US and World
In the United States corn and soybeans continue to impress as we head into the later parts of June. For the week ending June 8th, the USDA rated corn conditions as 75% good to excellent in the largest producing corn states. Soybeans were rated 69% good to excellent, with 79% of US soybeans planted. Benign weather has helped these crops get off to an excellent start. The big difference in 2015 has been wet weather in the US corn belt. How this will manifest itself on corn and soybeans yields at this early stage is anybody's guess.
On June 10th, the USDA released its latest USDA crop production and supply and demand report. The June report is usually a preamble to the bigger report later in the month. In the report the US estimated US corn production at 13.63 billion bushels, with an average yield of 166.8 bushels per acre. They estimated old crop ending stocks at 1.876 billion bushels, which was up 25 million bushels because of a cut in ethanol use. The estimated new crop ending stocks were pegged at 1.771 billion bushels. The old crop stocks to use ratio is now a 13.8% and the new crop ratio is at 12.9%.
USDA estimated the total soybean production in the United States would be 3.85 billion bushels with an average yield of 46 bushels per acre. The USDA actually lowered its old crop ending stocks by 20 million bushels to 330 million bushels. The new crop ending stocks were pegged at 475 million bushels, down from the 500 million predicted in May. USDA reported all wheat production near the high end of pre-report estimates at 2.121 billion bushels.
On June 12th, corn, soybean and wheat nearby futures prices were lower than the last report. Corn futures had the July 2015 futures at $3.53 a bushel. The December 2015 corn futures were $3.69/bushel. The July 2015 soybean futures were at $9.40 bushel. The July 2015 Chicago wheat futures closed at $5.03 a bushel. The Minneapolis July 2015 wheat futures closed at $5.61 a bushel with the September 2015 contract closing at $5.70 a bushel.
The nearby oil futures as of June 12th closed at $59.96/barrel up slightly from the nearby futures of last month of $59.69/. The average price for ethanol on June 12th in the US was $1.88 a US gallon vs. last month at $1.99 a US gallon.
The Canadian dollar noon rate on June 12th was .8127 US down from the .8326 US reported here last month. The Bank of Canada's lending rate remained at 0.75%.
In Ontario good planting weather has helped get much of the crop in and growing as of June 12th across the province. The one exception is Essex County where unusual above-average precipitation has stymied planting progress. As of mid-June much of West Essex still needs an extended dry period to get all soybeans planted.
Aside from Essex County, the crop in the rest of the province is somewhat ahead of schedule and doing well. Heavy rains have inundated much of southwestern Ontario after very dry start in May. This damaging precipitation has been variable and regionally based in many production areas. Side dressing of nitrogen and spraying have surely had its challenges.
With frost and wet weather giving us fits this spring, basis values have largely gyrated on a wobbly Canadian dollar. This has been especially true for soybeans and wheat. With approximately 2.1 or 2.2 million acres of corn planted early and growing well a 350 million bushels plus crop may be coming off this fall. With Ontario corn demand approximately at 325 million bushels it will set up for some basis decreases in the fall. Of course, much will depend on Ontario weather and ultimate yield. With the crop planted earlier, at this early point it looks better than 2014.
Old crop corn basis levels are .55 to $1.00 over the July 2015 corn futures on June 12th across the province. The new crop corn basis varied from .20 to .85 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $1.47 cents to $1.70 over the July 2015 futures. New crop soybeans range from $1.35 to $1.50 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on June 12th was $7.76 for SWW, $6.67 for HRW, $6.12 for SRW and $6.85 for Red Spring Wheat. On June 12th the US replacement price for corn was $4.68/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
Crop prices have been going sideways and down for several weeks now. There have been short periods of rallying followed by small declines over periods of time. You might call it treading water, but a big crop and big carryouts are dialed in almost everywhere. As we look toward the June 30th USDA actual planting report, we can expect more of the same unless there is fresh news that day.
The weather in the American Midwest has been uneven. For instance heavy rains across much of the US corn belt especially at this time a year will challenge the idea, rain makes grain. 75% good to excellent for corn at this time of year doesn't lie, but too much water can hurt crop yields. All of the soybeans are not planted yet, simply put, there is much production risk ahead that may affect crop prices. A June 30th USDA acreage surprise followed by subsequent hot and dry may be the stimulus to make grains go higher.
As it is on June 12th, the market has dialed in these lower prices based on crop weather, carryouts and the situation around the world. The June USDA report substantiated these large carryouts of grain in both old crop and new crop. Also, the Brazil second crop is quite huge and carryouts were increased there as well. We are already trading these numbers. Sideways may be the order of the day until July and August weather determines who will win.
