US and World
We are starting into the home stretch with regard to crop development and critical crop weather in July and August. The July 4th weekend has historically been a time, where the trade decides if the crop is made. Critical weather forecasts at this point in the corn pollination time frame can also frame price action. The American Midwest has been hot and dry with heat warnings across much of the central United States. It is that time of year when market prices can be tremendously volatile. Aside from that, the USDA released its June 29th report giving updated acreage and stocks projections.
In the June 29th report, USDA pegged soybean acres at 89.6 million and corn acres to be 89.1 million marking the second time in history that US farmers have grown more soybeans than corn. This still represents a reduction in acreage from last year, 1% for both soybeans and corn. The quarterly corn stocks as of June 1st came in at 5.31 billion bushels, which is about the same as last year. The March to May 2018 corn usage was 2.59 billion bushels, which is up 200 million bushels from the same time period last year. On the soybean side, stocks as of June 1st were 1.222 billion bushels, which is 26% higher than a year ago. Soybeans usage during the March to May timeframe was 888 million bushels, which was up 33% from a year ago.
The USDA pegged planted wheat acreage at 47.8 million acres, which is a 4% increase from 2017. However, this means it is still the second lowest wheat acreage since 2018. The June 29th USDA report is usually explosive for prices, but this year the decline in prices throughout June mitigated much of that expectation. The threat of Chinese tariffs on soybeans was real and July 6th looms as the deadline date for action from either the United States or China. That took much drama away from the USDA report.
On June 29th, wheat futures were slightly higher than the last Market Trends report. Corn and soybean futures were lower. September 2018 corn futures were at $3.59 a bushel. The August 2018 soybean futures were at $8.63 a bushel. The September 2018 Chicago wheat futures closed at $5.01 a bushel. The Minneapolis September 2018 wheat futures closed at $5.36 a bushel with the September 2018 contract closing at $5.97 a bushel.
The nearby oil futures as of June 29th closed at $74.15/barrel up from the nearby futures of last month of $65.06/barrel. The average price for ethanol on June 29th in the US was $1.63 a US gallon the same as last month.
The Canadian dollar noon rate on June 29th was .7594 US, about the same from the .7589 US reported here June 15th. The Bank of Canada’s lending rate remained at 1.25%.
In Ontario extreme heat is making crops grow rapidly as we head into July. Rainfall across the province has been variable, although there are still some areas that have missed the rains with their crops suffering in the extreme heat. There have been other areas with too much rain, which has delayed some field activities. The winter wheat crop continues to move along with early July heat accelerating crop development. The first week of July usually sees some winter wheat harvested in Essex County. That is likely to happen again in 2018.
Ontario basis levels for corn and soybeans have actually been maintained since June 15th, which is slightly surprising considering the meltdown in futures prices. There is still much old crop corn left in Ontario with the replacement price currently at $5.12 a bushel. The Canadian dollar has been a large part of this, buffeted partly from the tough trade talk between both countries.
Old crop corn basis levels are $.80 to $1.10 over the September 2018 corn futures on June 29th across the province. The new crop corn basis varied from .80 to $1.15 over the December 2018 corn futures. The old crop basis levels for soybeans range from $2.48 cents to $2.55 over the September 2018 futures. New crop soybeans range from $2.43-$2.65 over the November 2018 futures level. The GFO cash wheat prices for delivery to a terminal on June 29th were $6.26 for SWW, $6.19 for HRW, $6.26 for SRW and $5.61 for Red Spring Wheat. On June 29th the US replacement price for corn was $5.12/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/.
The Bottom Line
It is a very tough grain-marketing environment. The USDA report, which often at the end of June is very seminal, lost a little bit of its luster in 2018, based on all the tariff talk the month before and the resultant decline in soybean prices. Sympathy to that move helped draw down corn and wheat prices. The December corn futures have lost approximately $.50 since May 24th. The November soybeans futures have lost approximately $1.60 a bushel.
July 6th is the deadline when US tariffs may apply to Chinese goods and subsequent retaliation from China may take place. The specter of this possibility has helped cause the market carnage. At the same time if there is some type of negotiation where American agricultural commodities avoid tariffs, it should infuse the market back to some extent. Daily market vigilance during these volatile times is key.
At the same time that this is taking effect, the Chinese stock market is feeling the heat as it broke support last week and is currently now at a two-year low. It may be a reflection of these trade problems. To an outside observer, China still has great need for American soybeans this coming fall. It’s difficult to judge what China may do, but finding a way to make any possible tariff on American soybeans come off the table might be prudent while other disputes get negotiated.
