US and World
In December with the US crop mainly finished its always a time of reflection within the grain market. This past fall has been a good one for harvest conditions helping producers bring in some of the largest crops in American history. Eventually the cold winds will come along with the snow and we will see this big crop move out into markets. It's been an extremely bearish time in the grain complex and farmers have responded by slamming the bin door shut. The USDA added to the bearish tone in the December 9th USDA report.
In their December 9th report, the USDA raised its projection for corn used for ethanol production by 25 million bushels, but at the same time cutting exports by 50 million bushels, pegging US corn ending stocks at 1.785 billion bushels. This actually increased the corn ending stocks to use ratio to 13.1%. The USDA maintain Brazil and Argentinian corn production at 81.5 MMT and 25.6 MMT respectively.
The USDA didn't touch the soybean or wheat supply and demand balance sheets in their report. The soybean ending stock figure remained at 465 million bushels, with ending stocks to use remaining at 12.4%. USDA maintained their prediction that Brazil and Argentina would come in at 100 MMT and 57 MMT of soybeans respectively. On the wheat front, the USDA increase Canada's forecast of production to 27.6 MMT, which was up from last month. European production was also increased slightly.
On December 11th, corn, and soybeans nearby futures prices were higher than the last Market Trends report. Wheat was lower. The March corn 2016 futures was at $3.75 a bushel. December 2016 corn futures were at $3.96 bushel. The January 2016 soybean futures was at $8.70 a bushel. The November 2016 soybean futures were at $8.90 a bushel. The March 2016 Chicago wheat futures closed at $4.90 a bushel. The Minneapolis March 2016 wheat futures closed at $5.07 a bushel with the September 2016 contract closing at $5.38 a bushel.
The nearby oil futures as of December 11th closed at $35.62/barrel down from the nearby futures of last month of $40.74/barrel. The average price for ethanol on Dec 11th in the US was $1.81 a US gallon vs. last month at $1.84 a US gallon.
The Canadian dollar noon rate on December 11th was .7301 US down from the .7501 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario the weather into December has been very mild and harvest has continued especially in Eastern Ontario where much corn has still been out to some extent from slow grain movement and lack of storage. Of course, parts of the reason are the good yields. The Ontario corn yield is set to come in at approximately 170 bushels per acre. If it does, it will be a record for the province.
The high corn yield in Ontario has affected the basis and in Eastern Ontario the basis has eroded substantially more than the rest of the province. Needless to say, a 72/73 sent Canadian dollar has made for large basis values, especially in soybeans and wheat and has helped sustain the corn basis. Corn continues to be moved into New York State and the US basis adjacent to Southwestern Ontario has been strong.
Basis of course is fluid. Farmer selling has been slow even with the Canadian basis making price optics so much different than in the United States. The classic situation where we export corn out of Ontario and then import it back in may or may not happen. Certainly, we have enough corn in Ontario for our needs for all of 2016, but how that plays out among importers and exporters and end-users is always a difficult puzzle to decipher. The low Canadian dollar at 72 and $.73 US will surely keep offshore and American buyers interested.
Old crop corn basis levels are .85 to .90 over the March 2016 corn futures on December 11th across the province. The new crop corn basis varied from .85 to $.95 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.65 cents to $2.71 over the January 2015 futures. New crop soybeans range from $2.30-$2.52 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on Dec 11th was $8.66 for SWW, $6.19 for HRW, $6.19 for SRW and $6.01 for Red Spring Wheat. On Dec 11th the US replacement price for corn was $5.60/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
You might say grain futures are stuck in the mud. The question is how long will we stay here? With the big crops in the United States and another one coming in South America corn and soybeans and wheat have been range bound. It is likely to take some very fresh news or even a black swan event to break these agricultural futures prices to much higher levels.
Of course, we have been here before many times. At the present time in Brazil there is drought in parts of the country and not in others. USDA has substantiated the Brazil soybean crop at 100 MMT, but other private forecasters have gone even higher. This is weighing on soybean futures prices and until this is threatened in a big way the computer algorithms that drive trade at Chicago will resist. Even in these times of abundant commodities, weather in global crop growing regions remains very key.
