US and the World
It is getting close to go time. Across the American mid-west farmers are beginning to plant corn. 4% of US corn had been planted as of April 11th. It is a time of year when hope springs eternal for good planting conditions and markets often react to what may or may not be happening in the fields. The western US has had drought conditions, and this has caused some nervousness in markets. However, as all farmers know, a bit of drought at planting time is good for getting that crop in the ground. It’s a full court press for acres this year and spring conditions will surely conspire to how that all works out.
On April 9th, the USDA released their latest WASDE report. This report is usually less hyped versus the bigger March 31st report and this year was no different. The USDA cut its corn ending stocks number by 150 million bushels down to 1.352 billion bushels. This was due to a 75 million bushels rise in US exports; a 50 million bushel increase in feed demand and a 24 million bushel rise in ethanol demand. There was a 4.4 MMT increase in world corn demand. Chinese corn imports were factored in at 24 MMMT, which was unusual, as the Americans have shipped about that much, and China has bought Ukrainian corn as well. Needless to say, it lent credence to the idea that China will be in the market for more corn.
USDA kept US soybean ending stocks at 120 million bushels from their March USDA report. On the global front, USDA showed rising ending stocks of 3.2 MMMT up to 86.9 MMT. The Brazil soybean crop was raised 2 MMT to 136 MMT, while Chinese soybean demand was trimmed back by 2 MMT. At the same time, US wheat stocks went up 16 million bushels to 852 million. The Chinese wheat demand estimate was increased by 5 MMT. The 2020-21 world ending stocks of 295.52 MMT is now below where it was a year ago. Wheat is being fed more in rations in both China, the United States and other places in the world.
On April 16th, corn, soybean and wheat futures were higher than the last Market Trends report. May 2021 corn futures were at $5.85 a bushel. The May 2021 soybean futures were at $14.33 a bushel. The May 2021 Chicago wheat futures closed at $6.52 a bushel. The Minneapolis May 2021 wheat futures closed at $6.67 a bushel with the September 2021 contract closing at $6.80 a bushel.
The nearby oil futures as of April 16th closed at $63.13/barrel up from the nearby futures recorded in the last Market Trends report of $61.45/barrel. The average price for US ethanol on April 16th in the US was $2.09 a US gallon up from the $1.90 recorded in the last Market Trends report.
The Canadian dollar noon rate on April 16th was .7998 US, higher than the .7959 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
There is some corn already planted in the deep southwest of Ontario as well as quite a few sugar beets. However, the warm March served up to set our appetite to get in the fields, but the calendar date held us back. If late April gives us good weather, expect planting to be in full swing across Ontario.
Corn basis levels have improved slightly possibly a reflection of higher US basis levels. New crop corn basis has also improved from the last Market Trends report. Corn is moving all across Eastern Canada, some of it replaced by US corn. Much corn earlier had been exported out to the UK and EU, now this corn has to be replaced. The soybean basis has been maintained largely reflective of the steady Canadian dollar just under 80 cents US.
Keep in mind basis levels are higher historically based on higher grain futures prices. Grain futures prices were higher in 2012, but not necessarily Ontario cash prices. At that time, our Canadian dollar was at par or over. Good cash prices are always relative to futures, but sometimes when the dollar is relatively low, cash prices are that much higher based on those two factors coming together. That cannot be lost in this current market environment. $15.50 new crop soybeans and $6.12 new crop corn prices are a product of that.
Old crop corn basis levels are $1.50 to $1.60 over the May 2021 corn futures on April 16th across the province. The new crop corn basis varied from $1.00 to $1.45 over the December 2021 corn futures. The old crop basis levels for soybeans range from $3.66 cents to $3.74 over the May 2021 futures. New crop soybeans basis levels range from $2.77-$2.87. Ontario SRW wheat prices are in the $7.92 range on April 16th, with new crop values in the $7.55 range. On April 16th the US replacement price for corn was $7.95 /bushel. You can access all of these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
Grain prices are good, but there is so much going on. In many ways how we got here is in the past tense, Chinese demand, spurred on by shorter North American crops last year tempered with Covid. Looking ahead, we need to measure just where we are on the risk management spectrum and our sensitivity to volatility. Profitable prices are here, contracts have surely been signed for new crop. Where do we go from here?
Clearly, many farmers are waiting for the other shoe to drop, whether that means another leg up or a big leg down. It’s really no secret that soybeans are about $5 higher than they were a year ago. Looking back, it’s hard to imagine how that could be. Looking forward, there are a several factors that have to come together to maintain the status quo on prices. Weather and acres in the Northern Hemisphere is a big part of that. China is very important too.
Spring and early summer weather will be very important, not only to get the crop planted, but also to determine yield. Past years have told us how fast the crop can be planted. Knowing that, as we look out toward July 1st, where will we be? Will the soybean and corn acres be increased from their March 31st estimates. How does the crop look going into July? If it looks good, the price pressure should ease. If widespread and “hot and dry” happen all bets are off. Usually by June/July we’ll have some ideas about supply.
