Market Trends for January & February 2020

US and the World

As we careen into the new decade, 2020 can surely represent opportunity for those within the greater grain economy.  2019 was a difficult year for many in the Eastern Corn belt and 2020 represents an opportunity to do better.  Looking further out, what will a new decade define the grain economy going forward? 

There are many questions, but clearly if history proves to be any indicator, by the next decade in 2030 things will look different.  Needless to say, here we are at the start of another decade with the crops we have and the associated prices.  Looking ahead, among other things, it will surely be about the weather.

On January 10th the USDA released their “final” WASDE report on the 2019 crop.  The January report is often a flashpoint within the market, sometimes causing wide price swings.  However, on January 10th, this was not the case. 

The USDA raised both corn and soybean production slightly from their earlier November and December estimates.  US corn is now set to come in at 13.69 billion bushels, on a national yield of 168 bushel per acre.  The USDA increased soybean production to 3.558 billion bushels, up from 3.55 billion bushels in their December report. This was based on a US national yield of 47.4 bushels per acre.   

The corn quarterly stocks were down 5% from a year ago, with soybeans stocks 13% lower.

USDA decreased corn harvested acreage by 300000 acres and soybeans by 600000 acres.  Corn ending stocks were decreased to 1.89 billion bushels.  There was a big demand change as USDA increased feed and residual demand by 250 million bushels, but exports were cut 75 million bushels and industrial use was cut 10 million bushels.

The US ending soybeans stocks remained at 475 million bushels, the same as their December 2019 estimate.  USDA kept Brazil’s soybean production at 123 MMT and Argentina at 53 MMT.  US winter wheat acreage was pegged at 30.8 million acres, the second lowest in US history.  Soft winter wheat acreage actually increased 8% from last year. 

On Jan 10th, corn, soybean and wheat futures were higher than the last Market Trends report.  March 2020 corn futures were at $3.85 a bushel.  The March 2020 soybean futures were at $9.46 a bushel.  The March 2020 Chicago wheat futures closed at $5.64 a bushel. The Minneapolis March 2020 wheat futures closed at $5.60 a bushel with the September 2020 contract closing at $5.81 a bushel.

The nearby oil futures as of January 10th closed at $59.04/barrel down from the nearby futures of last month of $60.07/barrel.  The average price for US ethanol on January 10th in the US was $1.50 a US gallon lower than the $1.62 recorded in the last Market Trends report.

The Canadian dollar noon rate on January 10th was .7662 US, higher than the .7586 US reported here last month. The Bank of Canadas lending rate remained at 1.75%.

Ontario

In Ontario, good weather throughout late December and early January made for some unusual late harvest conditions to aid producers with crop still left in the field.  In fact, there was some tillage done into January as temperatures were above normal.  However, this varied across the province.  As of January 10th, most corn is harvested, and the fields left are mostly by choice.

Statistics Canada has reported an Ontario corn yield of 158 bushels per acres, which is a bit below average, but still quite healthy when considering the difficult season.  There is a wide variance across the province.  Much of the corn in the deep south west of Ontario was high yielding with no test weight issues.  However, as you went east and north in the province, there were quality concerns.  In the far east of Ontario, this has been accentuated. The late uneven spring has been the cause of many of these concerns.

Corn basis has responded accordingly, holding steady or even increasing in some areas.  In Quebec, the crop is lower with Statistics Canada projecting a 141.4 bushel per acres average.  However, much of the crop is light and this has strengthened basis for good quality corn from Ontario.  The FOB bid in SW Quebec as of January 10th was $2.32 Over March.  The soybean basis in Ontario has also held steady or increased partly based on the increased futures value and the low value of the Canadian dollar.

Old crop corn basis levels are $1.30 to $1.45 over the March 2020 corn futures on January 10th across the province.  The new crop corn basis varied from $0.85 to $1.30 over the December 2020 corn futures.  The old crop basis levels for soybeans range from $2.20 cents to $2.30 over the January 2020 futures.  New crop soybeans range from $2.23-$2.34 over the November 2020 futures level.  The GFO cash wheat prices for delivery to a terminal on January 10th were $7.76 for SWW, $7.96 for HRW, $7.63 for SRW and $6.90 for Red Spring Wheat. On January 10th the US replacement price for corn was $6.02/bushel.  You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

There is a partial China US trade deal about to be signed in Washington January 15th, something farmers have been waiting a long time for.  Of course, it’s very difficult to surmise what it might actually mean.  The numbers bandied about from some officials in the American government are $40 billion dollars of Chinese business in American agriculture commodities.  Clearly, some would say it’s the icing on the cake farmers have been all waiting for. 

The Chinese have not shown the same enthusiasm.  However, they have resumed buying American soybeans.  Their language has been much more muted and in the politically charged year of 2020 its telling.  Even the American administration has said any other China phases of trade agreements will be done post November.  The $40 billion figure of Chinese buying of US agricultural commodities seems much, but of course, the details and ultimate export numbers will be the real litmus test.  Needless to say, maybe this is the long way back from the calamity which started with the imposition of Chinese tariffs on US soybeans in 2018.