The US dollar is always a large determinant on commodity futures price direction. After rising through the 100 level on the index on April 13 it plummeted down over the next month to 93 before rising to 97 before settling now to 94.987 on June 12th. As the dollar goes down it is a stimulant for grain futures and the opposite as it goes up. At the 94-index value it is still much higher versus last July when it had a value of approximately 80. It will remain a key factor for grain futures price direction.
Commodity Specific Comments
Heavy rains had fallen across much of the 89.2 million corn acres in the United States. However, it is always difficult especially at this early time to determine whether that is detrimental to future crop yields. The question is as we lead up to the June 30th USDA report, will that 89.2 million acre number change and in which direction. The conjecture is that all the corn did not get planted. The June 30th corn planted acres number will be telling for that.
Despite changes from the EPA that may be coming with regard to the ethanol mandate, ethanol margins at the present time remain quite profitable, which bodes quite well for continued corn demand. 13.760 billion bushels of demand does not lie. If there is any hiccup in supply, this demand will not be easily tempered.
The July 2015, September 2015 future spread on June 12th was -.0575 cents, which is considered neutral. Corn prices are cheap, considering that the July contract is trading in the lower 5% of the last five-year price distribution range. Seasonally, the July contract tends to trend down through early July.
Market bears have been solidly placed in the soybean market for quite some time now. It is hard to find hope, but it may be coming in the soybean meal market. There is strong commercial interest in soybean meal in the United States and Brazil has been exporting meal to South and Southeast Asia to replace a lack of meal from India. With burdensome supplies almost everywhere, we'll take it.
As of June 12th there are still about 20% of the US soybean crop yet to be planted. The forecast is for wet weather in places like Kansas and Missouri, where many of the soybeans are intended. That may result this year in some soybean acres not being planted.
The July 2015, August 2015 soybean futures spread is bullish at +.185 cents on June 12th. This reflects an increasingly bullish market picture for old crop soybeans. The July contract is trading in the lower 5% of the last five-year price distribution range. Seasonally, the soybean futures market tends to trend down through early July.
Wheat futures have enjoyed some pretty good times lately reaching their 200 day moving average before falling back this week. Russia and the Black Sea region remains a key player in the wheat market. The possibility of an export tax on Russian wheat is very real currently. If this comes to fruition limiting Russian exports, North American wheat may benefit greatly. That region remains very volatile geopolitically.
Ontario's 600,000 acres of wheat is heading out with fungicide application being done across the province. This has been a challenge as wet conditions have made for different types of application. Wet weather has certainly been an incubator for disease. Producers will be hoping for dry and warm days ahead.
The Bottom Line (cont)
Do we have a reason to be positive as we consider the June 30th USDA actual planted acreage report? After that, do we have a reason to be positive for prices as we go into July? Or, as part of our management plan do we simply buy put options and let the chips fall where they may? Well, risk management never gets old and there are myriad of answers to all those questions. Hot and dry weather in July will define much. Simply put, the July 4th weekend is always a litmus test for when the US crop is made.
Prices are cheap especially considering where we are over the last five years and much can be said about buying grain when it is below the cost of production. This is reflected in huge demand numbers, which continue underneath the seemingly bottomless supply as long as mother nature plays nice. In fact, if demand continues to grow and supply matches it, it is likely there will be even less corn acres in 2016. Prices should improve then. Of course, the quintessential question is will mother nature play nice? There was really never any definitive answer to that.
In Ontario we have had our production problems, but we are still set to produce a 350 million bushel plus corn crop based on average yields. This should have the effect of the classic low harvest basis with Ontario corn being shipped into the United States and being imported back later. Of course, much will depend on our crop size moving forward. The Canadian dollar will remain the testosterone below Ontario cash prices.
After reaching a low of .7780 US on March 18th, the loonie rebounded to .8330 on May 14th and has since retreated down to .8127 US on June 12th. This is a far cry from where we were a year ago with a 93 sent Canadian dollar. Simply put, this lower Canadian dollar as well as the weekly gyrations in the loonie cause a wide variation in Ontario cash prices for grain. It is incredibly important to keep abreast of our dollar movement as basis values swing wildly, especially for soybeans and wheat. It is likely to continue throughout the year.
The challenge for Ontario farmers is to hedge accordingly both in front and after the June 30th USDA report. As reports go, the June 30th report is one of the biggest and will reset the goalposts for grain fundamentals this year. After that, the July 4th weekend often serves as a flashpoint for traders deciding whether the crop is made. Short-term and long-term weather forecasts at that time can be critical to price direction. Standing orders for grain can be very useful tool at this very volatile pricing time. Marketing where you are profitable and comfortable never gets old. Patience can also be key. Daily market intelligence will remain, a very important task for Ontario grain growers.
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.