US and World
It is the time of year when planters are rolling almost everywhere. As of May 8, 69% of US corn had been planted versus 50% for the previous five-year average. At the same time 26% of US soybeans had been planted versus 16% for the previous five-year average. It is a very fluid, dynamic planting environment in May and June as acres are shifting as well with market prices. The road ahead will be defined at least in the short term by weather.
On Tuesday, May 10th the USDA released their May WASDE report. The May USDA report always gives us our first indication of new crop fundamentals and also a fine-tuning coming-out of the sometimes-explosive April reports. In the May report the USDA projected corn-ending stocks for the new crop year 2016/17 to come in at 2.15 billion bushels, which would be the biggest since the mid-1980s. The wheat ending stocks were projected to top 1.029 billion bushels, which is the highest since the 1987/88 crop year. The real kicker in the May USDA report was a projected new crop soybean ending stocks of 305 million bushels, which was at the low end of pre-report estimates and down 95 million bushels from old crop ending stocks. This sent the nearby soybean contracts up the limits at $.65 through much of the report day May 10th.
The production of corn was left unchanged at 14.43 billion bushels, which if realized would be 214 million bushels more than the record year of 2014/15. The soybean production remains at 3.8 billion bushels on 82.2 million acres, which is down from last year by 129 million bushels. On a global basis the USDA projects the Brazilian new soybean crop to be a whopping 103 MMT, up approximately 4 MMT based on increased acres and yield. US wheat production is projected at 1.998 billion bushels, down 3% from last year. The total global wheat production is pegged at 727 MMT, which is the second-highest total ever.
On May 14, corn, soybeans and wheat nearby futures prices were higher than in the last Market Trends report. The July corn 2016 futures were at $3.90 a bushel. December 2016 corn futures were at $3.98 bushel. The July 2016 soybean futures were at $10.65 a bushel. The November 2016 soybean futures were at $10.54 a bushel. The July 2016 Chicago wheat futures closed at $4.74 a bushel. The Minneapolis May 2016 wheat futures closed at $5.28 a bushel with the September 2016 contract closing at $5.35 a bushel.
The nearby oil futures as of May 14 closed at $46.21/barrel up from the nearby futures of last month of $43.73/barrel. The average price for ethanol on May 14 in the US was $1.80 a US gallon unchanged from last month at $1.80 a US gallon.
The Canadian dollar noon rate on May 14 was .7728 US down from the .7890 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario as of May 14 planters have been rolling across the province with varying degrees of progress. In Eastern Ontario much of the corn has been planted with soybeans also going into the ground. However, dry weather can be a curse too, and rains are needed for this crop. In other areas of the province with heavier soils such as in the Southwest many producers have not planted any crops. Recent rains have also delayed getting into the field. However, it is still relatively early especially for soybeans and producers are hoping to get into the fields before the end of May.
Ontario corn continues to be exported with vessels leaving for offshore. The big Ontario old crop corn mountain continues to be whittled away, but it is likely that we remain on the export corn basis until next harvest. Basis levels have been maintained since the last Market Trends report as the Canadian dollar has weakened slightly. Of course, the basis for soybeans and wheat is somewhat more sensitive to the Canadian exchange rate. Looking ahead new crop basis values will largely be based on the condition of the crop throughout this year. Expectations as of mid-May for a 2 million acre corn crop and a 2.9 million acres soybean crop are still in the offing.
With the Ontario wheat crop looking strong as of May 14, pricing becomes even more of a priority. Finding a place for this wheat in a very competitive marketplace will be a challenge. The Canadian dollar value needs to be monitored closely to take advantage of any futures price swing.
Old crop corn basis levels are .65 to $0.85 over the July 2016 corn futures on May 14 across the province. The new crop corn basis varied from .50 to $0.85 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.28 cents to $2.40 over the July 2016 futures. New crop soybeans range from $2.15-$2.33 over the November 2016 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on May 14 was $7.62 for SWW, $5.42 for HRW, $5.35 for SRW and $6.10 for Red Spring Wheat. On May 14 the US replacement price for corn was $5.38/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
There is life in these markets. The May USDA report reaffirmed that, with the new crop soybean ending stocks jumping off the pages. It would seem that soybean demand is higher than anybody expected. It is a bit like a wild horse kicking around the corral without any way to truly measure or control it. As we look ahead in this market environment the true picture on soybeans is likely to become clearer. As of now, it is difficult to really know why soybeans have rallied $2 since March. Sure, demand has risen, problems in South America, more corn acres in North America, but there is much more to the story. As planters continue to roll, it may come to the fore.
