US and World
The machinery is put away and snow has fallen across much of the North American corn belt as another year is rapidly coming to an end. There might be a few cornfields left out there to harvest, but realistically the 2017 crop year has come to an end. It was marked from some very uneven weather across the corn belt, but it didn’t seem to make any difference to yield overall. It is a testament to management and modern science that even in a year of spotty weather conditions, yields have been maintained and increased across the board.
In their December world agricultural supply and demand estimates (WASDE) the USDA weighed in with their latest crop numbers. Usually the December report is of little consequence to overall market action. It comes a month before the final USDA report in January, which is typically explosive in nature. On December 12th, the USDA maintained 2017 yield estimates at 175.4 bushels per acre for corn and 49.5 bushels per acre for soybeans.
In the December report the USDA pegged US corn ending stocks at 2.437 billion bushels, which is below pre-report estimates. USDA actually increased ethanol usage by 50 million bushels, as US ethanol exports have been strong. Higher US sorghum export estimates were also a reason as some ethanol plants, which use both corn and sorghum used more corn. US corn exports were maintained from November at 1.925 billion bushels. On the soybean side, USDA actually reduced soybean exports 25 million bushels as Argentinian and Brazilian exports remain strong. The soybeans ending stocks was actually increased by 20 million bushels to 445 million bushels. USDA maintained Brazilian and Argentinian soybean production at 108 MMT and 57 MMT respectively. The USDA actually lowered wheat exports by 25 million bushels to 975 million bushels partly because Canadian export pace has been highly competitive.
On Dec 15th, corn futures were higher, but soybeans and wheat futures were lower than the last Market Trends report. March 2018 corn futures were at $3.47 a bushel. The January 2018 soybean futures were at $9.67 a bushel. The December 2017 Chicago wheat futures closed at $4.18 a bushel. The Minneapolis December 2017 wheat futures closed at $6.20 a bushel with the September 2018 contract closing at $6.26 a bushel.
The nearby oil futures as of December 15th closed at $57.30/barrel up from the nearby futures of last month of $56.74/barrel. The average price for ethanol on December 15th in the US was $1.48 a US gallon down from last month at $1.62 a US gallon.
The Canadian dollar noon rate on December 15th was .7792 US down from .7885 US reported here last month. The Bank of Canada’s lending rate remained at 1.0%.
In Ontario corn harvest continues in parts of the province where wet weather had delayed harvest. However, winter weather has descended across Ontario with moderate to heavy snow impacting many cornfields. Harvest of the crop left in these fields may be pushed into 2018. Most of the crop however is harvested in Western Ontario and yields have been tremendous. The Statistics Canada projected corn yield of 169.5 bushels per acre, once negated here, has new resonance. In SW Ontario, corn is piled everywhere.
The big news in Ontario is the announcement from the Ministry of the Environment and Climate Change that Ontario is looking to move to a 10% ethanol mandate by 2020. This is seen as a boon for domestic Ontario corn production and ethanol refining. It is a big facet of increasing the Ontario demand for corn. If realized, it will reduce carbon emissions and stimulate the agricultural economy within Ontario. The focus now will be on how we move forward into 2020 and beyond.
Ontario corn basis levels have decreased through October and November as crop size was realized. Eastern Ontario still maintains an approximate $.40 premium to basis levels in southwestern Ontario. This is usually always the fact and will likely be maintained into 2018 and beyond. The Canadian dollar has been fluttering around the 77 and $.78 US level helping to maintain cash grain prices where they are. It continues to be a buffer for cash prices in Ontario.
Old crop corn basis levels are $.55 to $1.01 over the March 2017 corn futures on December 15th across the province. The new crop corn basis varied from .65 to .84 over the December 2018 corn futures. The old crop basis levels for soybeans range from $1.81 cents to $2.05 over the January 2018 futures. New crop soybeans range from $1.85-$1.86-$2.05 over the November 2018 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on December 15th were $4.81 for SWW, $5.07 for HRW, $4.94 for SRW and $6.64 for Red Spring Wheat. On December 15th the US replacement price for corn was $4.78/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
December can be one of the most bearish times of the year for the grain market and in 2017 that might be the case especially with the January USDA report in front of us. The January 12th USDA report will be the final estimate of yield on the 2017 crop. There are always fireworks on that day because of the implications on price. If the USDA decides to raise yield even further on US corn, it will have a very tough affect on prices.
Of course, if the USDA cuts production it will go the other way. Nobody knows. Corn demand is down from last year but still pegged at 14.485 billion bushels, which is incredible. The main reason that prices have decreased over time is because of our production propensity to continually raise yields. The science of this will likely continue, but not necessarily the weather to support it. Demand will likely continue to grow again, but eventually supply will have a hiccup and there will be a correction. Prices will eventually move up.
At the present time weather for the South American soybean crop is benign. There had been some dryness in Argentina, but it is been mitigated by rain. Needless to say, rain totals and weather nuances in Brazil and Argentina for the next two months will be critical for soybean price movement as they produce half the world’s soybeans. USDA has continued to say 108 MMT of Brazilian soybeans, while CONAB has said 109.2 MMT. The road to getting this big crop will surely be uneven and that will add to the soybean price volatility.
Ethanol is always part of the equation when it comes to corn and the boost and ethanol demand in the December USDA report was welcome. On the soybean side of the ledger increased biodiesel demand, which is being predicted needs to happen to further boost soybean demand. China’s insatiable appetite for soybeans continues, but US demand was cut in the December report. Simply put, even for soybeans we cannot take anything for granted.
Commodity Specific Comments
Corn nearby futures prices near the $3.40 level is not getting anybody excited. The burden of the big crop continues to weigh on both futures and cash prices. In fact, we have been in this for quite some time. Over the last five years from December through to the following November, the new crop corn price has seen its highest weekly close in the first week of December. For this year, that means a December futures of $3.85. We’ll see what happens.
Ethanol seems to be getting a little bit more buzz these days especially with USDA raising ethanol demand in their December report by 50 million bushels. At the same time, we know that China is looking to use more ethanol in future years. Japan is now actively importing American ethanol. Canada remains the United States biggest ethanol customer, partly because of demand for British Columbia. Then of course, there is the recent Ontario announcement of moving toward a 10% ethanol blend by 2020.
The March-May 2018 corn futures spread is now -8.25 cents, which is considered bearish. The March corn contract is currently priced in the lower 10% of the market’s past five-year price distribution range. Seasonally, over the last five years the market tends to trend down January.
Soybeans are currently going into a critical phase in Brazil and Argentina. January and February are critical to yield in both of those South American countries. Recently, the soybean price was maintained by dryness in Argentina, but recent rains there quickly overtook this. Simply put, over the next eight weeks whether markets in South America will affect the price of soybean futures. Presently, there are no real problems. However, this could change anytime.
This is a time when the United States usually takes over the world export market for soybeans as South American supplies dwindle. However, the December report showed a 25 million bushel decrease in US exports. This is somewhat troubling especially in a time when US soybean prices are cheaper than South American supplies of the gulf. It is likely to pick up into January.
The January-March 2018 soybean futures spread is -10.75 cents, which is considered bearish. The January soybean futures contract is currently priced in the lower 31% of the last five-year price distribution range. Seasonally, over the last five years nearby soybean futures tend to trend down through the first week of January.
The wheat market continues to be under the burden of big global wheat supplies. This is happening however within a market that sometimes has a huge need for HRS wheat with really good protein levels. In fact, the popular press has ran many articles lately about bakers not having adequate supplies of protein rich wheat. Russia and the Black Sea region continue to replace lost US wheat acres on the global market. As we move through winter the focus for US wheat will be on snow cover and the condition of the crop in the field.
In Ontario the wheat is now under a blanket of snow almost across the entirety of the province. Of course, at this point there is no idea how it will emerge in three months time. Keeping that Canadian dollar under $.80 US will remain helpful to Ontario wheat prices.
The Bottom Line (cont.)
It would be nice to have a robust noncommercial demand sector for grain bursting at the seams. However, that is not the case especially in a time with burdensome supplies worldwide. At the present time non-commercials are short corn approximately 200,000 contracts with no sign of that ending. Of course, that can change very quickly, but it is unlikely to do so until some type of production problem in 2018. However, in this bearish environment with big ending stocks in the United States, it may not change even then.
The Canadian dollar continues to change the cash grain price optics in Ontario. The Bank of Canada has kept interest rates the same last month and the Bank of Canada governor Stephen Poloz continues to manage monetary policy on good Canadian economic numbers. Generally speaking, the value of the Canadian dollar has an inverse relationship to the value of the US dollar and this needs to be continually monitored. Any move upward into the 80-90 cent levels US means a major erosion of cash grain prices regardless of what futures price do.
As stated earlier, the announcement of the move from Ontario to go to a 10% ethanol blend represents a significant structural institutional improvement in the long-term demand for Ontario corn. However, there is a difference between an announcement and actual demand being created. Over the next few years infrastructure will need to be spawned to satisfy this demand. With the earlier creation of the Ontario ethanol industry partly forged through the past Ontario Ethanol Growth Fund, the industry should be poised to take advantage of this new regulatory environment.
Despite the bearish market environment, history tells us that there will be many marketing opportunities ahead for both old and new crop. This is especially true with the many marketing tools available to farmers. However, it does not cure that bearish environment overnight. In December 2017 that is where we find ourselves. The challenge for Ontario producers is to position themselves in front of the January 12th USDA report. Refine and retool those marketing plans for 2018. It surely will be a challenging year.
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.