1.38 over the December 2020 corn futures.  The old crop basis levels for soybeans range from $2.45 cents to $2.56 over the March 2020 futures.  New crop soybeans range from $2.25-$2.35 over the November 2020 futures level.  The GFO cash wheat prices for delivery to a terminal on February 14th were $7.45 for SWW, $7.65 for HRW, $7.45 for SRW and $6.56 for Red Spring Wheat. On February 14th the US replacement price for corn was $6.01/bushel.  You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

Coronavirus is the black swan of early 2020.  What was a Chinese anomaly early in January has exploded on the world stage.  Numbers are fluid, but as of February 14th, 1523 people have died from the COVOD-19 virus in China and 67000 people have been infected.  As it is, the equity markets are telling us that “everything is going to be OK”.  However, agricultural commodity markets didn’t react that way with soybeans losing 89 cents/bushel in the period between January 2nd and February 2nd.  With China being the elephant in the room with regard to agricultural commodity demand, it was a body blow.

It is still not over as of February 14th and the outcome is not known.  However, if you combine the coronavirus with African Swine Fever and outbreaks of Swine Flu in China, it hasn’t’ been a banner time for Chinese potential demand.  It is hard to know the outcome going into later 2020.

As this was all playing out, we had a partial agreement on agricultural trade between the US and China.  In the Phase 1 agreement China has agreed to buy $36.5 billion of US ag products in the calendar year 2020 and $43.5 billion in 2021.  Both the Americans and the Chinese acknowledged that this would be based on “commercial considerations”.  In other words, just like back in the pre 2018 days, these commodities would have to be competitively priced. 

It is a good thing, which will probably help thaw the chill in US Chinese trade.  Those commercial considerations will probably mean Chinese buying of Brazilian soybeans coming off now at harvest.  However, it likely also means, going back to a state of normalcy for agricultural trade with the US.  Chinese buying of US soybeans will eventually come back.  There is a path ahead, but it is no panacea.  Brazil was given a gift in 2018 and they took full advantage.  It will take time to get American soybean exports back in a big way to China.   

Commodity Specific Comments

Corn

US corn is so cheap in some areas that it is showing up in Quebec to satisfy poultry farmers who need the quality.  It begs the question, how cheap can corn get in the US in this coming year?  Keep in mind, the ending stocks are less this year than last year.  The US needs a big corn crop to satisfy demand.  There are always production worries getting there and this will present selling opportunities. 

At the present time, Brazil has no corn to sell, as the second crop is just getting into the ground.  Good weather will be needed there, to get that crop to the finish line.  Corn exports from the US should improve on this reality.  China is buying corn, but they recently purchased from Ukraine.  It is what it is.  However, its likely American corn gets into China this year.

The March 2020 May 2020 corn futures spread is currently -.0425 cents which is considered sideways.  Seasonally corn prices tend to trade higher through June.  The March 2020 corn contract is currently in the 42nd percentile over the past five-year range.

Soybeans

The phase 1 portion of the China US trade agreement came into effect on January 15th.  Of course, there is lots of derision among analysts on what this means.  However, it’s likely to mean future Chinese soybean purchases when the price is right.  We’ll take it vs what was imposed in July 2018 when Chinese tariffs on US soybean exports were first imposed.

The recent drop in soybean prices has many villains with the coronavirus being one of them.  However, keep in mind the Brazilian currency has lost 8% against the US dollar since the 1st of January and this has translated into higher domestic Brazil soybean prices.  Brazilian farmers have been aggressive sellers. 

The March 2020 May 2020 soybean futures spread is currently -.095 cents US which is considered bearish.  Seasonally, soybeans prices tend to trend up from here into July.  The March 2020 soybean contract is currently in the 25th percentile of the past 5-year price distribution range.

Wheat

Wheat prices actually peaked over the last month but have been heading downward in the week preceding February 14th.  The spec funds had gone long to a point where 75% were net long.   This became somewhat cumbersome and as usual in those situations, they broke back going into February 14th.  Just like most any other time, there is wheat everywhere, waiting in various forms to satisfy demand.

Seasonality is not a strong point in SRW wheat, mostly grown in Ontario.  However, prices generally speaking top out between October and March.  It’s always a bit of an issue contracting wheat when it’s under ice and snow in Ontario.  However, the fundamentals are not as bearish for SRW wheat vs the other wheat classes.  Ontario farmers are surely hoping for a good wheat harvest after the short harvest of 2019.

The Bottom Line (cont.)

So here we are, poised to plant another crop.  So are our American friends.  Preliminary numbers for 2020 acreage are fluid with USDA set to release some numbers into the week of February 20th.  However, 2020 corn acreage pegged at 94.5 million acres and soybeans at 84 million acres have been bandied about.  This represents a 5% increase for corn and a 10% increase for soybeans.  Add mother nature playing nice and you’ve got huge crops next fall. Of course, it’s all a theory now, as there is much production risk ahead. 

The weather is still important.  This is a default and should be emphasized despite the obvious.  USDA is predicting an even bigger soybean harvest in Brazil.  However, South American weather will be key, not only for the rest of soybean harvest, but also the winter Safrinha corn crop just being planted.  Gathering weather information from multiple sources will help with market intelligence. 

The Canadian dollar continues its dance with 75 cents US, and this has helped basis levels especially in wheat and soybeans.  The Bank of Canada has sustained its interest rates over the last several months, but a rate cut is negative for the loonie.  Of course, nobody knows, but we cannot ignore the foreign exchange influence on our domestic grains basis levels.  It’s a two-pronged consideration always, and a marketing management challenge.  Standing pricing orders can surely help garner those flat pricing opportunities. 

2020 has been noisy on the geopolitical front to say nothing about the coronavirus which came out of nowhere.  These variables will surely continue to boil as Ontario farmers plan for spring.  It’s all part of our greater risk management plans.  The road ahead will likely be more of the same.  However, there will be some seasonal pricing opportunities.  Daily market intelligence will remain key.