The US dollar has been part of that equation. It is declined since the start of the year, which makes US agricultural commodities cheaper to foreign buyers. This may be part of the reason that we have seen an increase in exports for all three grains. It may also be a reason to fuel grain prices in the next few months. However, since May 3rd the US dollar has actually been gaining and has recently been the benefactor of some bullish technical signals.
The Canadian dollar on the other hand is the inverse of the US dollar and on May 3rd it crossed over $.80 US, but then fell down to the 77 cents US level. It is a constant dance with the US dollar and the Canadian dollar with their opposite effects on each other and our futures and cash grain prices. It's that other constant layer to grain marketing in Ontario.
The situation in South America is one of record crops, but below previous expectations. There has also been extremely wet weather in Argentina hampering harvest as well as lowering yield. On May 10, CONAB, the Brazilian crop agency cut their soybeans estimate to 96.9 from their previous April report of 99 MMT. Needless to say, USDA has pegged their new crop soybean production at 103 MMT. Production potential in Brazil remains huge.
Commodity Specific Comments
The elephant in the room is a perceived shift in corn acres to soybeans because of the large rise in soybeans prices since planting commenced. As it is now, 93.6 million acres of corn will produce the largest corn crop ever. With soybean prices taking off since USDA estimated that figure March 31, the shift might be on, making the June 30 report a seminal mark for corn prices.
As of May 14 corn planting is experiencing some wet conditions in the United States slowing planting. The US corn complex is also benefiting from lower Brazilian supplies and a less than stellar Safrinha crop. This is all happening in a market environment where 2.15 billion bushels of new crop ending stocks don't lie. It's still bearish, but maybe not as bearish as market watchers once feared before the May USDA report.
The December 2016 March 2017 corn futures spread is neutral at -.07 cents as of May 14. Seasonally, the corn futures prices tend to trend sideways thru mid June. The July corn contract is currently trading in the lower 31% of the five-year price distribution range.
The USDA has never had a stellar record when it comes to measuring soybean stocks, with predictive ending stocks constantly changed through the years. When USDA came out with 305 million bushels projected soybeans ending stocks it was a shock to the market and soybeans responded aggressively. It is likely there will be more changes in this number as soybean demand continues to grow aggressively.
Crush and exports are higher from the May USDA report reflecting renewed demand. Also too, world soybeans demand continues to grow, partly reflected in a reduced world ending stocks from the May USDA report of 74.25 MMT.
The November 2016 Jan 2017 soybean futures spread is at .0275 cents/bushel as of May 14 and this is considered bullish. Seasonally, soybeans futures tend to trade sideways thru mid June. The July soybean contract is currently in the lower 34% of the past five year price distribution range.
Wheat futures have retreated since April and have been reticent to join the run up in prices led by soybeans. Wheat's bearish fundamentals are just too onerous. Weather going forward will certainly impact crop development especially in the SRW areas south of Ontario. Winning the quality war in this production area is always important for Ontario wheat farmers.
Ontario's wheat continues its excellent development with herbicide and fungicide applications taking place. Weather will dominate crop quality going into harvest. Growers will also need to keep a keen eye on the Canadian dollar, which may heavily influence basis values leading into harvest.
The Bottom Line (cont.)
It is a unique time for grain markets. One reason for that are the tremendous bearish fundamentals for all three grains seemingly being ignored in price action over the last month. It is true that soybeans have led that charge with both corn and wheat reluctantly attempting to follow. Huge ending stocks for corn and wheat don't lie. In fact, the May USDA report projected the largest new crop corn ending stocks since the mid-1980s. Of course, it's all a theory now. We have a growing season to go through before that ever gets realized.
Being cautious in this grain-marketing environment would be prudent. Visions of much higher prices are unlikely unless there is some catastrophic weather event moving into the American Midwest this summer. The drought year of 2012 is proof that that can happen, but generally it doesn't and when pricing opportunities emerge they need to be captured.
Looking ahead daily market intelligence will be key as always. The June 30 USDA report will be a pivotal moment in this marketing year with a possible readjustment of planted acres. Will the USDA cut 1 million acres out of their 93.6 million corn acre estimate from March 31? Will this possible cut in corn acres go all to soybeans? Will the USDA surprise and offer nothing of that? Will the June 30 USDA report reflect a further cut in grain stocks? Will it be hot and dry? These are all some of the questions that we need to weigh as we manage our marketing plans going ahead. There is much risk to be measured yet and much price action to take place.
As I've said many times, risk management never grows old. With planters rolling, it's no time to stop now. With so much risk on the table amid the swirl of acres planted, yields, weather, currency etc., standing price orders remain a good way to capture marketing opportunities that emerge quickly in violent market action. Futures spreads should serve as clues as we move toward to June 30. Market where you are comfortable and profitable. