US and World
It is a quiet time for grain markets. Mid-March is typically a time where farmers are busy getting ready for spring. At the same time traders and market watchers are anticipating the end of the month USDA report that will give us the USDA's first official estimates of prospective plantings in the United States this year. So, it is not entirely unusual to see markets treading water until the big numbers are released at the end of the month. It's no secret that farmers are getting ready to plant another crop in North America. How much they plant will certainly be a focus of interest leading into the March 31st USDA prospective plantings report.
The March 9th USDA report reflected some of this quiet time in the grain markets. The USDA left unchanged its corn ending stocks at 1.837 billion bushels the same as their February report. In fact all the major numbers in US corn remained virtually the same from February. On the global side of the market the USDA actually decreased global ending stocks for 2015/16 to 208.81 MMT from 206.97 last month.
While the corn ending stocks number remains the same, the USDA actually increased soybean ending stocks 10 million bushels to 460 million bushels. The USDA decreased the crush number by 10 million bushels to come up with this figure. On the world stage global soybean ending stocks were reduced for 2015/16 from 80.42 MMT to 78.87 MMT. The USDA also kept Brazilian and Argentinian production the same as February at 100 MMT and 58.5 MMT respectively.
The USDA kept wheat stocks the same as their February report at 966 million bushels. They also decreased world ending wheat stocks for 2015/16 to 237.59 MMT from 238.87 MMT. The reduction in global ending stocks for all three grains was about the only bullish nugget to take from the report.
On March 11th, corn, soybeans and wheat nearby futures prices were higher than the last Market Trends report. The May corn 2016 futures were at $3.65 a bushel. December 2016 corn futures were at $3.82 bushel. The May 2016 soybean futures was at $8.95 a bushel. The November 2016 soybean futures were at $9.06 a bushel. The May 2016 Chicago wheat futures closed at $4.75 a bushel. The Minneapolis May 2016 wheat futures closed at $5.10 a bushel with the September 2016 contract closing at $5.28 a bushel.
The nearby oil futures as of March 11th closed at $38.55/barrel up from the nearby futures of last month of $29.44/barrel. The average price for ethanol on March 11th in the US was $1.63 a US gallon the same as last month at $1.63 a US gallon.
The Canadian dollar noon rate on March 11th was .7576 US up from the .7228 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario farmers are getting ready for the spring push and the focus will begin on Ontario acres in 2016. There was an increase of winter wheat acres in Ontario planted last fall of approximately 350,000 and these acres will likely make for decreased soybeans acres in 2016. Much will depend on the spring that we have, but it is likely that Ontario corn acres go up slightly with soybeans taking the brunt of the acres that were planted into wheat. Last year Ontario had 2.055 million acres of corn and 2.9 million acres of soybeans and 630,000 acres of wheat.
Spring and summer weather will be a large determinant of Ontario yields as always. Basis fluctuations will surely follow. At this point there is only guessing how that will play out. The specter of “hot and dry” has been scarce the last few years. However, this is agriculture and it could come back at any time. Needless to say, Ontario producers are hoping for another year of benign weather and good rainfall into late August and September.
Ontario corn has been moving into the United States and to New York State as we continue on the export basis. There will be more corn that needs to be exported into spring. It's entirely likely that we have enough old crop corn to get through to the next season. However, it often doesn't work out that way and producers will have to monitor basis levels daily. There is still much old crop corn in the countryside. The recent rise of the Canadian dollar to over the 75-cent level from .6883 over the last two months has quieted cash sales.
Old crop corn basis levels are .80 to $1.00 over the May 2016 corn futures on March 11th 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 $2.36 cents to $2.55 over the May 2015 futures. New crop soybeans range from $2.22-$2.32 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on March 11th was $8.14 for SWW, $5.89 for HRW, $5.89 for SRW and $6.02 for Red Spring Wheat. On March 11th the US replacement price for corn was $5.15/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The focus of the market now is on the March 31st USDA Prospective Plantings report. This is one of the big three reports that happen every year, the next one being the June 30th report when we will know actual surveyed acreage. It is hard to know at this point what American farmers will do for acreage in 2016. The classic agricultural economist would say prices need to go down to a point where production is curtailed. It is difficult to say, but we are unlikely to see lower planted acreage figures in 2016 based on current prices. Last year, we had 85.1 million acres of soybeans and 88.9 million acres of corn. Informa economics has a preliminary projection of 87.5 million acres of soybeans and 88.5 million acres of corn for 2016. A cut in acreage may not be in the cards.
The March 31st USDA report may serve as a flashpoint for grain futures markets, but the Canadian dollar over the last eight weeks has eroded cash basis values in Ontario. After reaching a low .6883 cents US on January 20ths, as of March 11th it's reached over $.75 US in a meteoric rise. The trade-off between lower dollar and higher futures is always difficult for Ontario producers and the last eight weeks have proven why with futures sideways and the dollar gaining. This will continue to challenge Ontario farmers throughout 2016.
