US and World
It has been an uneven growing season in much of the American corn belt. The Western corn belt has been dry especially in the Dakotas, while the mid south and Eastern corn belt were inundated with heavy rains earlier in the spring. The forecast in late July turned cooler and wetter for all of the American corn belt. This new forecast essentially changed much of the outlook for the American crop, but still many analysts were expecting lower August USDA numbers reflecting some of the earlier tough conditions for US corn and soybeans. Anticipation of the August 10th USDA report was filled with expectations of lower yield projections.
On August 10th, the USDA lowered their projected corn yield estimate to 169.5 bushels per acre down from their earlier projection of 170.7 bushels per acre and less than last year’s 174.6 bushels per acre. At the same time the USDA raised soybean yield expectations to 49.4 bushels per acre up from their 48 bushels per acre earlier estimate. This pegged 2017/18-soybean production at 4.4 billion bushels. Both of these USDA estimates rocked the grain market August 10th, as it was a big surprise. With so much uneven weather affecting this crop in the field a US corn yield of 165-166 bushels per acre was a general trade estimate. Futures prices plummeted on this very bearish report.
The USDA corn yield estimate would be the third highest on record for both yield and production. The new crop corn ending stocks were trimmed slightly to 2.273 billion bushels. Old crop ending stocks remained at 2.370 billion bushels, the same as July. Both old and new crop global ending stocks for corn were above pre-report estimates. If the 49.4 bushels per acre of soybeans predicted by USDA is realized, it will be the largest US soybean crop on record. Interestingly enough, within this bearish report, USDA pegged old crop ending soybeans stocks at 370 million bushels, below trade expectations. New crop ending stocks edged up to 475 million bushels. All US wheat production was reduced to 1.739 billion bushels, the lowest since USDA began keeping records.
On August 11th, corn, soybeans and wheat futures were lower than the last Market Trends report. September corn 2017 futures were at $3.60 a bushel. The July 2017 soybean futures were at $9.45 a bushel. The September 2017 Chicago wheat futures closed at $4.39 a bushel. The Minneapolis September 2017 wheat futures closed at $7.74 a bushel with the September 2018 contract closing at $6.23 a bushel.
The nearby oil futures as of August 11th closed at $48.82/barrel up from the nearby futures of last month of $45.77/barrel. The average price for ethanol on August 11th in the US was $1.79 a US gallon up from last month at $1.77 a US gallon.
The Canadian dollar noon rate on August 11th was .7883 US down from .7969 US reported here last month. The Bank of Canada’s lending rate increased to 0.75%.
In Ontario weather continues to dominate growing conditions and is variable across the province. A tough wet year is continuing for many farmers in Eastern and Central Ontario, while other areas of the province are parched for moisture. Variability can sometimes be a buzzword for crop conditions, but it is very real this year in Ontario.
Basis levels for grains in Ontario have sunk into August largely due to the appreciation in the Canadian dollar over the last several weeks. On July 27th, the Canadian dollar reached up over $.80 US and basis levels have responded accordingly. The Ontario corn basis remains below import levels at the elevator level, but continues to approach those levels for industrial use. As we move ahead this may change significantly into September based on dwindling old crop supplies and the condition of the Ontario corn crop growing in the field.
Amid raindrops and parched fields producers are making decisions about fungicide and Western bean cut worm in corn. With the problems in Ontario fields it is likely that the yield will continue to trend below 2016 setting up a scenario for an import basis in 2018. Needless to say, late August and early September weather will help determine that.
Old crop corn basis levels are $.55 to $1.00 over the September 2017 corn futures on August 11th across the province. The new crop corn basis varied from .65 to $1.06 over the December 2017 corn futures. The old crop basis levels for soybeans range from $1.94 cents to $2.07 over the November 2017 futures. New crop soybeans range from $1.65-$1.98 over the November 2017 futures level. The GFO cash wheat prices for delivery to a terminal on August 11th were $5.19 for SWW, $5.19 for HRW, $5.12 for SRW and $6.64 for Red Spring Wheat. On August 11th the US replacement price for corn was $4.96/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
The USDA has done it again, re-setting the goalposts of a grain futures market, which was poised to react to lower yield expectations. However, like so many times in the past when market players were on the wrong side of that expectation, the USDA went the other way, laying out an extremely bearish market report sending prices downward. The resultant vitriol from the report was strong, especially after USDA’s own crop conditions numbers had been the lowest since 2011, when corn yield eventually settled 6% below trend line. The August 2017 USDA report ignored that.
Doubting USDA reports can be a growth industry. It is best to leave it there and move on. What we have is the third highest US corn crop projected ever based on 169.5 bushel per acre yield, which is the lowest since 2015. The US soybean crop has the potential to be the biggest ever. The one redemptive factor in all of this is a demand picture for both corn and soybeans, which seems insatiable. That is good, especially with the consistency of abundant supply uninterrupted from American fields.
