US and World
It is that time. In the United States and to a very limited amount in Ontario planters are rolling across farm country. With the bearish tone set in the market coming off the March 31st USDA projected plantings report, there is much interest in just how many acres American farmers will plant in 2017. For the week ending April 16, 2017, American farmers had approximately 6% of the US corn crop planted compared to 12% last year. It is early yet and weather has not cooperated throughout the American Midwest. As we move ahead, those weather concerns will define the crop mix and ultimately market prices.
On April 11th the USDA released its latest world agricultural supply and demand estimates. This report usually is a smaller encore to the much larger report on March 31st. In the report, the USDA actually raised global soybean production for 2016/17 by 5.18 MMTs and increased global soybean ending stocks by 4.59 MMT. The USDA also raised US soybean-ending stocks for 2016/17 by 10 million bushels to 445 million bushels. Global corn production was also raised 4.52 MMTs, partly because of increase crop yields in Brazil and Argentina. Not to be outdone, global wheat stocks for 2016/17 were raised another 2.32 MMT to just under 223 MMT. The US domestic wheat stocks were raised another 30 million bushels to 1.159 billion bushels, close to a 30-year high.
The USDA actually raised domestic ethanol use by 50 million bushels, but this was offset by a decrease in feed demand by the same amount. The USDA also fell in line with many other private estimates boosting Brazilian soybean production to 111 MMT. Argentinian soybean production was boosted by half a million bushels. The report substantiated many of the bearish assumptions within the market. Grain futures prices have settled to possible “pre-planting lows”. Spring weather will surely redefine these numbers.
On April 23rd, corn and wheat futures were lower than the last Market Trends report. Soybeans futures were slightly higher. May corn 2017 futures were at $3.57 a bushel. The May 2017 soybean futures were at $9.51 a bushel. The May 2017 Chicago wheat futures closed at $4.05 a bushel. The Minneapolis May 2017 wheat futures closed at $5.26 a bushel with the September 2017 contract closing at $5.42 a bushel.
The nearby oil futures as of April 23rd closed at $49.62/barrel down from the nearby futures of last month of $50.60/barrel. The average price for ethanol on April 23rd in the US was $1.82 a US gallon up from last month at $1.74 a US gallon.
The Canadian dollar noon rate on April 23rd was .7404 US down from the .7500 US reported here last month. The Bank of Canada’s lending rate remained at 0.50.
In Ontario there is some corn planted in Chatham Kent and in selected fields throughout the rest of the province. However, as of April 23rd this is somewhat of an outlier as most production areas have been too cold or wet to get anything planted. In fact, wet weather across the province in mid April has slowed planting progress. However, rainfall has been variable and Ontario planting will commence in earnest as soon as fields dry up.
The Ontario crop mix will be defined as we get into May. Statistics Canada weighed in with their estimates in March predicting 2.2 million corn acres and 3 million soybean acres. Québec production was pegged at 976,100 acres for corn and 926,000 for soybeans. The Ontario numbers seem to be high especially for corn. The 2 million mark is always significant in Ontario as any production less than that with a less than average crop will increase corn basis levels substantially the following year.
In Ontario there is still much old crop corn to be sold and end users needs seem to be met looking forward into September 2017. Basis levels have been raised to some extent with the Eastern Ontario corn basis level much higher, which reflects their much tighter supply/demand situation. Quality concerns in some areas of the province continue to challenge. Wheat substituting for Ontario corn in feed rations is in the mix.
Old crop corn basis levels are $.55 to $1.19 over the May 2017 corn futures on April 23rd across the province. The new crop corn basis varied from .95 to $1.20 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.60 cents to $2.75 over the May 2017 futures. New crop soybeans range from $2.35-$2.73 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on April 23rd were $4.73 for SWW, $4.73 for HRW, $4.73 for SRW and $5.62 for Red Spring Wheat. On Arpil 23rd the US replacement price for corn was $5.15/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
It is a volatile time for grain futures prices despite the general bearish tone in the market and the sideways movement especially in the corn market over the last few weeks. It is that way because spring planting and spring weather always represent uncertainty and with that usually selling opportunities for grains. 2017 is no different than other years other than the onerous grain stocks, which have impacted prices over the last several months.
Part of that impact on futures prices is coming from South America. With a 111 MMT soybean crop coming out of Brazil, finally backed up by USDA soybean futures prices have taken the brunt of that impact. However, the Brazil corn crop is doing well with adequate moisture. In Argentina, corn is being harvested, 25% as of April 23rd. All of these supply factors are weighing on prices. We are in the time frame now of South American post harvest lows similar to October and November in North America.
Demand for our grain is still at record highs, but supply has done a very good job of keeping up at outstripping that demand. For instance, it is rare that Canada gets mentioned in the soybean market. However, with the growth potential of soybeans in Western Canada, Statistics Canada estimated there would be a 27% increase in Canadian soybean production in 2017. It is unusual to see this but it is an aside to places like Russia, the Ukraine and Kazakhstan, where grain production on all fronts is increasing.
The US dollar has been in a trading range between 98.5 and 101.25 over the last month. It will remain extremely important with regard to grain demand. Geopolitical events will continue to weigh in on this as well as interest rate increases in the United States. Of course, as always the Canadian dollar will generally move in an inverse fashion to the US dollar.
Commodity Specific Comments
Corn planting is behind normal slightly, but that probably doesn’t make a big difference in 2017 like it once did. Early spring weather forecasts had called for a wetter, cooler spring in the Midwest and that is exactly what is happened. However, it is not expected to impact corn planting.
This wetter, cooler weather in the Midwest did not do anything to corn futures except keep it in a tight range. It is like the market does not believe it has been a problem. The long-term weather forecast for summer sees no major threats on the horizon for the US corn crop. Of course, many people would say those are famous last words. If we knew what the weather was going to do, you know the rest of the story.
The May 2017 July 2017 corn futures spread is -.0675 cents as of April 23rd. The May corn contract is currently priced in the lower 32% of the five-year price distribution range. Seasonally, corn markets over the last five years tends to trend down into August.
There are a lot of soybeans in the world especially with their Brazilian friends producing 111 MMT, another record. Soybean futures have fallen, but have stabilized in and around the $9.50 mark. Over the last four years, we have seen soybeans rally $1.80-$3.00 from the South American harvest lows. Can we get part of that rally this year? History tells us yes.
Brazilian farmers have been reluctant sellers at these price levels. However, that can never hold forever and they own the export market at least for the near future. The Americans still produce approximately a third of world soybean supplies, so this growing season is still extremely important for price.
The May 2017 July 2017 soybean futures spread is considered bearish at -.0975 cents. The May soybean contract is currently priced in the lower 20% of the five-year price distribution range. Seasonally, the old crop market tends to trend up through late June.
The wheat market continues almost like its Groundhog Day. For instance Chicago soft red wheat contracts reached again to their contract lows recently, which doesn’t lend confidence to wheat farmers especially when US wheat acres are at an almost century low.
The July 2017 September 2017 Chicago wheat futures spread is -.1450 cents, which is considered bearish. Seasonally, the Chicago market tends to trend down through mid-May. The Canadian dollar trading in the $.74 and $.75 range continues to give Ontario producers a slim glimmer of hope.
The Bottom Line (cont.)
It cannot be emphasized enough how important foreign exchange has been to Ontario farmers. With the loonie currently fluttering around the 74-cent level it puts a floor under grain prices, at least in Canadian values. Call it a mirage, call it price optics or call it what it is, sub $3 cash corn values are not a reality here like they are in much of the United States. The Canadian dollar is a large part of that, and it has an even more pronounced effect on Ontario soybeans and wheat.
As we move ahead into the spring planting season we need to keep in mind the acres published in the March 31st report. Will 90 million acres of corn and 89.5 million acres of soybeans come to fruition in the United States? Will there be major variances on that theme looking forward to the June 30th actual planting report? If there is some type of weather variance between now and then, how will the noncommercial demand component within the market react? Any market rally coming off these different possibilities will represent a good marketing opportunity.
There will be issues for this market going ahead. History tells us that. However, supply seems to be ruling the day with regard to prices. Having said that, there are a series of geopolitical concerns that still may add to price volatility. That may come from Asia, between China and North Korea and United States. Of course, there is every possibility in between.
The challenge for Ontario producers is to balance these marketing factors on a daily basis. Standing orders for grain are especially effective at a busy planting time. The road is littered with those analysts who thought they knew where price is going. The bottom line is good risk management never grows old. There will be many marketing opportunities ahead.
Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications.