US and World
February is a time in the grain market that can be marked by indecision, choppiness and quiet markets. The January USDA report usually sets the tone for the market putting a period on last year's crop and setting up the fundamentals for the new crop year. You might describe it as swimming in mud until the prospective plantings report in late March. Grain markets are drifting sideways and lower. The February USDA report can serve as a fine-tuning of the January report and the new crop year which is about to dawn. There is corn already planted in Texas.
In the February USDA report the grain bears continued to dominate the day. The USDA actually increased Brazil and Argentinian projected corn production 84 MMT and 27 MMT respectively. At the same time the USDA set the Brazilian crop at 100 MMT, but raised the Argentinian crop 1.5 MMT to 58.5 MMT. The USDA also increased corn, soybeans, and wheat ending stocks further pushing the bearish envelope.
USDA pegged corn-ending stocks at 1.837 billion bushels, up to 35 million bushels from last month with the domestic stocks to use ratio for corn boosted to 13.6%. They also boosted US soybean stocks to 450 million bushels. US Wheat stocks were raised to 966 MMT, up 25 MMT from last month. Globally wheat-ending stocks were increased to 33.6% from last month's estimate of 32.4%.
On February 12th, corn, soybeans and wheat nearby futures prices were lower than the last Market Trends report. The March corn 2016 futures was at $3.58 a bushel. December 2016 corn futures were at $3.81 bushel. The March 2016 soybean futures was at $8.72 a bushel. The November 2016 soybean futures were at $8.86 a bushel. The March 2016 Chicago wheat futures closed at $4.57 a bushel. The Minneapolis March 2016 wheat futures closed at $4.84 a bushel with the September 2016 contract closing at $5.05 a bushel.
The nearby oil futures as of February 12th closed at $29.44/barrel about the same from the nearby futures of last month of $29.42/barrel. The average price for ethanol on February 12th in the US was $1.63 a US gallon vs. last month at $1.58 a US gallon.
The Canadian dollar noon rate on February 12th was .7228 US up from the .6883 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario, mild weather was the order of the day into late January and early February. However, that all changed in mid-February as frigid cold subzero temperatures returned. There was some reflection about Ontario wheat during this time even some musing about it starting to grow again at the wrong time. However, some snow and freezing temperatures have changed all that, but so far the wheat looks to be largely still there as of mid-February. Producers will be hoping for good things when wheat finally emerges from its winter slumber.
The Canadian dollar actually reached in the 68-cent range on January 20th before rebounding into the $.72 range as a mid-February. This had a significant impact on basis levels especially on soybeans and wheat at that time before eroding as the dollar gained back. This is seemingly the normal this winter season, as Canadian dollar risk will have a huge impact on basis levels.
Old crop corn basis levels are 1.00 to $1.10 over the March 2016 corn futures on February 12th across the province. The new crop corn basis varied from .95 to $1.10 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.80 cents to $2.92 over the March 2015 futures. New crop soybeans range from $2.65-$2.75 over the November 2016 futures level.The GFO cash wheat prices for delivery to a terminal on February 12th was $8.27 for SWW, $5.78 for HRW, $5.78 for SRW and $5.74 for Red Spring Wheat. On February 12th the US replacement price for corn was $5.44/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
It is very difficult to get excited about grain futures prices. There is hardly a path forward to see a place for the grain bulls to break free. The February USDA report added to that general tone with increases in stocks both in the US and globally. However, it is important to remember that nothing has really changed. We have been in this down to sideways movement for several months now. It's going to take some very fresh news to change that direction.
When that will happen is anybody's guess. The days of February are passing quickly and the psychology is definitely changed to a new crop adaptation. It is likely that we drift in the same general direction until we're into March with the March 30th USDA report giving official USDA numbers for 2016 acres. However, it will be important to watch futures spreads closely. This will give clues on future market direction and disappearance.
Are there flies in the ointment as we head toward March? There surely are a few such as wheat conditions around the world. There are problems in some black sea wheat fields with too much ice, but at this point that is just a flyer. The price of oil continues to flutter at very low levels pushing down the price of gasoline. Ethanol stocks are at very high levels.
