US and the World
It’s about COVID19 now. It is the biggest Black Swan since September 11, 2001 to affect markets. For farmers across North America it is the best of times and the worst of times.
Spring is in the air and the grain world is waking up to farm activity across the greater North American farm belt. However, there are also states of emergency across the United States and Canada as public officials try to engage people in the fight against the Coronavirus, which originated in China.
Grain markets have boiled with volatility, down hard from early January. Emotions have been high. Grain fundamentals have been almost beside the point.
Amid the turmoil, the USDA released their latest WASDE report on March 10th. It was almost like it was frozen in time, as USDA left ending stocks and production largely the same from their February report.
Soybean ending stocks are still set at 425 million bushels and corn at 1.892 billion bushels. March corn production was still pegged at 13.69 billion bushels. March soybean production was still at 3.558 billion bushels.
USDA pegged Brazilian soybean production to come in at 126 MMT, which is an increase from last month’s estimate and a reflection of the good growing conditions in Brazil this past season.
Argentinian soybean production was maintained at 54 MMT. The wheat supply and demand trajectory is the same as last month. Global ending wheat stocks are lower but still at record production. The Chinese have slightly over half of that. (52%)
On March 14th, corn, soybean and wheat futures were lower than the last Market Trends report. May 2020 corn futures were at $3.65 a bushel. The May 2020 soybean futures were at $8.48 a bushel.
The May 2020 Chicago wheat futures closed at $5.06 a bushel. The Minneapolis May 2020 wheat futures closed at $5.08 a bushel with the September 2020 contract closing at $5.28 a bushel.
The nearby oil futures as of March 14th closed at $31.73/barrel down hard from the nearby futures of last month of $52.05/barrel. The average price for US ethanol on March 14th in the US was $1.46 a US gallon lower than the $1.56 recorded in the last Market Trends report.
The Canadian dollar noon rate on March 14th was .7194 US, lower than the .7548 US reported here last month. The Bank of Canada‘s lending rate was reduced in an emergency action to .75%.
In Ontario, it’s hard to avoid the obvious, with events canceled all across the province on recommendation from health officials. This includes the always-excellent Grain Farmers of Ontario March Classic, where farmers gather from across Ontario.
The road ahead is unknown on that front. However, there is a crop to plant and staying healthy is part of that. As we move into late March, the concerns are growing.
Basis values for grain have been the saving grace at this difficult time. This has largely been because the Canadian dollar has dropped substantially in the last month as investors looked for the safest place to invest, which is the US dollar. The Bank of Canada emergency rate cut added to the situation. Flat Ontario cash prices are not a lot different than a month ago. This is somewhat of a surprise despite a global pandemic.
Corn basis levels in Eastern Ontario and into Quebec remain strong reflecting quality concerns, which came out of the past difficult 2019 harvest season. This is also reflected in new crops bids for the upcoming season. However, looking ahead in this highly charged Covid19 market environment makes forecasting new crop prices very difficult. Traditional patterns may not play out like they have in the past.
Old crop corn basis levels are $1.50 to $1.55 over the May 2020 corn futures on March 14th across the province. The new crop corn basis varied from $1.05 to $1.45 over the December 2020 corn futures. The old crop basis levels for soybeans range from $2.70 cents to $2.92 over the May 2020 futures. New crop soybeans range from $2.55-$2.65 over the November 2020 futures level. The GFO cash wheat prices for delivery to a terminal on March 14th were $7.33 for SWW, $7.54 for HRW, $7.33 for SRW and $6.66 for Red Spring Wheat. On March 14th the US replacement price for corn was $6.15/bushel. You can access all of these prices on the Daily Commodity Report.
The Bottom Line
Things are pretty dark. However, at a certain point history tells us there will be light at the end of the tunnel. Its clear the world has changed. Almost every facet of what we used to take for granted only a few months ago has gone toppy turvey.
The world needs to get better, but it also needs to eat. Agricultural demand will eventually come back in a big way. Getting over this COVID19 hump will be the first step.
The good news may be coming from China. Earlier in March, the Chinese President visited Wuhan province at a time when the number of reported cases of COVID 19 was declining. The last makeshift hospital has been closed down in Wuhan China. South Korean infections have also declined.
