US and the World
Late summer is a time of accounting for many farmers in Ontario and across the greater North American corn belt. Weather is always a defining issue at this time of year with much of it in the past tense for the crop growing in the field. This year we have the tale of two areas of the corn belt, west and east. In the NW corn belt drought has extended down from Western Canada into the Dakotas, Minnesota and NW Iowa hurting potential crop yields. On the other hand, the Eastern corn belt is looking at record yield, which might extend into Ontario and Quebec. As we head into September, and as corn harvest starts in the southern corn belt, we should get a good idea of how big this 2021 crop really is.
On August 12th USDA released their latest WASDE report. USDA pegged domestic corn production at 174.6 bushels per acre, down from 4.9 bushels per acres from their July report. This put total corn production at 14.75 billion bushels, down 415 million bushels from July and below pre report trade expectations. New crop 2021-22 marketing year corn ending stocks were reduced to 1.242 billion bushels. Old crop corn ending stocks were pegged at 1.117 billion bushels. USDA lowered Brazil corn production to 87 MMT from 93 MMT last month and kept Argentina corn the same at 48.5 MMT.
On the soybean side of the ledger, USDA pegged soybean yield at 50 bushels per acres setting new crop production at 4.339 billion bushels, which was within pre report expectations. Old crop soybean ending stocks were set at 160 million bushels, with new crop ending stocks pegged at 155 million bushels. USDA dropped all wheat production by 50 million bushels down to 1.32 billion bushels. World stocks were dropped significantly down to 279.6 MMT based on lower production in Russia, Canada and the US.
On August 15th, corn and soybean futures were higher than the last Market Trends report. September 2021 corn futures were at $5.68 a bushel. The November 2021 soybean futures were at $13.65 a bushel. The September 2021 Chicago wheat futures closed at $7.62 a bushel. The Minneapolis September 2021 wheat futures closed at $9.53 a bushel with the September 2022 contract closing at $8.05 a bushel.
The nearby oil futures as of August 15th closed at $68.44/barrel down from the nearby futures recorded in the last Market Trends report of $72.07/barrel. The average price for US ethanol on August 15th in the US was $2.31 a US gallon up from the $2.28 recorded in the last Market Trends report.
The Canadian dollar noon rate on August 15th was .7991 US, higher than the .7952 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
The Ontario wheat harvest was a good one, although it was severely challenged by quality issues especially in southwestern Ontario. In Eastern Ontario, it was not as much of a concern. Yields have been above average mostly and producers have been able to benefit from stronger prices. More feed wheat is never good, but this year, higher prices and the relative higher prices of corn meant there were and are good spots for it in Ontario and Quebec feed markets. The early harvest resulted in quite a few double crop soybean acres planted and as of mid-August many of those acres look hopeful.
It’s not a secret that corn looks very good across Ontario. Adequate moisture across the province and good weather has resulted in what may be an Ontario corn crop in the 170 bushel per acre range of higher. We’re not too far away from Illinois and Ohio which are projected at 214 and 193 bushels per acres respectively. This could certainly transfer to Ontario and Quebec and may weigh on basis going forward. Producers are currently scouting fields for tarspot, a new disease for Ontario, first identified last year. Some spraying for it is taking place in the deep southwest of Ontario.
Basis levels have dropped slightly for soybeans but been maintained for corn except in Eastern Ontario where they have dropped since the last Market Trends report. It’s likely with the big corn crop in the offing basis will come under pressure, depending on how we get to the finish line. Soybeans might be in the same situation, except for the fact they are much more dependent on the Canadian dollar, which has been fluttering just below the 80 cent US level for the last three weeks.
Old crop corn basis levels are $2.90 to $3.00 over the September 2021 corn futures on August 15th across the province. The new crop corn basis varied from $1.10 to $1.50 over the December 2021 corn futures. The old crop basis levels for soybeans range from $3.90 cents to $4.24 over the November 2021 futures. New crop soybeans basis levels range from $2.80-$3.05. Ontario SRW wheat prices are in flux the spot price in SW Ontario approximately $8.47. On August 15th the US replacement price for corn was $9.11 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
Markets are still bullish, despite the big crops that are in the offing. Corn and soybean futures spreads tells us that. It’s also a function of demand, and a function of where prices have been over the last few months. Profitable opportunities are here, and the August 12th report reinforced where we are now. Weather is still a big issue over the next month, but harvest will be starting in the southern corn belt. Have those standing marketing orders ready.
As it is, price action may also be affected by monetary and fiscal policy around the world. We all know how the value of the American dollar is important to how grain moves. Interest rate changes can also reinforce how the American dollars move. This has been accentuated over the last 18 month by huge infusions of capital into world economies partly to fight Covid and stimulate the economy. With this, there is evidence of inflationary pressure starting to emerge. This will have the effect of keeping prices higher, but it will also manifest itself in higher input prices affecting crop profitability.
Should we be ready for a September surprise in the next USDA report? Of course, nobody really knows, but a surprise in yield estimates the upside might have a big negative effect on price. Sure, these are bullish markets, and the funds are long in many grain markets. However, they will exit quickly if there is a turn. As of August 15th, non-commercials are adding to their long position. However, violent prices action is still a very real possibility depending on how the winds blow.