It is an old axiom, but it will take fresh news to move grain futures prices. Call this a black swan event or an unexpected Tuesday, something that the market doesn't see to boost prices higher. We should also realize that we have been in this downward to sideways pattern for quite some time now and it may simply just continue.
Commodity Specific Comments
The December corn futures in February need to be focused on partly because they are responsible for setting US crop insurance revenue levels. As of February 15th, December corn is at $3.81 dropping from $3.95 on Feb 5th. This drop if it is maintained will likely mean less corn acres and more soybean acres in 2016 based on crop insurance revenue guarantees. However, if this changes significantly into the end of February it will have the opposite effect. It is one of the first clues into 2016 acreage shifts between corn and soybeans.
Corn has several issues. With ending stocks at 1.837 billion bushels and ending stocks at 13.6%, this is the largest since the 2005/2006 marketing year. That was just before the ethanol boom, showing that the supply part of the market has adjusted accordingly.
The March 2016/May 2016 corn futures spread is currently at -.0475 cents/bushel, which is neutral to corn. Seasonally, corn tends to trend up through early March. The March corn futures contract is currently trading in the lower 6% of the five-year price distribution range.
Big crops weighing on our soybean market have been there since the fall. However, at the present time there is much harvesting going on in South America and the yields are very good. This was substantiated in the USDA report with Brazil being sustained at 100 MMT and Argentina being increased to 58.5 MMT of soybeans. It is a theory no more and market actions will be shifting because of that.
Focus will surely be on soybean acreage in the United States going forward. Much will depend on the crop insurance revenue guarantees. Inform economics published their projection of 87.5 Million acres of soybean recently, which is an increase from 85.1 million acres last year. It only adds to the bearish sentiment in soybeans.
The March 2016 May 2016 spread is -.0375 as of February 15th, which is considered bullish. Seasonally, the soybeans market tends to trade up through early May. The March contract is being priced in the lower 3% of the last 5-year distribution range.
Wheat seemingly is always in difficult bearish territory and the February USDA report didn't help matters. USDA actually raised US wheat ending stock to 966 million bushels up 25 million bushels from last month. The US stocks to use ratio continues to rise, currently sitting at 49.3%. The USDA effectively piled on by also raising global stocks to 238.87 MMT, far more than expected.
In Ontario, cold weather has returned as of mid February after a very open January when wheat was exposed to higher than normal temperatures. The cold temperatures have created conditions for snow cover, which is wanted by many Ontario wheat producers.
The Bottom Line (cont.)
Commodities continue to be in a difficult position around the world. Oil continues to be very shaky trading under $30 with reserves growing. Gasoline prices are way down and ethanol profits have been down partly because of that. Ethanol is usually priced less than wholesale gasoline, but lately in the United States it is being higher. The US renewable fuel standards mandate ethanol but under this price environment growth is stymied. Most US ethanol plants continue to operate, but at reduced capacity.
The Canadian dollar remains the trump card for Ontario grain prices, but it has rebounded to some extent over the last three weeks currently to the 72 levels US up from 68 on January 20th. This has been the saving grace for grain prices in Ontario. Managing this volatility going forward will remain a management challenge.
With the collapse in commodities the focus is clearly on the US farmer. With the relative strength of the US dollar compared to other currencies most world production areas are getting the signal to plant in a big way whether that is in South America, Europe, the Black Sea region or in Canada. Corn futures prices of $3.58 and soybeans at $8.72 with lower basis levels are what American farmers are looking at. Classic agricultural economics would say the American farmer would eventually produce less if the price got cheaper. That is the focus of price action at the futures level right now. However, in 2016 it still looks at these lower prices will not cause a reduction in acres.
Of course there always is weather. In South America there been a few problems with generally benign weather leading to the great crop. South Africa has had disastrous drought partly caused because of El Niño. North America has had a mild winter. This El Niño may turn into a La Nina with adverse crop growing conditions for North America and Western Europe, but is not expected to come along until later in 2016 after the crop is made. Still, we know as farmers everything is cyclical including the weather.
The key challenge for Ontario is to focus in on managing our risk going forward. The Canadian dollar is providing opportunity and capturing some of that can never be a wrong thing. As we move into March the focus will increasingly be on the March 30 USDA report. There surely will be many crop-marketing opportunities ahead.
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.