History tells us that most disease pandemics end as the fear dies down and people return to a more normal life. Eventually, a past tense COVID 19 will be the new normal. Hopefully, this will have a corresponding effect on agricultural commodity markets.
Needless to say, despite all the emotional arguments on how COVID19 is changing the game, grain fundamentals are still in the background. We’ve got a big soybean crop coming out of the fields in South America and a Safrinha corn crop in the development stage.
We are expecting big US acres of both soybeans and corn in 2020. Ending stocks here in North America are still very cumbersome, which continue to way on futures prices.
Commodity Specific Comments
Oil prices have plummeted over the last month and per usual, this is not always good for corn futures. At one time gasoline futures were above ethanol futures, but this is now in reverse, putting ethanol margins at risk. This is never a good thing for corn futures.
Nearby futures at $3.65 and December corn at $3.73 don’t impress anyone. In fact, an argument can be made that prices aren’t down more based on the meltdown in equities. Needless to say, these prices aren’t buying more corn acres, unless you consider the decrease in soybeans futures of 43 cents per bushel in the week leading up to Friday March 13th.
The May 2020 July 2020 corn contract is currently -.0275 cents as of March 13th, which is considered sideways. The May corn contract is currently in the 34th percentile of the past five-year price distribution range.
Seasonally, corn futures usually tend to trade higher from now into June.
Soybeans demand has been a drag as exports are down and Chinese business is preoccupied with the COVID19. Much of the anticipated action in soybean prices depended on renewed Chinese business, which as of yet has not materialized. However, this might take shape later this year.
The FOB Brazil price for soybeans is less than the US Gulf price as of March 13th and this is an aside to the huge crop now being harvested in Brazil. The $8.48 close on March 13th was the lowest since May of 2019. At a certain point, Chinese buyers needed to satisfy China/US phase 1 agreement. Cheap soybeans available could be part of that.
The May 2020 July 2020 soybean futures contract spread as of March 13th is currently -.0725 cents, which is considered bearish. The May 2020 contract is currently priced in the 14th percentile of the past 5-year price distribution range. Seasonally soybeans tend to trend higher from now into July.
USDA didn’t change anything of significance for wheat in their March 10th report. Like all the time with wheat, production increases come with decreases in other countries. Last month India raised their production estimate with higher exports from Russia and Argentina. However, on the other hand, Canada and Australia reduced their exports. The US SRW belt looks wet at this early stage, which would be its second wet start in a row.
In Ontario, we have faired fairly well coming out of winter, a welcome reprieve after the difficult issues with SRW in 2019. Farmers will soon be side-dressing wheat with nitrogen. Often times, farmers like to see the wheat in the spring before contracting. A low Canadian dollar with standing pricing orders does help with that.
The Bottom Line (cont.)
The drop in the Canadian dollar has done much to mitigate the grain futures price drop within this Black Swan COVID19 episode. The Bank of Canada followed the US Fed rate cut, which also led the loonie to drop.
Ontario soybean basis levels are the highest in several years partly mainly because of the loonie dropping under 72 cents US. With Ontario farmers being flat pricers of grain, standing orders would serve as one marketing tool to capture these marketing opportunities.
With the COVID19 virus sucking up all the oxygen in the geopolitical room, the lower oil price has been lost to some extent in the ether. Russia and Saudi Arabia couldn’t come to an agreement about limiting production and with that oil prices plummeted March 8th.
This double whammy combined with equity markets tanking is not a conducive environment for grain prices to thrive. That continues to weigh on the market.
COVID19 has had quite the effect. Its also led the CME to announce that what’s left of the pit trade will be shutting down as of March 13th. That means computers will be doing all the trading. (90% is done that way now) The 10% who represent the human element will be left out, but they represent some market movers, spread and option traders who add important content to price discovery.
How this will all play out will be intriguing in trading action in the weeks to come?
As January 2020 dawned, most of us were looking toward a new start and a new day. 2019 had been so difficult. However, the Black Swan that just keeps on giving, has changed the parameters on markets and likely even to the way we farm.
We need to be well to farm. We need to get past this to get our markets truly back. The challenge ahead for Ontario grain farmers is make good marketing plans and have contingency plans beyond that. This is a completely new farming environment we’re moving into. Its uncharted water.
Daily market intelligence will remain key.
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.