US and World
February might be called the dog days of the winter grain-marketing season. In January we have the USDA final report on old crop and March ends with the new projections from USDA on a new crop acres. February can be a time where markets drift and the February USDA report is often seen as having minor influence on grain markets.
On February 10th the USDA released their latest world agricultural supply and demand estimates. In this report the USDA actually lowered its forecast for Brazilian soybean production by one million metric tons to 94.5 MMT. At the same time the USDA actually raised Argentinian production by 1 MMT to 56 MMT. This had been widely expected as dry weather in Brazil had cut into crop yield and the previous USDA estimate of 95.5 was always very generous. The USDA estimates for corn-ending stocks came in lower than pre-report estimates.
The USDA set US corn ending stocks at 1.827 billion bushels. This was down 50 million bushels from the January report. The USDA also cut feed and residual use by 25 million bushels, while increasing corn used for ethanol by 75 million bushels. The corn stocks to use ratio declined to 13.4%. The USDA also reduced soybean-ending stocks by 25 million bushels. The USDA also increased crushing by 15 million bushels and exports by 20 million bushels. This reflected livestock expansion and the rapid movement of exports in January. The global ending stocks for wheat came in at 197.9 MMT, which was 1.85 MMT above last month.
On Feb 12th, corn, soybean and wheat nearby futures prices were lower than the last month. Corn futures as of Feb 12th had the March 2015 futures at $3.83 a bushel. The March 2015 soybeans were at $9.83 bushel. The March 2015 Chicago wheat futures closed at $5.21 a bushel on Feb 12th. The Minneapolis March 2015 wheat futures closed on Feb 12th at $5.75 a bushel with the July 2015 contract closing at 5.79 a bushel.
The nearby oil futures as of Feb 12th closed at $51.09/barrel up from the nearby futures of last month of $46.69. The average price for ethanol on Feb 12th in the US was $1.78 a US gallon vs. last month at $1.74 a US gallon.
The Canadian dollar noon rate on February 12th was .8024 US down from the .8343 US reported here last month. The Bank of Canada's lending rate after 13 months of 1% was recently dropped to 0.75%.
In Ontario lots of snow and extreme cold weather as of mid-February has slowed grain movement. This is only a temporary phenomenon, typical of winter, and will surely change with warmer weather. Producers are certainly busy making their spring planting decisions. Ontario acres will be in flux, as spring gets closer. How many acres of corn will be planted in 2015? Will soybeans hold the day with a possible record crop well over 3 million acres?
The basis for soybeans and wheat has moved up in Ontario since the last report. This is mainly reflected by a lower Canadian dollar. However, the corn basis has decreased in Eastern Ontario, but increased in southwestern Ontario. This is reflected in farmers refusing to sell in many cases, but also because of the declining Canadian dollar. Agricorp numbers reflect a 165 bu/acre 2014 corn crop and a 45 bu/acre soybean crop. Eventually, this large Ontario corn crop will be weighing on the basis.
The Canadian dollar has declined precipitously again down in the $.78 range briefly in February from the .8343 level last month. This is adding support to all Canadian cash grain values. It will continue to be a key factor going into March.
Old crop corn basis levels are .75 to $1.00 over the March 2015 corn futures on Feb 12th across the province. The new crop corn basis varied from .38 to $1.00 over the December 2015 corn futures. The old crop basis levels for soybeans as of Feb 12th range from $1.48 cents to $2.35 over the March 2015 futures. New crop soybeans range from $1.45 to $1.95 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on Feb 12th were $7.26 for SWW, $6.82 for HRW, $6.45 for SRW and $6.55 for Red Spring Wheat. On Feb 12th the US replacement price for corn was $5.28/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
2015 has been dull for grain markets. Sure, the January USDA report did provide some fireworks but markets have been trending sideways to down over the last several weeks. As we look ahead it's pretty clear the South American crop is weighing in. The trend lower to sideways is in a holding pattern until harvest reaches its maturity next month. Record crops from South America are close to reality.
Cutting the Brazil soybean crop from 95.5 to 94.5 MMT of soybeans by USDA is not bullish. It is true that demand for soybean seems insatiable, but at a certain point one would think that South America would run out of acres. However, that is not happening and the 2015 crop looks tremendous. Harvest will be ramping up in many parts of South America over the next several weeks.
In February the USDA will actually put out its first inclinations of 2015 corn and soybean acres. There are many private forecasters who are forecasting 88 to 89 million acres of soybeans in the United States in 2015, with corn acres dropping below 90 million. These forecasts are taking place despite the fact that in 2014 we had a 7 million acre increase in soybean acres. Much will depend on weather. We know that the American farmer loves to plant corn and if spring is warm and dry, hither the corn planter.
Wheat has not been immune from the sideways to downward movement in the grain market. Grown on every continent, except Antarctica, there is always a question and answer for wheat. When one region has a problem it is made up somewhere else. The problems in the Ukraine and Russia have served as a flashpoint for wheat prices over the last 18 months. A recent cease-fire agreement between Ukraine and Russia may impact the wheat complex. History is not on their side because this is a very volatile part of the world. The jury is yet out to see how this may affect the Black Sea wheat growing region.
Commodity Specific Comments
The USDA in their February report lowered the old crop ending stocks once again to 1.827 billion bushels. With the depth of corn supply at the present time, to some extent that figure was ignored. However, it represents another cut in ending stocks because corn demand is so strong currently sitting at 13.645 billion bushels. Clearly, this demand will not easily be tempered when the supply hiccup finally comes.
Of course, when will that be? It is the nature of agriculture to continually get more efficient boosting production. However, in 2015 the debate about new crop corn acres is surely heating up as we go into March. Any corn acreage below 90 million, which gets in trouble in the summer of 2015, may hold the key to that perceived supply disruption.
Corn futures spreads remain bearish with the March to May 2015 future spread at .08 cents. Corn futures tend to trend up through early March. The March contract is now trading in the lower 17% of the last five-year price distribution range.
Ever since the finish of the American soybean harvest in 2014 we've been waiting for that huge South American crop so ballyhooed. The focus will soon change to new crop acres in the United States for 2015. If the spring is warm and dry, corn acres usually win that war. Wall-to-wall soybeans may not be as sure a thing as some analysts are saying.
Soybean exports out of the United States have been above expectations. On the week previous to February 12th, the USDA said that export sales totaled 27.4 million bushels and shipments totaled 58.9 million bushels. Both of these totals were well ahead of USDA's export estimate for 2014/2015.
Despite the bearish tone, the March July futures spread is a -3 cents/bushel which is neutral. The future spreads are mostly moving sideways with the carry levels indicating a neutral commercial outlook. Seasonally, soybeans usually tend to trend up through the first week in May. The March soybean contract is currently trading in the lower 10% of the five-year price distribution range.
It seems that wheat is almost always in bearish territory. In the February 10th USDA report the USDA pegged wheat ending stocks 197.9 MMT. This was actually an increase in global stocks and reflected increase production in Kazakhstan, Argentina, Turkey and Ukraine. The global ending stocks to use ratio is now at 27.7%. The wheat market will also be sensitive to any geopolitical tensions between the Ukraine and Russia.
In Ontario wheat prices have risen reflecting the lower Canadian dollar. Of course, at the present time what wheat is left in Ontario is underneath the snow. Much of that wheat is suspect from a very difficult planting season. There will be some conjecture going into March about how viable some of that wheat is. Approximately 600,000 acres of Ontario wheat were planted.
The Bottom Line (cont.)
As February changes into March the one constant that is staying the same is the Canadian dollar. Traveling down from $.94 US in January 2014 to the $.79 US level as of February 12, 2015, it remains the story in Ontario grains. Futures values have certainly trended down over the last 18 months, but the Canadian dollar has mitigated much of that fall in the last six months. Predictions of where the dollar might go are just that, shots in the dark. Needless to say, Ontario farmers need to keep vigil of the Canadian dollar's value on a daily basis.
At the same time the United States dollar has had the opposite effect on grains. In fact, with the US dollar climbing to seven-year highs it has put a brake on all commodity prices. Some, like oil might be more dramatic than others such as soybeans and corn. However, as the value of the US dollar goes up it hurts the demand for these commodities. With the American economy doing much better and the US Federal Reserve possibly set for an interest rate rise in June, the US dollar is looking very strong into 2015. It's variable on the currency watch, which Ontario farmers must manage.
Corn has been imported into Ontario since July 2014, but has slowed recently. Simply put, there is some conjecture about the 165 bushel/acre yield which has been reported. Elevator yields would be a good barometer, but estimating yields within grain bins is a much more inexact science. This is especially true in 2014/15 when test weights varied widely. It is not inconceivable that yields stored on farm may ultimately be 5 to 8% less than reported simply based on test weight issues. The 2014 growing year was very tough and it may come back to haunt us some more as bins are emptied out. Corn demand remains robust both in the United States and in Canada. Is not beyond the realm of possibility that Ontario cash corn prices will go back to import levels into later spring or early summer.
There are still lots of geopolitical risk in the world to affect grain prices. Russia and Ukraine will always be part of that mix in 2015. Oil prices will also be impacting economies around the world. We should not negate the positive effect that will have on China and other grain importing nations. Higher disposable income tends to be good for food demand.
Clearly, old crop has its fundamentals, but in the next few weeks traders will be jockeying for position in front of the March 31st USDA prospective plantings report. It will serve as one of the first big flashpoints of the new crop year. The challenge of course for Ontario farmers is to continue to manage their risk management strategy in front of that report. There are lots of risk on the table, but there is also lots of marketing opportunity ahead. Marketing where you are profitable and comfortable never gets old. The Ides of March will surely provide several more challenges and opportunities.
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.