US and World
As the calendar turns into late July and early August US crops continue their march toward harvest. July and August weather are critical for corn and soybean production. The 85.1 million acres of soybeans and 89.2 million acres of corn are damaged from their peak potential as they go into this critical weather. Heavy rains with record rainfall amounts have taken their toll. The question is, how much of a toll have crops paid and will summer weather provide them some opportunity to recapture some of that record potential?
On July 10th the USDA chimed in with their latest crop production report. The USDA actually lowered old crop ending stocks by 97 million bushels to 1.78 billion bushels. USDA also lowered the soybean ending stocks by 72 million bushels pegging them at 255 million bushels. On the new crop side of the ledger the USDA maintained their corn yield at 166.8 bushels per acre and soybeans at 46 bushels per acre. The new crop corn production estimate is at 13.53 billion bushels with a 1.6 billion bushel ending stocks. Soybeans are projected at 3.89 billion bushels with ending stocks coming in at 425 million bushels. The USDA also lowered all of its winter wheat production 3% from its June 1 forecast pegging it at 1.46 billion bushels.
The July report was somewhat overshadowed by the wet weather events over the July 4th weekend. The market had been buoyant on that news and the report did not really change anything. Crop conditions published by the USDA actually improved over the last two weeks with futures prices settling back a bit. The August report may surely have reduced yield projections from the USDA reflecting some of the weather problems. There'll also be results from the resurvey of soybean acres in Missouri, Arkansas, Texas and Kansas.
On July 17th, corn, soybean and wheat nearby futures prices were lower than the last report. Corn futures had the September 2015 futures at $4.20 a bushel. The December 2015 corn futures were $4.31/bushel. The August 2015 soybean futures were at $10.14 bushel. The September 2015 Chicago wheat futures closed at $5.54 a bushel. The Minneapolis September 2015 wheat futures closed at $5.67 a bushel with the September 2016 contract closing at $6.13 a bushel.
The nearby oil futures as of July 17th closed at $50.89/barrel down slightly from the nearby futures of last month of $58.56/. The average price for ethanol on June 30th in the US was $1.94 a US gallon vs. last month at $1.91 a US gallon.
The Canadian dollar noon rate on July 17th was .7693 US down from the .8017 US reported here June 30th. The Bank of Canada's lending rate dropped to 0.50%.
In Ontario the soft wheat harvest has commenced in parts of Chatham Kent and Essex County. However, ripening of the crop has been slow, as cool cloudy weather has impeded maturity. The grades at this early stage have been satisfactory. Wheat harvest is expected to ramp up in the next few weeks across the province. Corn and soybeans, which have been damaged by water throughout much of the province, continue to rebound with warmer weather. Much of Essex County did get planted before the crop insurance deadline of July 7th. However, there were many fields left unplanted, which may mean September wheat planting this year in Essex.
Basis levels in Ontario actually improved greatly over the last several weeks as the Canadian dollar continues to lose strength. Old crop corn exports out of Ontario have been mitigated by the uncertainty surrounding Greece. However, producers with old crop are enjoying better prices. Depending on weather moving ahead, it is likely that the 2.055 million acres of Ontario corn will produce 300-330 million bushels of corn this fall. It will set up the classic historical situation where corn is exported into the United States with a harvest low basis. Time will tell.
The soybean crop looks tough throughout much of South and Southwest Ontario, as heavy rains have stunted growth in many locales. However, in Eastern Ontario and in select other places through the province the soybean crop looks very good. So it is variable, in fact, beans look like beans. August is always a critical month for Ontario soybeans. Where soybeans are the great liars with regard to their yield, at the end of the day they always tell the truth. Ontario farmers are certainly hoping for good soybean weather into August.
Old crop corn basis levels are .55 to $1.20 over the September 2015 corn futures on July 17th across the province. The new crop corn basis varied from .45 to .90 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $1.97 cents to $2.40 over the August 2015 futures. New crop soybeans range from $2.05 to $2.44 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on 17th was $8.76 for SWW, $7.39 for HRW, $6.68 for SRW and $7.01 for Red Spring Wheat. On July 17th the US replacement price for corn was $5.70/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The psychology of the grain market has changed, but how much and for how long? Hot and dry usually trumps wet weather when it comes to crop damage. In many ways with futures prices retreating from recent highs many analysts might be asking themselves if the weather card for 2015 has been played out? Simply put, it looks like the specter of record yields have been taken away for this year. July and August weather will determine how and if some of these crops recover.
The US dollar has been strong in the last two weeks and this has made for additional gains in prices somewhat difficult. The wheat market has taken somewhat of the brunt of US dollar movement because of so many competitors in the world market versus American wheat. As the US dollar goes up, buyers switched to other sources. This is much more difficult with corn. Needless to say, with the problems that Europe is having with Greece, the US dollar is benefiting. That is always hard for grain futures prices.