The question is have commodities reached the bottom or are they on the slow way back? Oil has gained almost a third of its value back from its lows. This has been significant to the Canadian dollar. Also too, even with the bearish fundamentals of the March 9th USDA report, futures have had a small rally going into March 11th making up to some extent basis losses. If we are on the way back, it is likely that oil will lead the way. On the other hand, if it's just a flash in the pan, agricultural commodity should consolidate again. It might take that production calamity or black swan event to get a real rally going.
The US dollar index as of March 11 is 96.172, which is down from the hundred-point level, which it reached last November. However, this is still much higher than the 80-point level we were at in 2013 and 2014. Of course, the US dollar has been even higher like in the 115 to 120 range in 2002. As the US dollar is the world's default currency, as its value goes up demand for products priced in US dollar goes down. Currently, at the 96-index level it is a detriment to agricultural commodity demand. The US dollar will continue to act as a brake on any grain futures rally if it stays that these lofty levels.
Commodity Specific Comments
Corn has been difficult to get moving for months now. A May futures at $3.65 is still nothing to write home about and the USDA did virtually nothing in their March report. The US dollar has also hurt corn exports in the March report. The USDA actually reduced corn used for ethanol slightly by 9 million bushels. Corn ethanol demand is currently 5.2 billion bushels.
Will the USDA say on March 31st there will be 90 million acres plus of corn in 2016? If it happens it will surely be another bearish factor for the new crop market. The old crop remains under the same old fundamentals, but eventually will have to move into the market. Producers selling into them may temper short-term rallies.
The May June 2016 corn futures spread is neutral currently at -.04 cents as of March 11th. Seasonally, corn futures tend to trend sideways through the middle of May. The May corn futures contract is trading in the lower 11% of the five-year distribution range.
Soybeans continue to be under all the bearish fundamentals that they have always been under over the last several months. However, they have rallied in the last two weeks before March 11th with the November contract actually passing over $9.00. This is happening in a market environment where many market observers are saying a Brazilian crop of over the USDA estimate of 100 MMT. The Argentinian crop is also higher at 58.5 and these soybeans continue to weigh on the market.
As of March 11th soybeans actually had their highest close in 2016. This is partly because of soybean oil rising along with the May Palm oil contract. US soybeans are actually cheaper at the gulf now than Brazilian soybeans, which is giving a little support to prices.
The May 2016 July 2016 soybean futures spread reflects a neutral commercial position at -.05 cents a bushel. The May soybean contract is priced in the lower 10% of the last five-year price distribution range. Seasonally, the soybean futures market tends to trend up through early May.
The wheat market continues with bearish fundamentals. However, in spite of that we've seen a $.30 rise in the July futures for SRW wheat in Chicago. For producers, the hope is that the low is in setting up selling opportunities for the robust looking Ontario wheat crop.
The Ontario wheat crop does look good coming out of winter in southwestern Ontario. In fact, some of the wheat has never looked better partly based on a very benign winter setting. However, that is not the case everywhere in Ontario especially in Eastern Ontario where ice has been a factor on many fields and it is yet to be determined how many acres are affected.
The Bottom Line (cont.)
The March 31st USDA prospective plantings report will dominate market action towards the end of March. Getting the USDA's best guess on corn and soybean acres for 2016 is almost like a starting gun on the real new crop year. Clues to how many acres might be planted may comes from the 2016 US crop year insurance prices. These are $3.86 for corn and $8.85 for soybeans. These prices were determined in February and are about middle-of-the-road with regard to expectations to boost acres in both crops in 2016. They are lower than last year, but probably high enough to slightly increase planted acres for 2016. It is all a theory now and we will know more on March 31st.
For Ontario farmers balancing the futures risk versus the Canadian dollar volatility continues to be very important. Nobody could have predicted on January 20th when the loonie hit .6883 cents it would turn around in a meteoric rise into March 11 at over $.75 US. On the contrary, there were many analysts that said it was going to go even lower. The simple fact is, nobody can predict these things with certainty. The Bank of Canada is unlikely to raise interest rates in 2016. However, I do not think that is the same for the US Federal Reserve in the United States. Any interest rate increase again in the United States will be bullish for the US dollar and may put additional pressure on our grain futures prices as well as the dampening of Canadian dollar value.
We are entering the season of weather related news, which may surely affect market prices. Sure, we still have bearish fundamentals for grain, but over the last few weeks, futures prices are higher and maybe a bullish signal for something else. Those futures gains have been mitigated by a Canadian dollar on a tear. Needless to say, managing that balance between futures prices and Canadian dollar volatility continues. The way down to 68 cents US was a bit of a mirage in that time frame. The road back currently now at over 75 US is too. Where it will even out and settle for an extended period is another question.
Grain marketing is always a fluid experience. It's a constantly changing market environment and in Ontario, even more so with our foreign exchange volatility. The right answer to our marketing is selling those crops over time profitably. In our current market environment that will continue to be a challenge. Timing of grain sales can be your friend. One thing we know is over time, everything changes including the weather. In 2016, we are entering that time in the market where weather will exact its influence significantly. Standing grain-selling orders are always good tools to capture those fleeting marketing opportunities that arise overnight in a blink of a futures screen. March 31st USDA report will help set the stage. As we get ready to plant, daily market intelligence remains 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.