Market Trends Report for August-September 2016
US and World
It has been a good year for crops across the greater American corn belt. Summer weather is always a large determinant with regard to the yield of crops. 2016 has been a good one for our American friends. As of August 8th, 72% of US soybeans are good to excellent and 74% of US corn is good to excellent. Widespread rains in the American corn belt have been very contrary to Ontario conditions, which is increasingly looking like huge production out of the United States in 2016.
This was substantiated in the August 12 USDA report. The USDA pegged the US corn crop at a record 15.15 billion bushels with a projected record corn yield of 175.1 bushels per acre. This was a big jump up from their previous estimate of 168 bushels per acre. The corn ending stocks for 2016/2017 crop year are projected to be 2.4 billion bushels. This is the largest ending stock since 1987/88. The corn stocks to use ratio is projected to hit 14.7% compared to 12.5% last year. Total corn supplies for 2016/17 will hit a record 16.9 billion bushels.
The USDA projected US soybeans to come in at 4.060 billion bushels. This is on a projected yield of 48.9 bushels per acre, which is up 2.2 bushels per acre from their July estimate. The US actually lowered the 2015/16 old crop ending stocks for soybeans to 255 million bushels. However, for the new crop year 2016/17 the USDA is raising ending stocks by 40 million bushels to 330 million bushels. The new crop soybean stocks to use ratio stands at 8.2%. The USDA also pegged all wheat production of 2.32 billion bushels, up 3% from their July estimate and 13% higher than last year.
On August 12th, corn, soybeans and wheat nearby futures prices were lower than in the last Market Trends report. The September corn 2016 futures were at $3.22 a bushel. December 2016 corn futures were at $3.33 bushel. The November 2016 soybean futures were at $9.81 a bushel. The September 2016 Chicago wheat futures closed at $4.06 a bushel. The Minneapolis September 2016 wheat futures closed at $5.13 a bushel with the September 2017 contract closing at $5.57 a bushel.
The nearby oil futures as of August 12th closed at $44.49/barrel up from the nearby futures of last month of $44.19/barrel. The average price for ethanol on August 12th in the US was $1.65 a US gallon down from last month at $1.75 a US gallon.
The Canadian dollar noon rate on August 12th was .7725 US up from the .7588 US reported here last month. The Bank of Canada's lending rate remained at 0.50%
In Ontario the sizzling summer continues with rain events mitigating some of the drought issues as of the weekend of August 14th. However, any rains that come now are beneficial, but they cannot take away the incredible dryness that most of Ontario has endured since planting time. Clearly, the corn crop in Ontario has been compromised and will have wide ramifications for local basis going into 2017. Soybeans may benefit from August rains and for those that get them thats a very good thing, but not all areas have seen widespread rainfall. Although widespread, Ground Zero for drought in Ontario has been the Niagara Peninsula and East of Toronto. However, there are localized areas, which are just the same.
This has been reflected in corn basis values moving to the import level last month and it is likely to be reflected further because of the compromised corn crop across Ontario. Last year, Ontario produced approximately 170 bushels per acre of corn, but this year its more likely to be around 145 or lower. It should make for some big regional variations in basis within Ontario.
Wheat harvest is almost complete across the province with record yields for many across Ontario. Dryness reduced disease pressure, which was partly responsible for the big crop. It also holds true that a early wide-open fall last year plus a mild winter was a huge plus for the wheat crop. We can only hope for that every year.
Old crop corn basis levels are $1.10 to $1.27 over the September 2016 corn futures on August 12th across the province. The new crop corn basis varied from .80 to $0.95 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.80 cents to $2.95 over the November 2016 futures. New crop soybeans range from $2.30-$2.65 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on August 12th was $4.76 for SWW, $4.63 for HRW, $4.89 for SRW and $5.62 for Red Spring Wheat. On August 12th the US replacement price for corn was $4.95/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
It has simply been a tough slog this year for Ontario farmers. The futures market for grain is one thing with tremendous bearishness within the market seen in the latest USDA report. However, in Ontario drought has been the story. Where we have become accustomed to very good crops over the last several years, many producers in 2016 are facing crop insurance payouts as crops have withered. It is a particular doubling down of bad news because our American friends have record crops in their fields driving futures prices down to contract lows.
A 15.15 billion bushel corn crop and a 16.9 billion bushel corn supply for this year doesn't take any prisoners. Clearly, these are huge numbers and are a reflection of the huge production potential in the United States. There will be much conjecture in trade circles about how these yields may or may not move as the USDA publishes reports up until January 2017. There has been precedent before for August report numbers to get smaller. In fact, in August 2010 USDA projected a corn yield of 165 bushels per acre, only to reduce that to 152.8 bu/ace in their final report of January 2011. Will that happen again in 2016/17?
