US and World
The winter season in North America is often one of hopes and dreams. With the January 2018 USDA report a month old the scope of the 2017 crop is now becoming a memory. Farmers have turned the page and will soon be planting corn in places like Texas. However, in the southern hemisphere corn and soybean crops are growing in the field and affecting prices every day. While the northern hemisphere freezes under the snow, weather in Argentina and Brazil has been defining the initial grain fundamentals for 2018.
On February 8th, the USDA released its latest World Supply and Demand Estimates. (WASDE) The USDA lowered US corn ending stocks to 2.352 billion bushels down 125 million bushels from last month. This was totally related to an increase in US corn exports by the same amount. This was attributed to a weakened US dollar and reduction in both Argentinian and Ukrainian corn exports. Hot weather in Argentina had USDA lowering their corn production 2.8 MMT to 39 MMT. USDA maintained Brazil corn production of 95 MMT.
USDA on February 8th lowered projected US soybean exports by 60 million bushels pegging ending stocks for 2017/2018 at 530 million bushels. USDA actually increased Brazil production to 112 MMT. They also dropped Argentinian soybean production 2 MMT down to 54 MMT. With hot dry weather impacting Argentina some estimates are as low as 50 MMT. US wheat stocks remain onerous with USDA raising wheat stocks up 20 million bushels to 1.009 billion bushels.
On Feb 8th, corn, soybeans and wheat futures were higher than the last Market Trends report. March 2018 corn futures were at $3.62 a bushel. The March 2018 soybean futures were at $9.83 a bushel. The March 2018 Chicago wheat futures closed at $4.49 a bushel. The Minneapolis March 2018 wheat futures closed at $6.03 a bushel with the September 2018 contract closing at $6.29 a bushel.
The nearby oil futures as of February 9th closed at $59.20/barrel down from the nearby futures of last month of $64.30/barrel. The average price for ethanol on February 9th in the US was $1.70 a US gallon up from last month at $1.50 a US gallon.
The Canadian dollar noon rate on February 9th was .7931 US down from .7997 US reported here last month. The Bank of Canada’s lending rate remained at 1.0%.
In Ontario there is no hint of spring as cold wintry weather continues to inundate the province as of February 9th. In between the snowstorms grain is moving and it will surely increase with some milder weather. Ontario wheat has certainly got it share of snow cover this winter.
Ontario basis levels for both corn and soybeans have increased since last month partly reflected in lower Canadian dollar but also an increase in grain futures prices. Any further decrease in the Canadian dollar will depend largely on where the US dollar goes. US dollar has seen renewed strength from its weakened position on the weekend of February 9th. Producers need to watch this closely as per usual, as a weakened loonie will strengthen our cash grain prices.
With the new Ontario ethanol proposal going to a mandated blend of 10% by 2020, it should be a stimulus for Ontario corn processing. At the present time, even with a 5% mandate, Ontario ethanol producers are above that now at 8%, which represents 1.1 billion litres of capacity. With the expansion at the Aylmer ethanol plant, this capacity should reach 1.2-1.25 billion litres by the end of 2018. Post 2020, it would not be surprising to see ethanol production closer to 13%.
Old crop corn basis levels are $.60 to $.92 over the March 2018 corn futures on February 9th across the province. The new crop corn basis varied from .65 to .92 over the December 2018 corn futures. The old crop basis levels for soybeans range from $1.80 cents to $1.90 over the March 2018 futures. New crop soybeans range from $1.85-$1.90 over the November 2018 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on February 9th were $5.59 for SWW, $5.53 for HRW, $5.47 for SRW and $6.28 for Red Spring Wheat. On February 9th the US replacement price for corn was $4.92/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
It is the best of times; it is the worst of times. It is the dead of winter in North America and many market observers are caught between the onerous market conditions behind us and the hope that springs eternal in front of us. South America does offer some type of theater to changing crop conditions. With hot weather currently inundating Argentina and rains bludgeoning Brazil’s soybean harvest there is still much drama in the marketplace.
Weather will remain key, but not necessarily to take crop fundamental numbers down significantly. It would seem that ending stocks are just too significant both in the US and globally to see that happen. However, at this time of year seasonal rallies often take place because of weather uncertainty. That is likely to happen, both this winter and going into late spring. Having those standing orders ready will remain key.
