US and World
This cropping season has been one of extremes in the United States. The crop got off to a very good start, but in the month of June wet weather-inundated parts of the Eastern corn belt causing all kinds of crop damage. The market was slow to catch on to what was happening, but finally did in and around the July 4th weekend. At that time grain futures prices had increased substantially only to retreat when dry weather returned. The August 12th USDA report stood as a barometer of how many acres were lost and what type of lower yield expectations the USDA was expecting. Market watchers were surely fixated on August 12th to give us a lot of answers about future price direction.
The USDA did not disappoint. On August 12th, the USDA shocked the market counterbalancing all of the bullish hype by printing increased yield numbers for both corn and soybeans. This was a complete contradiction on the market sentiment going into the report. The USDA pegged US corn production of 13.69 billion bushels with an average yield of 168.8 bushels per acre. Soybean production was forecast to be 3.92 billion bushels with an average national US yield coming in at 46.9 bushels per acres. Many market analysts leading up to the report were predicting the corn yield to come in at 164 and soybeans at 45 to 46 bushels per acre.
The market imploded downward on the USDA estimates with soybeans approaching limit down at one point and corn dropping $.29 a bushel. It was one of the largest turnarounds between average trade estimates and USDA numbers ever. You might argue that even the market bears were surprised. Old crop ending stocks for corn for pegged at 1.8 billion bushels with new crop stocks coming in at 1.7 billion bushels. The old crop soybean ending stocks came in at 240 million bushels with new crop stocks coming in at 470 million bushels, a very huge number. USDA actually cut soybean-harvested acres by 900,000 acres.The USDA also reported total wheat production at 2.14 billion bushels.
On August 14th, corn, soybean and wheat nearby futures prices were lower than the last report. Corn futures had the September 2015 futures at $3.64 a bushel. The December 2015 corn futures were $3.75/bushel. The November 2015 soybean futures was at $9.16 a bushel. The September 2015 Chicago wheat futures closed at $5.06 a bushel. The Minneapolis September 2015 wheat futures closed at $5.18 a bushel with the September 2016 contract closing at $5.75 a bushel.
The nearby oil futures as of August 14th closed at $42.50/barrel down from the nearby futures of last month of $50.89/barrel. The average price for ethanol on August 14th in the US was $1.86 a US gallon vs. last month at $1.94 a US gallon.
The Canadian dollar noon rate on August 14th was .7646 US down slightly from the .7693 US reported here last month. The Bank of Canada's lending rate remained to 0.50%.
Wheat harvest continues across Ontario as of August 14th. As the harvest moved out of the Southwest both quality and yield improved. Ground Zero for quality issues seem to come out of the deep South West this year. Basis anomalies with regard to quality issues were evident in some cases. Wheat harvest continues in Eastern Ontario and producers are hoping for good harvest weather to bring this crop in.
Corn and soybeans are variable across the province, but generally in good shape. For instance there are some pockets south of Woodstock and in other areas of central Ontario where a lack of moisture has hurt both corn and soybeans. Of course, other areas, which had too much early heavy rains in the spring, remain challenged. 10% of Essex county's intended soybean acreage was not planted. However, as of August 14th it is likely that Ontario is setting up for a corn yield of approximately 160 bushels per acre. Soybeans are much more difficult to quantify, producers will be hoping for August rain showers to gain yield.
Basis values have actually being maintained even with the drop in futures value as the Canadian dollar continues to flutter in the $.75-$.76 US range. There is a straight conversion for wheat and soybeans with regard to this foreign exchange, but corn basis may be different. Historically we are setting up for the classic harvest basis with a big Ontario crop, exporting the excess out at harvest time and then importing back in later. However, it never quite happens as smoothly as that. Export markets this year have been into Europe, where the Duricade gene is not wanted. Needless to say, as it is now we are setting up for a big corn crop this fall, which will challenge basis levels in southwestern Ontario. Eastern Ontario will continue to enjoy strong basis levels and will likely export grain into Québec.
Old crop corn basis levels are .70 to $1.25 over the September 2015 corn futures on August 14th across the province. The new crop corn basis varied from .45 to $1.00 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $2.33 cents to $2.50 over the November 2015 futures. New crop soybeans range from $1.95 to $2.28 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on August 14th was $8.72 for SWW, $6.95 for HRW, $6.56 for SRW and $6.20 for Red Spring Wheat. On August 14th the US replacement price for corn was $5.19/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The August 12th USDA report was brutal to the psyche of the grain market. In retrospect, the hype of the early heavy rains over 30 day period inundating the Eastern corn belt were not enough to mitigate yield below the previous March USDA estimate. Essentially, it seems like almost everybody was leaning on the wrong side of the boat. When the USDA came out with even higher numbers for yield for both corn and soybeans it was like a trap door opening. The sellers couldn't get enough.