As we head into the July 4th weekend and further into July, the weather forecast will be key to crop price movement. Extreme heat is moving in at the present time and this will be bad for pollination. Also too, temperatures above 80°F at night are bad for corn yield as this is been proven through previous years.
Commodity Specific Comments
The corn market has been trading a 180-bushel per acre yield over the last several weeks as prices have retreated. The USDA also pegged corn acres about 1 million more than the trade expected and this has added to the price bearishness. It is more likely the corn should be trading trend line yields, but fresh news is needed to take this market higher.
That fresh news might come in the form of weather forecasts as of July 4th. The north-central corn belt in the United States has seen heavy flooding rains, which has damaged the crop. At the same time extreme heat has moved into the Midwest, which is always a concern as corn moves into pollination. High temperatures at night hurt pollination and have been a precedent in the past for lower yields.
The July 2018 September 2018 corn futures spread is currently -9.25 cents as of June 29th. This is considered bearish. The old crop corn contract is currently priced in the 11th percentile the last five-year price distribution range, which means it is some of the lowest prices over the last eight years.
Soybeans have been the main targets of possible Chinese tariffs, which may come July 6th. With the possibility of tariffs, the funds have remained short soybeans and any strengthening in price seems unlikely, at least in the short term. Volatility will remain in this market until some certainty is defined. It may come in good news on July 6 with no tariffs applied or vice versa.
Rain in August always defines soybean yield and of course we are at least four weeks away from that. Soybeans can be very deceptive on the yield front, but so far weather has been benign, at least until heavy rains and extreme temperatures in the American Midwest. Needless to say, good weather and an end to tariff threats is exactly what soybeans need for the rest of the way.
The July 2018 August 2018 soybean futures spread is -5 cents as of June 29th, which is considered neutral. The nearby old crop contract is currently priced in the 2nd percentile of the past five-year price distribution range and it is close to its lowest point in nine years. Seasonally, soybeans tend to top out in early July, but it looks like that is in the rearview mirror this year.
In July, seasonally wheat tends to turn down and this is again the case in 2018. In the United States USDA increased the amount spring wheat planting, but all wheat acreage remains the second lowest since 2018. In different areas of the world such as the Black Sea area and Europe there have been a lowering of projected wheat production from poor weather. All of this will eventually factor in bringing wheat stocks down.
In Ontario, the 938,000 acres of Ontario wheat is about to be harvested in July and early August. The Ontario crop does look good, with domestic wheat prices continually helped by the relatively low value of the Canadian dollar.
The Bottom Line (cont.)
In Ontario, Statistics Canada projects 3 million acres of soybeans were planted which is down 1.8% from year ago. At the same time Statistics Canada is predicting Ontario farmers planted 2.2 million acres of corn, which is a 1.7% increase compared to 2017. In Québec, farmers actually increased corn acreage by 1.5% at 953,000 acres. Clearly, with the corn acres this high and with productivity increasing annually it is unlikely that there will be any import basis on corn into 2018 and 2019. However, mother nature doesn’t always play nice and weather can always change the production paradigm.
Lost in the tariff dispute between China and the United States and its effect on soybean prices has been similar threats to Canada from the United States. On July 1st Canada imposed tariffs worth $16.6 billion on US goods. These tariffs were a response to the 25% steel tariffs and 10% aluminum tariffs the US government instituted on June 1st. In the past several weeks these threats and different moves by the US government against Canada has been hard on our currency. However, as we all know as Ontario farmers a lower dollar is good for our domestic grain prices.
Coming up in July when we get past the tariff decisions, we’ll have another USDA report where the yield projections will be adjusted from 174 bushels per acre for corn and 48.5 bushels per acre for soybeans. Will the crop get bigger or will it get smaller or will these projections be changed again in August and September? These are some of the questions producers may want to ask themselves as we head into the heat of July. Simply put, even though the market thinks the crop is made, it’s not yet. Mother nature still needs to play nice.
With winter wheat harvest straight ahead, Ontario farmers are surely gearing up for harvest. At the present time in Ontario cash wheat prices are approximately $6 dollars a bushel, new crop corn prices $4.50 a bushel and new crop soybeans $11.23 a bushel. The challenge for producers is to measure the marketing risk ahead. Our low Canadian dollar has once again muffled a significant grain futures price drop. Its time to recalibrate those standing marketing price orders. Pricing volatility is back with a vengeance.
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.