US and World
You can feel it coming. That is spring. AS we turn the calendar over into March, it always represents a time of hope across farm country. In Ontario, a very tough cold February is in the rearview mirror and snow is beginning to melt. It is just like that across the American corn belt except more so. Farmers are beginning real hands-on preparation to move to the fields in a few weeks. Just as farmers are preparing to get into those fields, the grain markets are also focusing in on potential acreage for 2015. The USDA weighs in on those acreage projections on March 31st.
The March 31st USDA prospective plantings report is one of the three major reports of the year. So the March 10th USDA report is often looked at as a minor affair with regard to price action. 2015 was no different. On March 10th the USDA lowered domestic corn ending stocks by 50 million bushels down to 1.778 billion bushels. However, the USDA also increased feed and residual use by 50 million bushels and exports by 50 million bushels. The US corn stocks to use ratio declined to 13%. The USDA also lowered global corn ending stocks by 4.4 million MMT.
Soybeans have been fixated on South American production fields now into the home stretch of their harvest season. The USDA on March 10th did not change the US domestic supply and demand tables leaving ending stocks at 385 million bushels. They left Brazilian and Argentinian soybean production at 94.5 MMT and 56 MMT respectively. In the wheat market the USDA increased wheat used for seed by one million bushels. US ending stocks declined to 691 million bushels and the stocks to use ratio declined to 33.1%.
On March 13th, corn, soybean and wheat nearby futures prices were lower than the last month. Corn futures as of March 13th had the May 2015 futures at $3.80 a bushel. The May 2015 soybeans were at $9.74 bushel. The March 2015 Chicago wheat futures closed at $5.02 a bushel on March 13th. The Minneapolis May 2015 wheat futures closed on March 13th at $5.67 a bushel with the September 2015 contract closing at 5.80 a bushel.
The nearby oil futures as of March 13th closed at $44.84/barrel down from the nearby futures of last month of $51.09. The average price for ethanol on March 13th in the US was $1.82 a US gallon vs. last month at $1.78 a US gallon.
The Canadian dollar noon rate on March 13th was .7811 US down from the .8024 US reported here last month. The Bank of Canada's lending rate remained at 0.75%.
In Ontario, a very tough last eight weeks of winter seems to have broken. Temperatures above freezing are melting winter snows. There is actually some harvest activity in Ontario fields as some growers have got back into corn left over winter. This corn is testing between 16 and 18%, a drop of approximately 40% since it was left in December. Needless to say, farmers are focused on the spring planting plans and that crop mix will surely determine basis levels come this fall.
Basis for corn has actually softened to some extent across the province, but has withstood some of that depreciation because of the lower value of the Canadian dollar. Any American corn coming in now will be on older contracts. Cash values above $5 dollars for old crop is widely seen in Eastern Ontario. Vessels are scheduled to dock into the east when the ice clears having implications for lower basis levels. At a certain point Ontario corn may return to import pricing.
The US basis for soybeans has also softened over the last month despite the lower Canadian dollar. Capacity cutbacks at some Ontario crushers have forced this. However, with the Canadian dollar weakness it is almost transparent to farmers. Needless to say, in this currency environment checking the basis is extremely important when pulling the sales trigger.
Old crop corn basis levels are .80 to $1.00 over the May 2015 corn futures on March 13th across the province. The new crop corn basis varied from .40 to $.95 over the December 2015 corn futures. The old crop basis levels for soybeans ranged from $1.85 cents to $2.15 over the May 2015 futures. New crop soybeans range from $1.65 to $2.20 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on March 13th were $7.32 for SWW, $6.87 for HRW, $6.36 for SRW and $6.75 for Red Spring Wheat. On March 13th the US replacement price for corn was $5.16/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
Going into March we've seen more decline than sideways in the grain markets. To some extent this has been mitigated in Ontario by the declining Canadian dollar. However, in South America harvest is heading toward completion with record crops coming out of those fields. A Brazilian trucker strike caused somewhat of a hiccup in that process as diesel fuel became scarce across the country, but that has fizzled as of late. Those soybeans will eventually be delivered to ports and the Safrinha corn will get planted. Our old crop is in the rearview mirror; the focus now is squarely a new crop.
Like a raging bull, the US dollar has been on a rampage currently breaching the 100 level on the USDX. This is extremely significant with regard to our grain futures prices and commodities in general. In fact, this represents a 12-year high in the US dollar, which acts as a brake on agricultural prices going higher. A high US dollar results in higher commodity prices for foreign buyers. As we head into spring of 2015, the specter of an even higher dollar after a US interest rate hike will likely continue to put a damper on our futures price horizon.
At the same time that the US dollar is rising higher, it is having the opposite effect on the Canadian dollar. While the American economy is growing strongly, it is not so for much of the Canadian economy. With the price of oil at low levels Western Canada is not the job engine it once was. On the other hand a lower Canadian dollar is good for Ontario and this was recently justified as Ontario leads all provinces in economic growth, the first time in 15 years. Needless to say, the much lower Canadian dollar into the high 70s US continue to cushion Ontario farmers from substantial price declines. As we move ahead in 2015 this remains the story in the Ontario grain market.
