Market Trends Report – February & March 2023
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US and the World
With almost half of February behind us it will soon be time to blow the dust off the corn planters. Having said that, there is still at least about five weeks of winter left if we believe the Groundhog. February is a time of transition in the grain markets as a South American crop continues its March toward export markets. During this time, it is much like August in North America with every weather forecast affecting the crops growing in southern hemisphere fields. The grain world continually shifts and flexes as these crops continue to grow and to get to market. Back in North America, farmers continue to hone their marketing plans to catch the best grain pricing opportunities available.
On February the 8th the USDA released their latest WASDE report. The February report is usually not a game changer sandwiched between the important final numbers January report and the late March report on prospective plantings. This report followed that pattern. The USDA kept the corn domestic production at 13.73 billion bushels but left exports unchanged. Ethanol usage was actually decreased 25 million bushels which resulted in US domestic corn ending stocks being lowered by the same amount to 1.267 billion bushels. The Brazilian corn crop was maintained at 125 MMT, but Argentina was lowered 5 MMT to 47 MMT.
The USDA maintained American soybean production at 4.276 billion bushels, but they increased soybean ending stocks by 15 million bushels to 225 million bushels. This was because of a 15-million-bushel decline in the estimates of US soybean crush. Globally, the USDA decreased ending stocks by 1.5 MMT, while maintaining the Brazilian production at 153 MMT. the Argentinian soybean crop continues to be trimmed by drought with the USDA putting it at 41 MMT, down 4.5 MMT from last month. On the wheat front there was not much news as the USDA increasing world wheat production slightly. US domestic wheat ending stocks were also increased but they were below pre report estimates.
On February 10th, corn, soybeans and wheat futures were higher than the last Market Trends report. March 2023 corn futures were at $6.80 a bushel. The December 2023 corn futures contracts sits at $5.96. The May 2023 soybean futures were at $15.33 a bushel. The November 2023 soybean futures stood at $13.78. The March 2023 Chicago wheat futures closed at $7.86 a bushel. The Minneapolis March 23 wheat futures closed at $9.35 a bushel with the Sept 2023 contract closing at $9.04 a bushel.
The nearby oil futures as of February 10th closed at $79.72/barrel down from the nearby futures recorded in the last Market Trends report of $79.86/barrel. The average price for US ethanol in the US was $2.35 a US gallon, down from the $2.38 last month.
The Canadian dollar noon rate on February 9th, 2023, was .7484 US, up versus the .7468 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate increased to 4.5%.
In Ontario it has been a mild winter so far and as of the mid-February much snow has disappeared across southwestern Ontario with mild temperatures predicted. The dormant wheat crop has not had significant challenges with regard to ice and a lack of snow cover. This is significant as we move forward as the 1.3-million-acre record Ontario wheat acreage is looking toward a promising future. This should weigh on basis values as we move into the warmer months.
Ontario basis levels have decreased slightly for corn and more so for soybeans over the last month. This is a reflection to some extent of Canadian dollar values but also of the big crop that we got last year especially in eastern Ontario where basis values are lower than usual. It will always continue to be a challenge for Ontario farmers to balance that basis risk with the volatility in futures prices.
Our Ontario basis values will continue to be a reflection of the value of the Canadian dollar which continues to meander in the 74 and 75 cent US range. This is almost become a default over the last several months, but at a certain point value of the Canadian dollar will get out of this range one way or the other. It’s important for farmers to gauge this always and have standard pricing orders set at your local elevator or processor.
Old crop corn basis levels are $1.00 to $1.40 over the March 2023 corn futures on Feb 10th across the province. The new crop corn basis varied from $1.15 to $1.40 over the December 2023 corn futures. The old crop basis levels for soybeans range from $4.65 cents to $4.80 over the May 2023 futures. New crop soybeans basis levels range from $3.83-$4.05 over the November 2023 futures. Ontario SRW wheat prices are in the $9.25 range. On February 10th the US replacement price for corn was $9.29/bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
As we look ahead into 2023 should we be acting more defensively with our grain marketing? In other words, with the prices, we have now are still at historically very good levels. However, there was 210 million bushels of corn less demand in the February USDA report versus the January USDA report. To some extent this is proof of the old axiom that high prices cure high prices. In other words, at the $7 corn level corn demand backed off. At the $6.80/bu level for March and sub $6 for new crop can we expect demand to come back? At this point, it seems unlikely.
Lower prices in our current agricultural economic environment means farmers might be taking more of a haircut on profits in 2023 versus 2022 and 2021. The same could be said for soybeans except for the fact that there are just so many unusual market variables that could upset that thinking. For instance, as I said last month, the war in Ukraine represents such a wild card there are always a possibility for vertical price increases like we saw last summer.
That last point remains key. There is nothing like the element of surprise that can create unusual market volatility. The war did that last year in 2022. February 10th grain prices were up big on that day, which was dominated by Russian missiles being shot into Ukraine and straying into Romania. This will remain one of the biggest wildcards in our global grain market and it cannot be negated. Grain trading algorithms might have it dialed in but, tell that to the Ukrainians and the Russians.
