Market Trends Report – February & March 2022
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US and the World
February can be an in between time for grain markets. On the one hand we have got past the January final numbers from the USDA reflecting the fundamentals of supply and demand and production over the last year. On the other hand, March represents a time when we will get the official numbers from USDA on new crop production acres expected for the coming year. Many times, the February USDA report is a quiet one reflecting this transition to a new market day. With large parts of North America frozen, there is not much happening, but on the other hand in South America soybean harvest is ramping up in Brazil and dry weather is affecting the rest of the region. The market has reacted accordingly.
On February the 9th the USDA released their latest WASDE report. It was about as quiet as expected although there was some anticipation of how the USDA would gauge South American crops. At the end of the day the USDA actually decreased Brazilian soybean production down 5 million metric tonnes to 134 million metric tonnes. They also adjusted Argentinean production down 1.5 million metric tonnes to 45 million metric tonnes. This was not quite as much as some analysts had expected. CONAB, the Brazil government agency dropped the Brazilian crop to 125.5 million metric tonnes on February the 10th. Clearly, South American crop estimates have gone unusually lower this winter.
The February USDA report left most of the supply and demand tables domestically unchanged from the January report. For instance, corn production is still at 15.115 billion bushels and corn yield is at 177 bushels per acre. Total use is 14.835 billion bushels, an incredible number reflective of the big demand. The stocks to use ratio for corn came in just under 10.4%. Globally corn stocks were down slightly based on a lower production forecast for both Brazil and Argentina.
The USDA report for soybeans showed a boost in soybean crushing estimates by 25 million bushels, which dropped US ending stocks to 325 million bushels, which was within analysts ranges. The stocks to use ratio for soybeans is at 7.4%. On a global basis soybean production was cut by 8.7 million metric tonnes largely due to the shortfall coming out of South America. World wheat ending stocks were also increased slightly but at the same time American domestic stocks were increased slightly making for somewhat of a wash. American wheat stocks to use ratio is at 33.4%, not unusual for American wheat.
On February 11th, corn, soybeans and wheat futures were higher than the last Market Trends report. March 2022 corn futures were at $6.51 a bushel. The December 2022 corn futures was $5.94. The March 2022 soybean futures were at $13.69 a bushel. The November 2022 soybean futures were at $14.44. The March 2022 Chicago wheat futures closed at $7.97 a bushel. The Minneapolis March 2022 wheat futures closed at $9.69 a bushel with the September 2022 contract closing at $9.31 a bushel.
The nearby oil futures as of February 11th closed at $93.10/barrel up from the nearby futures recorded in the last Market Trends report of $83.82/barrel. The average price for US ethanol on February 14th in the US was $2.24 a US gallon.
The Canadian dollar noon rate on February 11th was .7873 US, lower than the .7971 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
Ontario
In Ontario cash prices for grain are very high. For instance, standing pricing orders for $20/bu. cash soybeans hit in the week of February the 11th, something that we have seen before briefly, but prices remain very close to the $20 level. Corn prices are either approaching $8 or over $8.00 depending on how you sell your corn. New crop soybean prices were over $17.00 a bushel with new crop corn over $7 a bushel in the week of February the 11th.
There will still be considerable challenge to move grain out of Ontario in 2022. Export markets are good for Ontario corn going into Europe, but it’s not lost on anybody that as soon as grain hits the open seas price is a function of the lowest common denominators which is cheap. In a world where the market is demanding more of everything, Ontario grain should be well placed in 2022.
In the deep Southwest of Ontario wheat acres are still a question mark under the ice and snow. This is not the case in eastern Ontario where the crop went in the ground in much better condition. It is always difficult to price this grain when it is in a precarious winter state, especially when you don’t know if it will be there in April. The 750,000 acres of Ontario wheat reportedly planted will likely be much less, possibly closer to 600,000 acres.
Old crop corn basis levels are $1.25 to $1.60 over the March 2022 corn futures on February 11th across the province. The new crop corn basis varied from $1.10 to $1.45 over the December 2022 corn futures. The old crop basis levels for soybeans range from $3.79 cents to $3.90 over the March 2022 futures. New crop soybeans basis levels range from $3.03-$3.43 over the November 2022 futures. Ontario SRW wheat prices are in the $9.20 range with new crop for next year currently fluttering near $9.53 across the province. On Feb 11th the US replacement price for corn was $8.49 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
Are these the prices we’ve always been asking for? Is it time to take yes for an answer? Is it time to take a whole lot of risk off the table? The answers to these questions are probably personal but probably to some extent also related to the profitability of your farms. These futures prices are not at record levels, but we have no idea if the effervescence of 2012 is going to come back. As it is, this grain market wants a lot of everything, almost every commodity is needed in great demand.
The dry conditions in Brazil have always been a concern over the last several weeks. Of course, it is always very difficult to know exactly what conditions may be like thousands of kilometres away on the other side of the world. Clearly though, there have been issues which have reduced the yield in Brazil substantiated by USDA and further substantiated by Conab. Those production problems in Brazil might be priced in at this point as we are at very high price levels.
