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Market Trends Report – December & January

US and the World

     2020 has been quite year.  We hardly need to go over it, as we’re still living within a world-wide pandemic which was declared last March.  At the time the grain complex partially fractured on the news as supply lines were interrupted and end users withdrew from the market.  Over time, much of this was corrected, or at least corrected as much as possible with a devastating second wave of Covid 19 now manifesting itself on the market.  Little did we know the market would rally late in the year.  As combines rolled into October and November, we saw some of the highest grain prices since 2013.  Essentially, grain prices were high when they should have been low.  Covid 19 was part of that puzzle and as we into 2021 it continues.  With a Vaccine now a reality, the grain world of 2021 might be a bit more traditional. 

     On December 10th the USDA released their latest crop production and World Agricultural Demand and Supply report (WASDE).  USDA put out no surprises in corn as the December report offered no US changes from their November report.  US corn production is still set to come in at 14.507 billion bushels, based on a national yield of 175.8 bushel per acre.  This is based on a harvested acreage figure of 82.5 million acres.  Total ending stocks for 2020/21 are set at 1.702l billion bushels.  Corn export demand is forecast to be record at 2.65 billion. 

     On the soybean side of the ledger USDA kept the status quo from November with the exception of a 15-million-bushel decline in soybean ending stocks to 175 million bushels.  If it comes to fruition it will be the lowest since 2013-14.  This was largely due to an increase in US domestic crush.  Soybean production remains at 4.17 billion bushels with a national average yield remaining at 50.7 bushels per acre.  USDA lowered Argentinian production to 50 MMT and maintained Brazil’s soybean production at 133 MMT.  US Wheat production remained unchanged from the November report.

       On December 11th, wheat, soybeans and corn futures were higher than the last Market Trends report.  December 2020 corn futures were at $4.23 a bushel.  The Jan 2020 soybean futures were at $11.60 a bushel.  The December 2020 Chicago wheat futures closed at $6.14 a bushel. The Minneapolis March 2021 wheat futures closed at $5.70 a bushel with the September 2021 contract closing at $5.93 a bushel.

     The nearby oil futures as of December 11th closed at $46.57/barrel down from the nearby futures of recorded in the last Market Trends report of $40.13/barrel. The average price for US ethanol on December 11th in the US was $1.47 a US gallon down from the $1.63 recorded in the last Market Trends report.

     The Canadian dollar noon rate on December 11th was .7831 US, higher than the .7613 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

    For the most part harvest is over across Ontario.  Good weather in November and decent weather in December has helped put this crop into the bin.  VOM in corn hasn’t been a widespread issue this year, although there was some evidence of it along the Lake Erie shore in Essex and Chatham Kent.  Good yields were evident across Ontario with regional variations reflecting the long year.  Good yields and good prices don’t often happen at the same time, but for all its problems, 2020 seems to have given Ontario farmers that gift.

     US basis levels for both corn and soybeans in Ontario are higher historically than they usually are, which has helped.  In Canadian dollar terms, it’s been more of a mixed bag as the loonie has risen a couple cents US from the last Market Trends report.  Soybeans briefly were above $15 only to settle back on futures erosion and a higher dollar.  A 78 cent US dollar is still a stimulus for Ontario cash prices.

    Ontario demand for both corn and soybeans has been dynamic. For instance, corn is being exported to the UK from Hamilton and other ports into Quebec taking advantage of Canadian free trade under CETA.  At the same time, corn from the US has been imported into both Ontario and Quebec, to satisfy some end users. At first glance, that doesn’t make sense, but over a long timeline, commitments are made and fulfilled.  As it is, farmers need to keep abreast of the movement of cash grain through cash prices on the ground.  Exporting corn will likely continue in spring.  A 15% renewed ethanol mandate in Ontario will surely help within this marketplace.

    Old crop corn basis levels are $1.25 to $1.42 over the March 2021 corn futures on December 11th across the province.  The new crop corn basis varied from $0.85 to $1.25 over the December 2021 corn futures.  The old crop basis levels for soybeans range from $2.78 cents to $2.93 over the January 2021 futures.  New crop soybeans basis levels range from $2.29-$2.50.  Ontario SRW wheat prices are in the $7.14 range on December 11th, new crop values slightly lower.   On December 11th the US replacement price for corn was $6.05/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 now.  We got here with our eyes wide open during one of the most tumultuous years ever.  Global pandemics are world changing events, the last of which was over 100 years ago.  The price rally was difficult to see last summer but a combination of supply and demand factors came together led by soybeans to push the market much higher.  Is it over?  Nobody knows, but as we forge ahead into 2021, the year 2020 should teach us a marketing lesson.  As dark as markets were last summer, sometimes it’s always darkest before the dawn.  2021 will be another new day.

     We’re into a weather market heading into January.  The La Nina weather phenomena continues to make nervous a market where Brazilian soybeans supplies have become taken for granted.  CONAB, the Brazilian crop agency is saying 126-128 MMT of soybeans are being produced in Brazil.  USDA continues to say 133 MMT.  Simply put, weather is exacting a price on the Brazilian crop and it’s difficult to determine by just how much.  Some areas are good, some not so good, but regardless, it’s still critical to our soybean futures market.  Daily market intelligence into crop weather will remain important to price direction.