Despite the many reasons that we might be seeing lower returns in 2023, you cannot argue with the inverse in the futures market for both corn and soybeans. (An inverse is when nearby months are higher than farther out months) This means that the market would much rather have your corn and soybeans now versus later in the year. It is true that our new crop price is based on November soybeans and December corn are lower, but that will be a function of all our risk ahead. For anybody holding old crop at this point the futures market isn’t really providing a reason to hold on. It wants your grain now and is offering premiums over the months ahead.
Commodity Specific Comments
The US is once again not the leading corn exporter in the world. For the first time since 2012/2013 Brazil exports will exceed the US for this coming year with a large portion of that going to China. In many ways, it is a natural progression of the agricultural expansion in Brazil. Obviously, with corn yields much higher than soybean yields the infrastructure will need to be developed further to make this efficient now and into the future.
While Brazilian corn production is set to increase, the drought in Argentina has taken down their corn production. The 42.5 MMT of Argentinian corn set to be produced it’s the lowest in five years. At the present time only about 20% of the corn crop there is rated good to excellent.
The March 2023 corn futures contract is currently priced 2 1/4 cents above the May 2023 contract which is a bullish indication of commercial demand. Seasonally, corn prices tend to reach their peaks in early to mid-June and bottom out in early October. The nearby March corn futures contract is currently in the 72nd percentile of the past five-year price distribution range.
With the large soybean crop coming off in Brazil we have all been waiting for the other shoe to drop with regard to price. However, with the May 2023 soybean contract closing at $15.33 and the November 2023 soybean contract closing at $13.78 on February 10th, these are still very good prices. Historically, one might be racing to contract these levels.
At the same time soybean demand is very strong. For instance, the combined March futures values for both soybean meal and soybean oil as of February 10th exceeded the cost of March soybeans by $3.33 a bushel. This is one of the most profitable crushed incentives ever seen. It should remain a stimulus for US domestic soybean prices going forward.
The March 2023 soybean contract is currently priced 9 cents above the May 2023 soybean contract which is another bullish signal of commercial demand. Seasonally, soybeans tend to peak in early July and bottom out in early October. The nearby March soybean futures contract is currently in the 76th percentile of the past five-year distribution range.
Wheat futures prices have shown a little bit more resilience lately as we have the lowest wheat stocks in about 15 years. There has also been dryness in the American southwest which is big wheat country. At the same time our Australian friends have a good crop down under, which means more of the same. That is, wheat is grown almost everywhere, and global shortfalls get filled rather quickly. The big wild card of course continues to be the Russian missiles flying over Ukraine.
In Ontario wheat prices are lower than they were a month ago. It’s almost hard to imagine that a new crop prices for wheat which are at approximately $9.20 a bushel, are lower than last year. Keep in mind that what happened last year was directly related to the hot war in Russia and Ukraine. The only way to capture $15 wheat in Ontario last year was on standing pricing orders sitting ready to hit. With the hot war continuing, those standing wheat pricing orders need to be placed.
The Bottom Line (cont.)
The Bank of Canada raised their interest rate to 4.5% in their last decision. Generally speaking, in the past this would have always been bullish toward the value of the Canadian dollar. However, the US Federal Reserve is doing the same type of interest rate hike and we have not seen a corresponding increase in the value of the Canadian dollar. As always, the value of the Canadian dollar is inverse to what happens to the US dollar. With Canadian employment numbers being very good over the last quarter it will be difficult for the Bank of Canada to stop their rate hikes. However, bank officials have said that’s all for now. Ontario grain prices are somewhat hostage to those decisions.
It has been very consistent over the last two years to mention geopolitical concerns as an ever-present variable affecting our grain prices. We all know what the war in Ukraine and Russia has done. However, we are not used to military aircraft shooting down objects out of the sky across Canada and the United States, but that is exactly what has happened in the month of February. This represents something new, which eventually could affect grain prices going forward. Nobody wants a wider conflict than we have now in the Black Sea.
Weather will continue to be the proverbial wild card for grain markets. Looking ahead, it looks like we are transitioning out of a La Nina into a El Nino over the next several months. This usually results in overall good corn and soybean yields in the United States and by extension in Ontario. As of now this winter La Nina is still in control, only the third time in the last 75 years we have seen this. Surely this will create a few unexpected weather anomalies in 2023.
As we look ahead into March, we should be getting some preliminary numbers on 2023 US corn and soybean acres from the USDA. Also too, in March we will have the prospective plantings report on March 31st which always can be a bit dramatic and sometimes make markets more volatile. At the same time, we should be able to determine how much Ontario wheat got to the other side of this Canadian winter. The grain markets will never stop, but continually adjust through a myriad of market factors. The challenge for Ontario farmers will be to continually measure and re-calibrate their grain marketing plans. There will be many marketing opportunities ahead. As always, daily market intelligence will remain key.