Of course, it is not over yet. However, corn harvest will be starting in southern Illinois very soon. It has already started in places like Texas and Oklahoma. Simply put, the August 12th USDA report has infused a new bearishness into the grain market, which unless it is stemmed within the next few weeks will be very difficult to break out of. Further to that, the August 12th USDA numbers may not be the highest numbers printed by the USDA this year. We cannot assume anything going ahead with regard to production.
The August 12th USDA report was a psychological blow, but it was not the only blow the commodity market took in early August. On August 11th, commodity markets woke up to the fact that China was devaluing their currency unit the Yuan. This fact alone pummeled the Asian equity and currency markets as well as Europe and North America. Undervalued Chinese currency means it's much more difficult to buy agricultural commodities from North or South America. Corn and soybeans dropped on that news just before the USDA report. Shakiness in the Chinese economy suddenly got even more real.
Of course all of this economic instability caused by the problems in China have only made the US dollar that much stronger. So, with all the problems that the commodity sectors is having, being priced in US dollars makes it that much harder. It's like canoeing upstream with the current increasing daily. Essentially, this is happening in a commodity world that is flat and depressed almost everywhere in every type of commodity. The grain markets are completely caught up in that.
Commodity Specific Comments
Skepticism is an honest reaction to USDA corn numbers published out of the August 12th report. In the next few weeks with different crop tours going through the cornfields in the United States it will be telling their results. Whatever happens, it is clear that this corn crop is huge. However, corn demand is currently sitting at a record 13.775 billion bushels, a good thing with supply so robust.
Weather has always been a critical factor to the corn crop currently growing in the United States. A lack of heat, especially at night combined with the El Niño weather patterns have boosted corn growing conditions. At the end of the day it looks like hot and dry will always trump too wet in our cornfields. As of this point it surely looks like this has happened in the United States this year.
The December 2015 March 2016 corn futures spread is at -11.5 cents as of August 14th. This reflects somewhat of a neutral position for corn. The five-year seasonal index shows that corn futures tend to tread up through early September. Currently, the December contract is trading in the lower 10% of the five-year distribution price range, which reflects just how cheap corn really is.
Soybeans had a bit of a double whammy on August 12th as the report actually increased soybean yield but also decreased harvested soybean acres by 900,000 from the USDA's earlier estimate. However, this was far less than was expected so the world was awash in soybeans at least for that day.
Demand remains strong for soybeans, but of course the Chinese situation is very fluid and will affect soybean demand greatly. At the same time conditions are ripe in Brazil for an expansion of soybean acres especially with the Brazilian currency being devalued against a strong US dollar. Argentina on the other hand, has its own domestic issues, which may limit any increase in soybean acres come this fall.
The November 2015 January 2016 soybean futures spread is at -.05 cents/bushels as of August 14th. This represents a somewhat bullish market position. The soybean futures market tends to tread up seasonally into early September. The November soybean contract remains priced in the lower percentages of the five-year price distribution range.
Wheat remains bearish with supplies ample around the world. There has been tremendous heat in Europe, which reduced crop production and of course terrible quality problems in the Eastern corn belt of the United States. It is very dry in the northwestern United States wheat belt, but even that is not made prices ripple.
In Ontario wheat harvest is close to done with some producers still finishing up. Producers will be soon be turning to planning their wheat acreage for 2016. It is likely that Southwestern Ontario will get a lot more wheat acres in the ground this fall especially with soybean harvest starting earlier. 1.5 million acres of wheat may be in the offing.
The Bottom Line (cont.)
It is almost the time where crop supply is set. In the case of 2015 crops it looks like some of the biggest ever. With the August 12th USDA report behind us, there has being a recalculation of crop price expectations. If the crop in the United States gets bigger through the fall into January, we all know what price will do. Into September combines will be rolling in southern Illinois and we should have better expectations.
In Ontario the futures price drop continues to be mitigated by a low Canadian dollar currently fluttering in the $.76 range. This has been accentuated to some extent by the strong performance of the US Dollar buoyed by a growing and healthy US economy. It also might get even stronger if US Federal Reserve Chairman Janet Yellen announces an interest rate rise in the United States this fall. Whether that is already priced in is open to conjecture, but it is likely coming and the loonie will fall or remain weak under such a scenario.
The US corn export number may be overstated because of the strength of the US dollar. There is also some resistance to US corn because of the Duracade trait in some of the supply. If the US corn crop gets bigger going into harvest or into the winter, this may send corn-ending stocks up toward 2 billion bushels. It will take any urgency away from corn end-users to source supplies unless farmer selling completely dries up.
Of course there is also South America and we know that story. Farmers will be planning to get their soybeans in the ground in another eight weeks. For the Ontario producer looking at a big crop coming off starting in September, we've been here before. For crop yet unsold there surely will be future opportunities. The challenge is always to measure the market factors, which affect those choices. Standing orders for grain will always remain key even at times when market action seems quiet. You never know when the unexpected will come along in the grain markets. Risk management never grows old and as we careen into harvest daily market intelligence will remain key.
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.