Then there is China. Will that Chinese demand for agricultural commodities be as robust as last year tapping out Brazilian soybean supply? Take their hog herd for example. According to the Chinese Bureau of Statistics, their first quarter hog production is up 31.9% over last year. Their overall hog numbers are 415.95 million hogs. The United States on the other hand has 80 million hogs. Think of that for a minute. We always hear about ASF when it comes to Chinese hogs. However, the truth is somewhere in the ether. Given that huge hog number, and with Chinese economic growth surging post Covid, it points to even bigger buying of the world’s agricultural commodities. Corn, soybeans, wheat, you name it, demand from China should remain strong. That is, depending on whether some geopolitical winds come along to temper those sails.
Commodity Specific Comments
Corn futures have been gaining lately, even eroding the soybean corn ratio to its favour. Part of the stimulus has been dryness with the Safrinha crop in Brazil, which could represent 4.3 billion bushels of corn in a year where corn supply out of the United States is short. Of course, all “weather markets” are fickle, and it will continue that way into pollination.
Corn basis is strong in the United States, which is partially reflected here in Ontario. Of course, as we move into later spring and early summer, this is expected to be more volatile as supply grows even shorter. Inverted futures can cause some unusual things. Hitting an early market for corn in September might be a goal of some and this year that might pay big dividends. Crop weather will hold that key.
The May 2021 corn futures contract is currently priced over 11 cents above the July contract, indicating very bullish demand. Seasonally corn prices tend to peak in early June and bottom out in October. The nearby spot contracts is currently in the 95-percentile compared to the last five-year price distribution range.
The story on the soybeans is about the same as it’s been, which is a good one. May soybeans closing at $14.33 on April 16th is within about the same range since January. Is there a lid on soybeans prices? Well, keep in mind, China is getting a lot of soybeans from Brazil now, who are completing another record harvest. Of course, there is a season of production risk ahead, which will add to the volatility.
Basis is also wild in soybeans as domestic US supplies are less and less. On top of this, the soybean oil market has been hot of late as world vegetable oil markets have been surging. Crush margins are good, but of course the problem is sourcing soybeans. It calls into question the USDA’s predicted ending stocks of 120 million bushels.
The May 2021 soybean contract is currently priced over 11 cents above the July, which is quite bullish. Seasonally, soybean prices tend to peak in early July and bottom in October. The nearby spot soybean contract is in the 96th percentile, compared to the past five-year price range.
Is there a drought in US wheat country? Well, with the talk of drought in the western plains, you’d think so, but so far wheat prices haven’t really reflected much of that. There are also onerous US wheat stocks. However, wheat prices have benefited recently from a freeze in Western Europe. As always, wheat is grown everywhere and other areas like the Black Sea are poised to fill any gap.
In Ontario, the 1.12 million acres of wheat looks quite good with nitrogen side dressing either done or ongoing across the province. Prices have rebounded lately for SRW reflecting some of the issues in the United States. The Canadian dollar just below 80 cents US continues to be a stimulus for Ontario wheat prices. Prices as of April 16th are approximately $7.50 for SRW off the combine this July.
The Bottom Line (cont.)
The Canadian dollar has refused to dip below 79 cents US almost in some dogged attempt to get back over 80 cents US. It’s a complete play on where the US dollar is going. Over the last two weeks, the US dollar has weakened slightly causing the stuttering loonie to keep its 80-cent hope alive. Keep in mind, the Canadian dollar is thinly traded compared to the US dollar or the Euro. It’s top of mind to Ontario farmers, as it should be because its fluctuation has a huge effect on Ontario soybean and wheat prices.
The Ontario cash market needs to be watched closely per usual. Basis does make a difference, even more so at these elevated grain futures levels. Keep in mind that grain futures are inverted heavily on the old crop side. This means that nearer futures months are higher than futures months farther out. On the new crop side, soybean futures are inverted, corn futures not so much, but with very small carries. It reflects the bullish market structure we see for both corn and soybeans. Watching these futures spreads always gives clues for where the market is going. With speculative limits now increased by 50% at the CME, funds can now add fireworks into this equation. It becomes somewhat of a firecracker to predict.
If all goes to script, there wouldn’t be any drama. We certainly will have drama in these markets. At the present time the Brazilian Safrinha corn crop, which was planted late, is having a battle with drought. At the same time the Brazil soybean harvest is almost complete. The shipping route from Brazil ports to China are busy. It’s resulted in elevated price levels, which are not lost on the world. In 2012, we found out the world loved growing $8 corn. We’re not there yet and we might not get there, but keep in mind, how these prices will impact the incentive to produce grain. Across the Northern Hemisphere in far off places like the Ukraine, Western Europe and Asia production will ramp up. We are in that zone.
It is in that zone where Ontario farmers are operating. Both old crop prices and new crop opportunities are higher than we’ve become accustomed to over the last 8 years. The challenge for Ontario farmers is daily market intelligence, which means know the weather patterns, know the grain futures spreads, know the Canadian and US dollar value and know cash prices daily. Making decision for more profitable farms are here, but nobody knows the future. All we can do is immerse ourselves in market factors and make the best decisions for our farms. Risk management never gets old. There will be many grain marketing opportunities ahead.