A key point of light in the USDA August report was the old crop soybean ending stocks. USDA lowered US domestic soybean ending stocks down to 370 million bushels. This is down from last months estimate of 410 million bushels. It represents a 23% reduction from the 480 million bushel ending stocks estimate from last November and December. These stocks will continue to decrease based on average usage over time. It suggests that the final old crop soybean ending stocks could come in close to 170 million bushels. That contrast is huge in these projections, so much lower than the 480 million bushel prediction from USDA last year.
Of course, the focus of the market has changed, almost scripted from these USDA numbers. The old crop focus has been replaced by all the bearish new crop projections. The USDA’s own weekly crop condition numbers didn’t seem to matter. Moving ahead, the September USDA report may readjust things, but it may not. Futures market clues via future spreads can offer informed market intelligence.
Commodity Specific Comments
Corn received somewhat of a gut punch from the USDA with yield predicted at 169.5 bushels per acre. With a sizzling hot July that yield figure was an outlier to the market. If the USDA is right about that, it may be a testimony to modern genetics. However, there are many analysts to say be patient, the yield will come down when combines start to roll.
Corn continues to suffer from the very onerous old crop stocks from last year. This is happening with corn harvest already underway in the American South and moving into southern Illinois. The August 10th USDA was a major bearish market flashpoint for corn, which may be challenged to continue to maintain its long held trading range.
The December 2017 March 2018 corn futures spread is -11.75 cents US, which is considered bearish. The December contract is currently priced in the lower 42% of the past five-year price distribution range. Seasonally, the corn market tends to trend sideways through late August and early September.
Soybeans may be the great liars in the field, but so far the USDA is very optimistic pegging their production of 49.4 bushels per acre. Many analysts think it would have been more characteristic of USDA to keep the soybean yield 48 until August weather was finished. However, it is what it is, in the end soybeans always tell the truth, there is no way of knowing what the September USDA estimate will be.
As we head into later August, despite the conjecture on yield projections, as of now this is likely to be the biggest soybean crop ever in the United States. The good spot in this bearish supply scenario is demand continues to be bright. Of course, geopolitical events surrounding the Korean Peninsula weigh in the background of this market.
The November 2017 January 2018 soybean futures spread is -8.75 cents US as of August 11th and this is considered neutral. The November contract is currently priced in the lower 21% of the past five-year price distribution range. Seasonally, old crop soybeans tend to trend up through late August.
The run-up in the wheat futures market fueled by the devastating drought in the Dakotas is slowly coming back to earth. The drought is not over and the wheat is still dead, but the market has digested the information. This is somewhat typical for extreme drought situation price movement. Other wheat class markets have responded accordingly. World stocks continue to be onerous.
The run-up in the spring wheat market did provide marketing opportunity for Ontario wheat farmers. The harvest continues in some parts of Eastern Ontario, all but finished west of Toronto. Producers will soon turn their focus on wheat planting intentions for late September.
The Bottom Line (cont.)
Geopolitical events are always in the background of any grain market and this summer is no different. However, the specter of nuclear conflict in Northeast Asia has obvious connotations for markets. Any stray nuke would ruin the soybean market overnight. Of course, nobody wants to go there. Having said that, the issues, which pertain to North Korea, the United States and China are always relevant in the soybean market. It bears watching, especially as the world’s greatest soybean consumer is so close to the issue.
As always the Canadian dollar is being instrumental in Canadian grain marketing. On July 27th it briefly went above the $.80 US level. Last May 2nd, it was in the 72 cent US level. As of August 11th it has retreated back to the 78 cent US level. However, the volatility in the Canadian dollar over this time frame has created huge gyrations in Ontario cash grain prices especially for soybeans and wheat. The Canadian economy is strong and the Bank of Canada has responded by raising interest rates and this may continue. Hedging our Ontario cash prices and managing our Canadian dollar risk will continue to be important.
Looking ahead, crop weather is still important as we move into September. Simply put, there is still yield to be gained or lost in the United States. We are also edging closer to planting intentions in the southern hemisphere this fall. The Ontario crop needs good growing conditions in later August and September to finish, as much of it is later than usual. This may affect basis levels especially on a regional basis throughout Ontario as we move into September.
It has been a tough month for grain markets. In fact, it is been a tough few years for grain markets in the United States. The price optics in Canadian dollars has been somewhat different. However, it just means that Ontario farmers will continue to be challenged to find and seek out market opportunities. Despite the huge supplies that seem apparent, nothing is ever for sure in the world of production agriculture, even now in August 2017. Demand for grain remains at record levels and is growing. As we move ahead, standing orders for grain will remain an important tool. Separating emotions from our grain marketing decisions will remain difficult. However, it’s imperative in this supply driven market.
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.