As we move into March there will also be buzz intensifying regarding the 2018 projected soybean and corn planted acres. Will US soybean acres overtake US corn acres in 2018? This was a debate last spring and it will likely continue this year. With corn’s remarkable performance of 2017 still in everybody’s memory, the soybean market will need to rally significantly to make that happen.
Chinese demand for our agricultural commodities is insatiable, right? That’s what we’ve always said based on the huge exports to China. However, there might be cracks in that facade based on the latest musings coming out of China regarding anti-dumping investigations from China’s Ministry of Commerce into US sorghum. Sorghum is one thing, but if it extends to US soybeans, the hurt gets real.
Commodity Specific Comments
Corn has been sort of a whipping boy over the last couple of years with its onerous supplies. However, at this time of year leading into spring and summer there usually is a seasonal rally. In the last five years we’ve seen rallies of over $.50 a bushel during this time frame. Who is to say that 2018 will be any different?
In Brazil it’s raining on the soybean harvest, but that also means that some corn planting will be delayed or eliminated altogether. USDA have predicted a 95 MMT Brazil corn crop, but CONAB is now saying 88 MMT based on weather concerns. This will be part of the narrative over the next few weeks in the corn market.
The March 2018 May 2018 corn futures spread is -7.75 cents as of February 9th. This is considered neutral. The March 2018 corn contract is currently in the lower 30% of the last five-year price distribution range. Seasonally, corn futures tend to trend up into June.
Hot dry weather is impacting Argentinian soybean production, which was reflected in the latest USDA numbers. On the other hand Brazil numbers were actually increased for soybeans with rains pounding down on their harvest. It goes without saying in the next few weeks these weather variables will continue to impact soybean futures prices.
$10 November 2018 futures prices cannot be ignored. This is a significant price based on all of the bearishness in the soybean complex, especially looking at that 530 million bushels ending stocks number. It was not too long ago that the USDA actually posted US ending stocks under 100 million bushels. November 2018 futures need to be monitored closely over the next few weeks.
The March 2018 May 2018 soybean futures spread is -10.5 cents, which is considered bearish. The March 2018 soybean futures contract is currently priced in the lower 42% of the last five years price distribution range. Seasonally, the soybean market tends to trend up June.
The wheat market has been stronger over the last few weeks mainly based on the dry conditions in the US southern Plains. This has been impacting the HRS market and likely will continue until rain takes that all way. Wheat has nine lives and this is just another episode of the drama. Being watchful of the US drought Monitor during this time will be insightful to market conditions.
US wheat is always very susceptible to the value of the US dollar, which is being in a weakened position for the last several weeks. Recently it is shown a tendency to rebound, which will surely affect US wheat exports. In the February 8th USDA report, US exports were decreased pushing wheat ending stocks back up over 1 billion bushels.
The Bottom Line (Cont’d)
The February 8th USDA report was initially seen as bearish for soybeans. The 530 million bushel ending stocks is huge, with export demand decreasing in the report. After an initial selloff on the news the soybean market finished positive on the day, somewhat counterintuitive to market fundamentals. Increasingly, computer algorithms are less focused on USDA data, more so weather, non-commercial demand and other factors. Market action on February 8th was indicative of that.
The US dollar weakened into the $.88 US Index range on January 25th, but is rebounded up to 90.334 on the US Index on February 9th. A weak US dollar is good for agricultural commodity demand. We are still within that range where the US dollar is down compared to its past history. However, like I have said many times in Market Trends, the Canadian dollar moves in an inverse fashion to the US dollar. Recent weakness in the Canadian dollar is reflective of the US dollar moving higher. Interest rate moves by the Bank of Canada reflecting on the Canadian economy also weigh into that equation. However, the litmus test for Canadian dollar value is almost always the inverse to the US dollar. It has a significant effect on our Ontario cash prices for grain.
Geopolitical concerns remain part of the grain price equation. There are always the usual suspects, but the upheaval in the stock market of late has added jitters to money flow. Weather adds more to this uncertainty. A hot and dry Argentina gets rain and milder temperatures and the crop price buzz changes again.
The challenge for Ontario farmers is to continue to hedge their risk in capturing marketing opportunities. History tells us a seasonal rally is coming. History also tells us we have onerous crop supply fundamentals. As always, there are a myriad of market factors skewing the grain price landscape. Into March, those 2018 USDA acres projections will be published. Have those standing orders built in. There will be many marketing opportunities ahead. Daily marketing intelligence is key.
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.