     Keep in mind, it’s not only soybeans but corn too in Brazil that need to be watched.  Much of Brazil soybean planting was delayed, which not only will have an effect on Brazilian soybean yield, but also on some Safrinha corn being planted.  Brazil corn acres and yield will be impacting our corn market.  As we look ahead, this is manifesting itself in the background. 

     Global wheat ending stocks were cut 3.95 MMT in the December 10th WASDE report.  At first glance, this might make you yawn, but it came after the trade was expecting an increase.  Wheat stocks are still large, but US stocks continue to shrink.  Wheat is divided up into different classes and not all classes are the same, with supplies divided up across the world.  For instance, China holds approximately 51% if world wheat stocks.  Or do they?  It’s always an instance of conjecture for the trade.  However, it’s not exported which makes a decline in global wheat stocks a bigger issue.  It’s part of the reason Chicago wheat futures are above $6 a bushel.  This needs watching as 2021 dawns. 

Commodity Specific Comments

Corn

     US corn exports are hot, if realized will be a record of 2.65 billion.  As everybody knows, China has committed to buying quite a bit of American corn.  It has resulted in March corn at $4.23 and Dec 2021 corn at $4.12, which are good prices, but to be maintained, Chinese buying needs to continue and a weak US dollar helps. 

    Ethanol might help too.  In January of 2020, US ethanol production topped out at 1.081 million barrels/day but fell to a low of 537,000/day in April as the Covid lockout intensified.  We’ve worked our way back to 991,000/day as of December 4th.  Even though we’re into a brutal second wave, with a vaccine, you can hope for increased ethanol usage to rise.

     The March 2021 corn futures contract is currently priced 4.75 cents below the July contract indicating a neutral to bullish indication of demand.  Seasonally, corn prices tend to top in early to mid-June, but 2020 broke the mould on that.  Watch for it in 2021.  The nearby spot contract is in the 74th percentile of the past five-year price distribution range. 

Soybeans

      How many soybeans are out there?  It’s hard to say, but the US ending stocks to use ratio is down to 3.9%, which is the lowest in 20 years.  It almost makes those 1 billion bushel carry outs from 2019 seem nostalgic! In fact, it’s hard to believe, but that is how this market has changed relatively quickly.  It should be well supported because of this thru the winter.

     As we move into 2021, you have to ask yourself how many soybeans are you planting next year?  As you might surmise, higher soybean prices have shifted the focus for more soybean acres next year vs spring wheat, cotton and even corn.   With 83.1 million acre of soybeans planted last year, do we approach 89-90 million acres that we had back in 2018/19?  Unless things change, the switch will be on.

      The January 2021 soybean contract is currently 5.5 cents below the March prices, which is still neutral to bullish.  Seasonally, soybean prices tend to peak in July and bottom in October.  Obviously 2020 was an anomaly to that rule.  The nearby January contract is currently in the 74th percentile of the past 5-year price distribution range.

Wheat

   It’s been exciting in wheat lately as President Putin has threatened to impose a grain export quota and export tax for the period of Feb 15-30th to help stem the price of bread.  This would be significant as Russia has put a lot of wheat into international markets.  22% of Russian wheat is in poor conditions now.  The market is a little bit more nervous than usual, because American acres are down.  Still, global stocks are onerous.  I think we all know the drill in wheat, it has at least nine lives. 

      In Ontario, lots of wheat was put into the ground this fall with quite good conditions.  Upwards of 1 million acres maybe planted.   $7 plus wheat contracts have been available for several weeks and a good starting point for many Ontario wheat producers.

The Bottom Line (cont.)

     The December WASDE report was low on drama, mirroring much of the same numbers that came in their November report.  There was some thought the soybean export number would be adjusted based on the torrid pace of soybean exports, but it was not.  Needless to say, the next USDA report day will be January 12th, 2021 and it should provide near final clarity on production, grain stocks and yield.  It might not be what it used to be but expect it to be a market mover on January 12th.  However, keep in mind, its “near final” as the USDA never loses the opportunity to change the numbers months and even years later at their convenience.

     It’s no secret that the Canadian dollar continues its rather aggressive move toward 80 cents US.  Moving 2 cents between November and December is significant and is based solely on the American dollar weakening.  That is always the litmus test, as the Canadian dollar moves in an inverse fashion to the US dollar.  There was no change in interest rates from the Bank of Canada.  The simple foreign exchange calculation aggressively shaves our Ontario wheat and soybean basis when the loonie gains in value.  Corn is a completely different animal, much more attune to US replacement price, but even that is changing with the relatively new preferential access export market into the EU and UK.

     As the year comes to an end and 2021 dawns, there is a certain sense of moving on from this crop year.  In Ontario prices were extremely high at harvest time compared to planting time.  Inverse futures spreads were screaming at farmers to sell their grain and a vast amount of old crop was sold.  Needless to say, the old crop market is not over, and the new crop market continues to boil.  There is still much relevance for daily market intelligence.  CONAB disagrees with USDA on Brazilian crop conditions.  There are a myriad of other geopolitical conditions that are manifesting themselves.  Market factors affecting grain prices continue to be dynamic.

    The most dynamic of all might be the release of the Covid 19 vaccine, which was released around the western world in mid-December.  Many scientists say this will be the game changer to break the pandemic.  Breaking the pandemic means getting back to a more normal pattern, not only for mankind but also our markets.  It should mean, better, larger and more stable demand.  The challenge for Ontario farmers is to continue to stay safe, while managing those marketing plans.  This world is changing again.  With that, there will be many grain marketing opportunities ahead. 

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