Of course the answer to that question is nobody knows. With such a bearish USDA report a limit move down would seem to be conventional wisdom. However, on August 12th report day that did not happen, in fact corn actually finished up one penny and soybeans were down three cents on the day. These prices broke hard on the release of the report, but fought their way back. This is somewhat reflective of noncommercial investment traders not willing to take futures prices lower. Corn and soybean demand are very strong, at record levels as well, which cannot be ignored.
Still, corn futures prices of $3.22, soybeans at $9.81 and SRW wheat at $4.22 don't excite anybody. While Ontario has sizzled, our American friends have managed much better and crop size is still onerous. We have to trade the numbers that we are given from the USDA and it is setting up the specter into September of another revision. By that time, corn will be coming off in southern Illinois and we should have a better picture of exactly where crop size is.
Commodity Specific Comments
There might be some debate about the size of the US corn crop especially when the USDA has made such a significant jump up to 175.1 bushels per acre. However, it is still a big crop even if it is reduced to some extent over the next several months. Producers need to keep that in mind. Also too, USDA may actually raise their corn yield number into the future.
Corn demand numbers are extremely strong and this may be reflective of why the corn market did not crash significantly August 12th. Total use is projected to be 14.5 billion bushels, an incredible number. Feed use was increased 175 million bushels from July and projected exports were increased 125 million bushels from July.
The December 2016 March 2017 future spread is -$.10 cents as of August 12th which is considered neutral. However, there is a carry out into July. The December contract is currently trading in the lower percentage of the last five-year price distribution range. Seasonally, corn futures tend to show a short-term uptrend through later August.
The soybean crop is big, but it did not break through the highest trade estimates on US report date August 12th. (4.06 billion) Demand is very strong. Old crop soybeans demand was increased by 95 million bushels with 85 of that going to exports. The new crop demand jumped by 45 million bushels.
It is significant especially at a time when the Brazil crop is down from expectations. Also too, with the USDA yield at 48.9 bushels per acre, it all works, but if that yield goes down with the balance of August in front of us, the supply demand situation tightens even more. There is an inverse in soybean futures markets months into the future.
The November 2016 January 2017 soybean futures spread is bullish at -$.005 as of August 12th. The November soybean futures contract is currently priced in the lower 24% of the last five-year price distribution range. Seasonally, soybean futures usually tend to post a short-term uptrend through late August.
Wheat futures continue in their bearish ways near contract lows. The French crop is way down but the wheat crop in the Black Sea area is up. In Ontario yields were strong adding to our export challenge. Commercial buying has been stronger in early August and hopefully this will continue.
In Ontario wheat cash prices from $4.50-$4.75 at harvest were realized. However, for the most part quality issues weren't apparent which is always a good thing for everybody involved. Looking ahead, weather and harvest dates will likely determine if Ontario farmers are able to plant 1 million acres of wheat again this year.
The Bottom Line (cont.)
Looking ahead, we still have part of August to get through with our crop weather. Soybeans depend on good rains and that remains the case going into September.
Current ending stocks depend on US soybeans reaching 48.9 bushels per acre. Export opportunities should be good at least up until January and February when another South American crop starts coming on. Also too, a slight El Nino may impact northern Argentina and southern Brazil's soybean crop. Expect Argentina to grow more corn this year as soybean export taxes have been reduced.
There are also the usual culprits with regard to our grain futures prices with the US dollar being one of them. It has been in a small general decline since the end of July, which has been helpful to grain prices. With the US Federal Reserve now expected not to raise interest rates this year, that's not good for the US dollar and by default good for grain futures prices. A careful watch of the US dollar will be important as usually the Canadian dollar behaves in an inverse fashion.
We have seen that over the last month as the US dollar has moved down the Canadian dollar has gained value now up to .7725 cents. Still, at this value it remains the big component of any Ontario cash price makeup. The Bank of Canada has actually been musing about a rate cut over the last several weeks. If this happens, expect our Canadian dollar to fall on that news.
So as we move ahead, the challenge will be daunting, but far from impossible. It is true, we are facing mountains of grain supply, but at the same time we have mountains of grain demand. It isn't in the bin yet. In Ontario our corn basis levels need to be monitored closely especially with a corn crop compromised. Local variations will surely be apparent. The challenge for the Ontario farmer will be to measure all of these factors and market the grain accordingly. It is always darkest before the dawn. Daily market intelligence will remain key. Standing orders will remain a good instrument to lend discipline to your marketing plan.