Part of this or maybe all of this is related to El Niño. This has helped produce an abundant crop supply in the United States this past year and it also is leading to a very mild start to our winter. This may change into a La Nina event going forward which sometimes means an uneven growing season for American crops. Sometimes weather is about conjecture. It's something to study going forward.
Futures might be stuck in the mud, but our Canadian dollar is not and its weakness continues to boost Canadian cash grain values. In 2014 and 2015 the declining Canadian dollar has been the story in Canadian grain pricing. It remains so. If grain futures spike the rise in cash prices to Ontario producers will be exponentially higher simply because of the 72 or 73-cent Canadian dollar.
Commodity Specific Comments
The fundamentals of the corn market are not as strong as they once were with ending stocks to use ratios going up from 11.3% in October, 12.3% in November and now 13.1% in December. At a certain point, we have to call out a trend. Too much supply can do that especially in a time when the demand market for corn is over. It is now a continuing supply market, until proven different, prices remain sideways and down.
The December USDA pegged ending corn stocks at 1.875 billion. A year ago, corn-ending stocks were 1.731 billion bushels. With exports falling and demand not being able to keep up to supply these corn ending stocks may grow even further into 2016.
The March 2016 May 2016 future spread is -.05 cents as of December 11th. This is considered neutral. The March contract is currently trading in the lower 13% of the last five-year price distribution range. Seasonally corn futures tend to trend up through early March.
Soybeans when it comes to ending stocks act differently than corn. USDA has a much better record of predicting corn ending stocks. In their December USDA report the USDA pegged soybean ending stocks at 465 million bushels, but that is similar to what they predicted last year. However, last year they came in at 191 million bushels. It is likely to happen that way again even with a big Brazilian crop.
In Brazil dry weather and drought has affected early planting in Mato Grosso, but so far the market does not really care. In fact, sporadic rains have eased some of that concern. Soybeans like it slightly dry and this might be in tune to greater yields. While the USDA says 100 MMT, RaboBank says 105 MMT. That reality continues to weigh on the sideways movement of soybean futures.
The January 2016 July 2016 soybean futures spread is -.03 cents, which is considered bullish. The January soybean contract remains priced in the lower percentages of the last five-year price distribution range. Seasonally, soybean futures tend to trend up through May.
Wheat is somewhat like corn and soybeans except more so. Global supplies of wheat are close to all-time highs. Geopolitical events in Russia and the Black Sea region may play a part in pricing moving forward especially with the latest dustup with Turkey.
In Ontario the 900,000 acres of wheat planted has enjoyed a long growing season especially with warm temperatures heading into the middle of December. Yield potential is very high and producers will be hoping to get through winter. $6 cash prices are at hand for harvest 2016 as of December 11th.
The Bottom Line (Cont.)
A characteristic of the last several months has been the high value of the US dollar. In the last two weeks the US dollar has actually dropped, but it's still at relatively high levels. On December 16th US Federal Reserve chairperson Janet Yellin may raise US interest rates, which will be bullish for the US dollar and bearish for our Canadian dollar. This will further hurt the demand for our agricultural commodities.
At the same time the Canadian dollar remains a big stimulus to our cash price situation here in Ontario. The foreign exchange conversion for wheat and soybeans has a tremendous impact on basis levels. Corn is a little bit different, but it still has an impact. Bank of Canada Gov. Stephen Poloz has even publicly mused about the specter of negative interest rates in our future to boost the economy. That is new economic ground and it is hard to say where the Canadian dollar will go if it came to that.
Of course the price of oil is almost a poster child for commodities in general declining down to the $35 level as of December 11th. Geopolitical forces are in sway in the Middle East, compelling OPEC to pump more and more oil. At the same time demand for oil is dropping and the supply is increasing. Our agricultural commodities to some extent are caught up in the oil economy.
The January 12th USDA “Final” report is the next possible market mover minus some over the holiday's weather event in South America. Of course, this will come after the US Federal Reserve decision on interest rates which may further affect the value of the Canadian dollar. Within that microcosm of market factors there will be market opportunities, both cash and futures. The change in the calendar year will bring renewed hope and renewed challenge. Marketing our grain will remain an exercise in daily market intelligence.
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.