China still holds the cards regarding robust future demand. Even though the USDA lowered Chinese corn demand by 1 MMT, Brazil’s reduced crop should put US interests in a good position. The phase 1 and phase 2 portions of the China US agreement on trade still hasn’t been met, which should help the possibility of corn import commitments going forward. Hopefully, Covid19 doesn’t get in the way, because the Delta variant is spreading throughout China. 18 months into the pandemic, it continues.
Commodity Specific Comments
The August 12th report pegged corn at 174.6 bushels per acre, quite a bit lower drop than the trade had expected. Keep abreast of this number as a benchmark moving forward, because a lower number moving into September might cause fireworks as we need that yield to satisfy corn demand this year. The September report will include actual field sampling vs survey and satellite data, which should give us a better idea of actual yield.
Corn demand is expected to be strong this year and that includes exports. However, the corn crop is not as good in the northwest part of the US corn belt and China usually likes to pull corn into the Pacific Northwest ports from there. Expect basis to be higher in the west vs in the east and this surely might affect movement of US corn in the China direction. It surely might also affect basis levels in Ontario and Quebec.
The December 2021 corn futures contract is currently 6.5 cents below the March contract, which is considered bearish for new crop corn. Seasonally, corn prices tend to peak in early June and bottom in early October. The September corn futures contract is currently in the 62nd percentile of the past five-year price distribution range.
The August 12th USDA report was bullish for corn, but not so much for soybeans. The 50 bushel per acre soybean yield was expected. In fact, it’s the tale of two soybean crops, west vs East. North Dakota yields were projected at 24 bpa, South Dakota at 39 bpa and Minnesota at 43 bpa tempering US national yield. We need all of that going forward to satisfy demand.
That will surely depend on August rains, which so far have been better than expected. The August 12th projections were made using survey and satellite data from August 1st and like corn, the next USDA report should give us a better indication of yield. The USDA lowered Chinese soybean imports 1 MMT to 101 MMT, which isn’t good, but still represents a huge presence within the soybean complex.
The November soybean contract is currently 3.75 cents above the March contract, which is a bullish indication of new crop prices. Seasonally, soybean prices tend to peak in early July, but bottom in early October. The nearby soybean contract is currently in the 65th percentile of the past five-year distribution range.
Demand has been incredibly good for wheat compared to more normal market action as worldwide events have come together to limit wheat production. Lower wheat production has taken place in Russia, Canada and even in places like Brazil where frost had an effect. 60% of world wheat stocks are held by China and India, who have large domestic markets and don’t export. This makes available wheat stocks much tighter than one might at first realize.
This has been to the benefit of Ontario wheat producers who have benefited from higher futures prices and a Canadian dollar fluttering just under 80 cents US. Wheat prices in the $8 range this year and for next year are part of the equation going forward. Soon, producers will be planning how much wheat to plant in Ontario, something that is usually impacted greatly by September and October weather.
The Bottom Line (cont.)
The Canadian dollar continues to flutter below 80 cents US, down about 4 cent since June 1st, which has created better cash price opportunities for farmers in Ontario. 4 cents is a big move for the relationship between the Ontario price of soybeans and wheat. It represents that classic marketing problem of farmers balancing futures prices vs the movement of the Canadian dollar. In the past, Ontario farmers have chosen flat prices to balance this concern. 2021 might be one of those years. Having standing marketing pricing orders ready always help with that.
Soybeans finished up over 28 cents in the week of August 15th refusing to shrug off its bullish tendencies. At the present time, China has tapped out Brazil for supplies, to such an extent that US FOB Gulf soybeans are now cheaper than in Paranagua, Brazil. Soybeans at China’s Dalian exchange are approximately $18.65 making US soybeans some of the cheapest in the world. Rain is still important to fill soybeans pods, but, as it is now, it’s going to be difficult for the US to have enough soybeans to satisfy demand in 2021/22.
With the Ontario wheat harvest in the rear-view mirror, it would be easy to forget about it until next spring when it comes out of dormancy. However, unlike other years, the fundamentals of wheat are quite changed. As stated earlier, the crop is down in Russia and Canada, but world ending stocks were down 112.62 MMT. American wheat stocks are also down to 627 million bushels putting their stocks to use ratio of 30.5%, which might seem large, but it’s down significantly from two years ago. Wheat exports from exporting countries are down. Futures prices are much higher than usual. Forgetting about pricing the Ontario crop until spring needs some scrutiny. The fundamentals of the wheat complex have changed so much.
Late August and earlier September is a time when you can recognize a slight chill in the early evening, which does serve as a signal that fall is just around the corner. Soon, we’ll see soybean ripening turn green fields into a cacophony of different autumn colours. At the present time, it looks like a big Ontario crop ahead. Prices are profitable. Standing orders need to be put in place. Daily market intelligence will remain key. A year ago, our present-day risk management possibilities could hardly be imagined. That’s how things change. The important thing is to recalibrate and change with shifting market conditions. There will be many marketing opportunities ahead.