US AND WORLD
The January USDA report is often one of the most influential of the year. Often in the past the January report has seen a limit move in grains as it represents the final numbers on the crop grown in 2015 from the USDA. With the bearish tone of the market over the last few months many market observers were expecting more of the same from the USDA. No question, there was a huge crop in the United States in 2015. Would the January USDA report make it even bigger?
In the USDA report it was the opposite, in fact, the US crop is not as big as previous USDA reports. This was somewhat of a mild surprise, but in many ways it puts in perspective how big the US crop really is. Sometimes the bearish hype can get to be too much. The USDA reduced the US corn crop by 53 million bushels down to 13.6 billion bushels. However, USDA increased the corn ending stocks slightly to 1.802 from 1.785 billion bushels from last month. The national yield was reduced to 168.4 bu/acre, from 169.3 in their December estimate. The ending stocks to use ratio came in at 13.3%, which is actually slightly higher than last month.
The soybean estimates from the USDA were slightly more bullish than their corn numbers. The USDA pegged the US soybean crop at 3.93 billion bushels, which was 1% lower than their November estimate. US national yield was reduced to 48 bu/acre. The USDA also cut 2015/2016 ending stocks to 440 million bushels from 465 million bushels in their December estimate. The USDA left the Brazilian Argentinian soybean production unchanged last month at 100 MMT 57 MMT respectfully. This was a bit of a surprise as many Brazilian forecasters have been pegging the Brazil crop down to approximately 97 MMT. The ending stocks to use ratio came in 11.9%, this is down from 12.4% last month. USDA increased its forecast for wheat ending stocks to 232 MMT, which was above pre-report estimates. There is “so much wheat”, that is the mantra of the day.
On January 17th, corn, and wheat nearby futures prices were lower than the last Market Trends report. Soybeans were higher. The March corn 2016 futures was at $3.63 a bushel. December 2016 corn futures were at $3.85 bushel. The March 2016 soybean futures was at $8.79 a bushel. The November 2016 soybean futures were at $8.85 a bushel. The March 2016 Chicago wheat futures closed at $4.73 a bushel. The Minneapolis March 2016 wheat futures closed at $4.97 a bushel with the September 2016 contract closing at $5.20 a bushel.
The nearby oil futures as of January 17th closed at $29.42/barrel down from the nearby futures of last month of $35.62/barrel. The average price for ethanol on January 17th in the US was $1.58 a US gallon vs. last month at $1.81 a US gallon.
The Canadian dollar noon rate on January 15th was .6883 US down from the .7301 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario January weather has set in with only a few cornfields left across the province. The story of course for our Canadian basis levels has been the value of the Canadian dollar slipping under the $.70 mark in the week of December 14th. Even with this low Canadian dollar that cannot take away the fact that we had record corn yields in the province in 2015 upwards of 170 bu/acre. We need to export possibly 50 to 60 million bushels of corn to get back to an import basis. That is unlikely until the summer time, if it happens at all. With current old crop corn basis at $1.00 above futures it is creating the environment of price optics not seen in quite some time.
Of course basis levels in wheat and soybeans tend to be more accentuated simply because it is a simple conversion of foreign exchange. A positive $3 basis for Ontario soybeans is unusual compared to the last two years, but it is not unprecedented. Where the loonie goes in the next four weeks will determine how this basis expands and contracts.
Old crop corn basis levels are .95 to $1.05 over the March 2016 corn futures on January 17th across the province. The new crop corn basis varied from .95 to $1.05 over the December 2016 corn futures. The old crop basis levels for soybeans range from $3.05 cents to $2.30 over the March 2015 futures. New crop soybeans range from $2.95-$3.05 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on January 17th was $8.92 for SWW, $6.30 for HRW, $6.30 for SRW and $6.21 for Red Spring Wheat. On January 17th the US replacement price for corn was $5.43/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
THE BOTTOM LINE
The January USDA report is what it is, but the elephant in the room is no longer China or the crop that was grown in 2015. It is the value of the Canadian dollar. Futures values have a tremendous effect on the price of grain and it is the same in Ontario. However, even though the value of the Canadian dollar has been the story in Ontario grains for well over a year now, its precipitous drop since Christmas has accentuated cash price opportunities in Ontario.
Simply put, we have all been waiting or even anticipating some type of grain futures rally since last summer. However, so far that is not come especially in this bearish grain futures market. Needless to say, when the grain rally in the futures market comes, it will be accentuated by the low values of the Canadian dollar to cash prices likely higher than we've seen the last few years. The wildcard is that futures rally. It will come, but when? For Ontario farmers, balancing the effect of the low loonie versus any type of increased futures value will continue to be our challenge.
Dry weather in Mato Grosso had earlier been thought as a big problem for Brazilian soybean production. However, even though there have been extremely hot temperatures, rains have reached into the soybean fields. It is unlikely at this point that the South American crop reality will be anything but bearish for grain futures prices. The USDA maintained Brazilian and Argentinian production at 100 and 57 MMT respectably in their last report. That is unlikely to change and in fact may be raised later in the year.
It's pretty clear fresh news is still needed to spark any type of positive price movement in the grain futures market. A 2015 corn yield 168.4 bushels and soybean yield at 48 bushel/acre is still substantial and that along with the South American crop size weigh on the market. In January, any crop related problems in the US in 2016 are simply a theory. As it is, fresh news is needed and it's not here yet.
COMMODITY SPECIFIC COMMENTS
The January USDA report maintained US corn demand at very strong levels. Current demand stands at 13.570 billion bushels, which is down from a year ago of 13.748. Of course, with the current supply levels 15.732 billion bushels, that isn't enough. Until this changes, it is difficult for corn to move substantially.
US corn ending stocks grew in the January report. 1.802 billion bushels is not unprecedented, but it is clearly getting much closer to the 2 billion bushel level. Exports have been a problem accentuated by the high level of the US dollar and the performance of other commodities.
The March 2016 May 2016 corn futures spread is neutral at minus .04 cents. This is reflective of a market going sideways. Seasonally, the corn market generally tends to trend up through early March. The March contract is currently trading in the lower 9% of the last five-year price distribution range.
The USDA report was more bullish for soybeans versus any other grain. With the reduction in national yield to 48 bushels per acre and a reduction in ending stocks, it set the tone for the market day where soybeans gained. Of course, USDA can sometimes change this later and it may be changed in September 2016.
Chinese soybean imports are being maintained and even increased in light of their deteriorating domestic economy. Lower economic growth numbers were expected in China, but food commodity demand has been maintained and even increased. Much of this demand will be satisfied by US soybeans until South American supplies come on stream.
The March/May 2016 future spread is .0025 as of January 17th and is bullish with commercials wanting soybeans. This is taking place in a sideways market. Seasonally the soybean futures market tends to trend up through early May. Currently, the March contract is priced in the lower 5% of the last five-year price distribution range.
The wheat market continues to suffer from too much wheat on world markets. The noncommercials interests have all been short the wheat market and this should not be surprising with world stocks rising.
In Ontario the wheat has not had a lot of snow cover especially in the deep South West and producers will be hoping it gets through some of the January rains. Of course cash prices for wheat are healthy compared to our history based on the low value of the Canadian dollar.
THE BOTTOM LINE (CONT.)
In the January USDA report there were more than a few bullish nuggets to give producers hope. However, there are always confusing facts that muddy the water. For instance, the USDA reduced corn planted area in 2015 400,000 acres, but kept the harvested acreage the same versus their December report. That defies common sense, but the USDA must have an explanation somewhere. It's just an example how numbers can change without little explanation.
In the week of January 19th we should learn from the Bank of Canada governor Stephen Poloz whether interest rates might be cut another 25 basis points. The reason for this is the worsening Canadian economy and the attempt by the bank to stimulate aggregate demand. Any cut in interest rates in Canada will be another negative to the Canadian dollar further boosting Canadian cash values. This needs to be watched as we move ahead.
Of course the antithesis of the Canadian dollar has been the value of the US dollar, which has been higher fueled by an American economy that is getting better. This continues to put a drag on all commodities, especially oil, which tends to get a lot of publicity. In this environment it is very difficult for grain futures prices to move to more positive levels with the US dollar reaching.
In many ways, it is the tale of two markets. Canadian cash prices have been rising as the loonie and grain futures levels have been dropping. If futures turn around and go higher, cash prices to Ontario farms will be much higher. It is not like we have not seen this type of loonie volatility before. However, when the Canadian dollar gets below $.70 cash price movement can swing wildly on daily intervals.
Looking ahead, the market will likely change focus barring some type of South American production calamity. New crop fundamentals will likely be debated into the March 30th USDA planting intentions report. In Ontario, a daily watch of the Canadian dollar will remain a must. The challenge for Ontario farmers is to manage the foreign exchange layer on top of those grain futures values. Daily market intelligence remains key to seizing those marketing 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.