How this will manifest with 2020 planting is another question.  The Trump administration has handed out $24.5 billion in government aid to Americans farmers.  Will this continue in 2020, turning into an annuity for American grain farmers?  Simply put, it’s part of the planting decision process going forward, with so many variables missing at the time of this writing.  From a Canadian perspective, it’s likely we’ll see increased US planting this spring, supported by possible MFP payments, leaving us in a tough position. 

It was hard to peg the January 10th USDA report as anything but bearish, but there was an unusual bullish push in a 250 million bushel increase for corn in feed and residual demand.  At first glance, you might be looking for something more specific, but it’s likely a response to their December 1st corn stocks report which was lower than expected.  Needless to say, it did help the corn balance sheet.  USDA also offered up that they will be doing a re-survey of corn production will take place in early spring in Michigan, Minnesota, the Dakotas and Wisconsin, where harvest has been later.   

Commodity Specific Comments

Corn

December corn as of January 10th was up 2 cents at $4.02.  Where does it go from here, as farmers are always looking ahead and $4.25 would be better, even though it would be considered a lofty value compared to the last 7 years.  Needless to say, US ending stocks under 2 billion bushels helps.  However, as of this time, there is not a big impetus for December 2020 corn to increase. 

Basis might give us clues.  Across the United States basis levels have been significant in telling the story of where it’s needed.  Quality is an issue in many parts of the United States, and this will eventually show up in utilization.  Even though the January 10th USDA is final regarding the 2019 crop, it’s unlikely so.  These quality issues might show up in the September stocks report where the 2019 crop year will be finally put to rest. 

The March 2020 May 2020 corn futures spread is currently -.07 cents, which is considered sideways.  Seasonally, corn prices tend to go up into June.  The nearby March contract is currently in the 52nd percentile of the past five-year price distribution range. 

Soybeans

Cotton might be soybean’s friend.  What’s that you say?  Cotton prices are a lot higher lately and if it continues, there could be a pull of southern US soybeans acres into cotton in 2020. 

Soybeans need some help, as even though USDA kept soybean ending stocks steady on January 10th, there are big crops in Brazil and Argentina, keeping prices at bay.

Of course, the shifting sands have much to do with a Phase 1 agreement with China on January 15th.  However, even when this is signed, it might not be public information which commodities might be on the shopping list.  Price will continue to be the litmus test for the Chinese despite their massive investments in the Brazil soybean economy.

The March 2020 May 2020 soybean future spread is -.13 cents, which is considered sideways.  Seasonally soybean prices tend to trade higher into July.  The March soybean contract is currently in the 37th percentile of the past 5-year price distribution range. 

Wheat

The hope for the wheat futures market will be for it to show continued life, with the USDA predicting the lowest wheat acreage in 111 years.  There have been production issues in Australia, but positive production news in Argentina, meaning the constant offset on supply and demand continues.  There are always problems and there are always good times in wheat, being its grown just about everywhere.  Needless to say, the wheat futures market may be asked to lead other grain markets forward.  However, with wheat, don’t hold your breath.

Ontario wheat prices at $7.63 for old crop SRW and new crop 2020 at $7.15 delivered to a terminal on January 10th don’t lie.  With about a million acres planted in Ontario, this might be a good place to have some standing orders.  There is always so much risk involved with contracting wheat in Ontario, based on our Canadian winters.  Producers need to weigh these and plan accordingly. 

 The Bottom Line (cont.)

All of this has been taking place in a heightened geopolitical environment, mostly centred on the Middle East, where the Americans and Iranians have exchanged military assets.  This had put a chill in markets as tensions escalated.  The downing on Ukrainian Flight 752 was an unfortunate tragedy from such heightened tensions.  The oil market was frenetic.  As of January 11th, tensions are still high, but the situation has deescalated.  Markets will continue to be a partial reflection of this situation. 

In Ontario, grain prices have benefited from a sustained basis even though the Canadian dollar has shown a bit of life, even briefly going over the 77 cent US mark.  Bank of Canada Governor Stephen Poloz has mused that the current interest rate of 1.75% might be adjusted in the future based on the health of the Canadian economy.  This adjustment is more likely to be down, which wouldn’t be good for the loonie, but positive for cash grain values.  It will continue to be a challenge for farmers to balance Canadian dollar volatility affecting basis vs grain futures values.

Basis has provided opportunity for many Ontario farmers and it is likely to continue. For Eastern Ontario farmers, corn basis bids into Quebec have been strong.  However, basis overall has been better than last year at this time.  It’s a reflection of many things, the Ontario crop being one of them, both this year and last.  Digging deeper on basis is important and sometimes it takes work to find even better bids, despite the generally good price transparency in Ontario.  Higher basis values in Michigan and Ohio have also helped this situation. 

The good news is grain prices trend up into the summer.  Seasonality tells us that.  Of course, the challenge is to market out crops at profitable levels, where are farms can grow ever more prosperous.  Standing pricing resting orders can be good Ontario centric marketing tools to capture profitable opportunities. Calling your elevator or end user only takes minutes.  Profitable opportunities can be gone in seconds.  Daily marketing inteligence will remain key.