The geopolitics concerning Ukraine and Russia will continue to affect this market. Chicago wheat was up sharply on February the 11th on these concerns. Keep in mind that Ukraine is the 4th largest exporter of corn and the fifth largest exporter of wheat in the world. It is one thing to have a market of uncertainty based on guns firing but it’s another to understand the aftermath of such war. Will the world boycott Russian wheat after an incursion in Ukraine? Will Ukraine’s exports be limited? How will all this effect prices post conflict? These are just some of the concerns that may crop up.
It goes without saying that many farmers have already cashed in their old crop at higher prices and are looking for new crop opportunities. There is so much risk ahead regarding that scenario and acreage is a big part of that puzzle. We should learn late in February and on the last day of March exactly what the USDA is thinking regarding US acreage in 2022. With December 2022 corn currently at $5.94 and November 2022 soybeans at $14.44 there is much to consider. Will the American predilection to plant more corn continue, leaving the US with lower than needed soybean acres again?
Commodity Specific Comments
Corn
Corn futures markets remain inverted and that will likely remain so for the near future. It is simply a reflection of the bullish nature of the corn market where commercials want the corn in hand, and they want it now. Prices are high in historical terms maybe even near the peak, but of course we will know that after the fact.
The soybean harvest of course is going well in Brazil, and this is significant regarding the second crop of corn which will be planted following the combine harvesters. USDA decreased their corn crop expectations from South America in the February report, but it is still quite early with the corn just being planted. The corn market will depend to some extent on the health of this corn being planted in the ground now.
The March 2022 corn futures contract is currently priced 3/4 of a cent above the May contract which is considered a bullish indication of corn demand. Seasonally corn prices tend to peak in early June and bottom in early October. The nearby active futures contract which is March is currently in the 80th percentile of the past five-year price distribution range.
Soybeans
Soybeans were the market leader last year before they handed the baton to corn in early winter. However, it’s clear as we head toward spring that soybeans need to buy acres from almost anything else whether it is corn, cotton or spring wheat. They are the leader in this sense and must be watched over the next 30 days as we get some indication from the USDA on acreage projections this year.
Keep in mind that soybeans are benefiting from the soybean oil market which is increasingly in demand from people who want renewable fuels. Of course, we know that oil itself has been much higher than usual lately and soybean oil has benefited from that. Watching that as well as the rest of weather conditions in South America will be helpful to determine future price direction.
The March 2022 soybean contract is currently priced three and three quarters cents below the May contract which indicates a neutral position for the demand for soybeans. Seasonally, soybean prices tend to peak in early July and bottom in early October. The nearby March contract is currently priced in the 90th percentile of the past five-year price distribution range.
Wheat
The wheat market is stabilizing and really hasn’t done a lot over the last eight weeks. Yes, we all know the effect that the Ukraine and Russia have had on the wheat market and of course it continues today. Has it been over hyped? When Russia moved on Crimea back in 2014 it was a one- or two-day market event and it might be this way again in the wheat market. However, peace is a much better option for everybody including the wheat market.
In Ontario, the winter weather has been fairly mild compared to past Canadian winters. We all know that the crop in the ground is not as many acres as we would like as conditions were so rough last fall. However, $9.50 wheat and $10 wheat has been there for the taking this winter. Historically speaking, that’s very good and much higher than last year.
The Bottom Line (cont.)
The Canadian dollar has lost ground over the last four weeks but keeping within that 78 and $79 US range. With futures prices gaining significantly over this time that had the effect of widening the basis making it better for Ontario farmers. The Bank of Canada has signaled that the days of status quo interest rate announcements are over and it’s likely that we see higher interest rates in our immediate future and possibly a lot higher. This undoubtedly will be positive news for the Canadian loonie, but much will depend on what the US Federal Reserve does. It is expected that they will also raise interest rates in the near future.
High futures and cash prices obviously put a little bit more pressure on the Ontario farmer to price their grain. For instance, how comfortable are you with going into fall when futures prices might be lower or status quo, but the Canadian dollar might be a lot higher? Of course, on the other hand how about if it’s the opposite? This would be a circular argument at the best of times but there are options here. Standing marketing orders pricing grain at specific flat price levels might aid in your marketing decision as we move throughout 2022.
We move forward measuring quite a few market factors with an eye toward South America going into March. As stated earlier there was a bit of a discrepancy between the USDA estimate of Brazilian soybean production and that of Conab. (133 vs 125.5 MMT) Brazilian basis on soybeans has also been unusually high through harvest time. Is this a reflection of how relatively poorly the Brazilian soybean crop was compared to history or was it more reflection of pent-up Chinese demand gnashing at the teeth to buy soybeans? The answer to that question is probably somewhere in the middle or maybe the answer lies in China. The bottom line is to keep an eye on what’s going on regarding soybean movement out of Brazil as well as Brazilian basis values.
There is no dance band on the Titanic in sight. In other words, we have our challenges on eastern Canadian farms, but these are good prices and relatively good times. I’m saying that, despite the scourge of COVID which still lives with us. Hopefully the supply constraints that have been terribly difficult to manage will not manifest themselves much more especially when it comes to spring planting. The market remains very dynamic for grain despite the geopolitical problems in the Black Sea and all the black Swans we cannot see as of now. As we look ahead daily marketing intelligence will remain key. Sustained profitability looks good for now. There will be many marketing opportunities ahead.