It's an old cliché, but weather this time of year trumps almost everything. Yes, we had a period of tremendous crop damage from too much water, but July and August still mean so much. Corn is 69% good to excellent and soybeans were 52% good to excellent in the week ending July 17th. These ratings were somewhat better than expected and to some extent it proves the point that not every acre was drowned out and those that weren't in fact may be getting better. There is a great balancing act this summer with regard to the good and bad parts of the crop in the US corn belt. Crop weather moving ahead into September will significantly determine the size of what still is a very big crop.
South America remains a very important supplier to the world and the big competitor to our American friends. With prices somewhat higher rumours of South American corn and soybeans landing into the American Southeast have been a factor. China has also imported 35% more soybeans from Argentina than they did a year ago. This might say more about Argentinian politics versus Chinese demand, but clearly China has multiple suppliers for soybeans. Corn is a different matter. Domestic Chinese corn prices are higher than imported values and US corn may be needed in increasing numbers to fill a void. However, the second crop of corn from Brazil will mean for stiff competition.
Commodity Specific Comments
The state of the US corn crop remains in flux, but may be stabilizing from the end of the 30-day monsoon period, which hit in June. The USDA average yield of 166.8 may surely change in the August USDA report. The question is, by how much? Analysts differ on how much lower, but probably by just a few bushels. This is not the 2012 crop disaster event. USDA dropping the corn yield to 161-163 bu/acre would be more likely.
Corn demand remains strong, but no more at record demand levels, which was reached in June. A 25 million bushel decrease in exports in the July USDA report may reflect a slight weakening of demand. Still, 13.735 billion bushels doesn't lie.
The December 2015 March 2016 corn futures spread is -.1025 as of July 17 in this reflects a more neutral stance for futures. The December contract is trading in the lower 26% of the past five-year price distribution range. Seasonally, corn futures tend to trend down to the first week of August.
Crop condition reports from USDA will be very telling for the US soybean crop going into August. Also too, the August USDA report will reflect updated acreage numbers not seen previous. This may hold some surprises for soybean prices moving ahead. Needless to say, August rains usually make soybeans and for those acres, which are left in good standing, it's the same story again.
Although Chinese demand still rings very strong, the stock market meltdown in equities over the last month has caused some nervousness in their economy. It is only another variable to consider with the world's largest soybean consumer. Any hiccup like this within the Chinese economy will always cause some angst in the soybean complex.
Soybean futures spreads remain bullish with the November 2015 January 2016 future spread as of July 17th at -.06 cents. Net long non-commercial futures positions in soybeans have increased over the last several weeks. Seasonally soybean futures tend to trend up through early September. The August soybean contract is currently trading in the lower 12% of the past five-year price distribution range.
The wheat market has been tempered by the high value of the US dollar and the problems currently seen in Greece and the Euro zone. Hot temperatures have also impacted the wheat crop in Europe. American wheat continues to have problems pricing it competitively in world markets.
In Ontario it's all about harvesting the 600,000 acres of wheat in the field. Prices have improved over past harvests as the Canadian dollar has had tremendous positive effects on cash prices. Sometimes the planets align with regard to wheat prices, yield and quality. Ontario farmers will surely be hoping for that this harvest season.
The Bottom Line (Cont.)
One of the pillars of marketing grain in Ontario is measuring the Canadian dollar movement and how that affects basis levels going forward. There is no question with the Canadian dollar reaching the 76-cent level on July 17th, that cash price opportunity is apparent for Ontario producers. It's always fickle to predict and especially fickle to combine it with rising futures prices to maximize revenue. Clearly though, in the summer of 2015 the lower Canadian dollar is creating opportunity to market grain effectively.
In Europe, Greece defaulted on loans to the International Monetary Fund, but also later agreed to another bailout package from the European Union. It is a difficult arrangement, but may serve as an example for what's ahead for other countries like Spain, Ireland and Italy. From a grain complex perspective this debt problem in Europe continues to cause nervousness in pricing. Nobody wants to get caught selling grain to buyers who may not be able to pay in hard currency. The quicker that Europe resolves these situations the better.
In Ontario crops mimic to some extent the problems in the US Eastern corn belt, but not as bad. It is likely that the Ontario corn crop will approach last year's yield level but fall slightly short. With the increased acreage in 2015 over 2014, Ontario could be a net exporter of corn all next year. However, weather will yet have it say about that. August rains will surely weigh in on Ontario soybeans as well.
The challenge for Ontario farmers is to continue to market their grain at profitable levels. The Canadian dollar will surely continue to be a daily watch. USDA weekly crop conditions reports as well as the August crop report will surely be telling for price movements. Of course, there is always the possibility of a black swan event incubating in the background. This is agriculture and the challenges continue to evolve.
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.