It remains a bearish situation compared to where we have been over the last five years regarding grain fundamentals. However, there is dryness in the US southern Plains, which may be working itself into the American Midwest. It is certainly affecting standing wheat in the United States. South America despite their record crop still has their infrastructure problems. With Argentina having a 35% export tax on soybeans, the situation there will remain muddled. So there is enough political instability in the world to create that unexpected Tuesday of explosive price movement. 2015 will probably not be telescoped as a year just like the others
Commodity Specific Comments
Despite the sideways to lower movement of corn futures over the last month, potential exists for future price appreciation. Corn demand at present is at record levels of 13.695 billion bushels. Even though we have had record crops, ending stocks continue to decline currently at 1.777 billion bushels. Even with corn planted acreage of 89 million acres with normal yields in 2015, ending stocks could be cut to 1.2 billion bushels as demand continues to grow. This is unsustainable in the long term unless price goes up to mitigate some of that demand. As it is now, corn demand is extremely robust.
Focus surely will be on the March 31st USDA Prospective Plantings report and the expected lower corn acreage number. It is expected that US corn acres will plunge below 90.6 million acres, which were planted last year. If that number is significantly down to 86 million, we could see a turnaround in prices on March 31st. Variations on that theme have similar direct pricing implications.
The corn futures spreads are neutral with the May 2015 to July 2015 spread at -.07 cents bushel. The noncommercial traders continue to liquidate their net long futures positions in the corn market. The May 2015 corn contract is currently trading in the lower 15% of the five-year distribution range. Seasonally, corn futures tend to trend down through mid-March.
Soybeans are starting to feel the true weight of the South American production numbers. The crop of 94.5 MMT in Brazil and 56 MMT in Argentina are finally coming off the fields and arriving in the ports in big numbers. Argentina is somewhat delayed both in production and with a heavy export tax. Needless to say, these beans are being met with robust demand from China. The Brazilian Real is also acting like the Canadian dollar, in that Brazilian farmers are receiving much more for their soybeans in their domestic currency based on the strength of the US dollar.
This devaluation in the Brazilian Real may cause even more soybeans to be grown next year possibly up to 6% more. That is on the bearish side. However, back in the United States we will be getting news on March 31st of the quarterly stocks report. The USDA has had soybean stock errors before in these numbers, which will be key for the immediate short term old crop pricing.
The immediate short-term outlook for soybeans is sideways based on a May 2015 July 2015 future spread of -4 cents a bushel. The May soybean contract is trading in the lower 8% of the last five-year price distribution range. Seasonally after a selloff in March, the soybean market tends to rally through early May.
In the northern hemisphere, wheat will be coming out of dormancy. Dryness in the American southern plains is causing concern. However, there is also lots of concern in the Ukraine and Russia, where large acreage could be compromised. Intelligence from that region may be always suspect and this year, more so with the political violence in the region.
In Ontario, farmers are anticipating good things as always as the snow recedes. However, that can't take away the difficult conditions much wheat was planted in last November. The 600,000 acres of wheat in Ontario is suspect and the acreage that is kept will surely fall.
The Bottom Line (cont.)
The focus now will be on the March 31st USDA report. It is a refined surveyed based look at the actual acreage numbers, which will be planted in the United States this year. Earlier during their Outlook Forum, the USDA released a preliminary number of 89 million corn acres and 83.5 million acres of soybeans. On March 30th this is likely to change and along with the quarterly stocks report will give fodder for headlines, which will be traded by the noncommercial interests. This might make for an explosive day.
Private firms have estimated US soybean acreage to be upward toward 88 million acres. Last year in 2014 we saw a 7 million acre increase over the previous record US soybean planted area. It is unlikely that we would see the same type of increase or even half of that. Of course nobody knows and that is why there is such drama leading in to these USDA reports. March 30th report can be one of the most volatile.
In Ontario we have the same type of estimation regarding our crop acres distribution. Will Ontario farmers grow more than 2 million acres of corn? Will Ontario soybean acres be over 3 million acres? With the Canadian dollar being in the 78% range will this affect the crop mix? Of course, will the Canadian dollar fall even further making for basis appreciation throughout 2015? It is a long road ahead.
Wheat may certainly see some fireworks this year, but it is too early at this point. The situation in Russia and the Ukraine remain somewhat troublesome. This is as an aside from the wheat crop, which is compromised in the growing region. It is likely to be a focus of some market excitement this year.
Of course, weather is always the biggest consideration going forward and nobody knows what that will be. Keep in mind, if March 31st gives us a lower corn acreage number than expected, a repeat of wonderful 2014 growing conditions will be a prerequisite to satisfying a growing demand for corn which may top out at 14 billion bushels in 2015. Any weather-related dryness, bringing yield down from 2014 levels will mean a rise in price to ration demand.
The challenge for Ontario farmers is to measure all of these considerations with a particular focus on the value of the Canadian dollar going forward. The depreciation in the Canadian dollar gave an unexpected bonus on basis last fall and it continues. Hedging that foreign exchange risk is always difficult. Daily market intelligence will help in that regard. The road ahead to March 31st will likely be very focused for grain traders. After that, we're off to the races. Preparing and measuring your risks during this time is very important.
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.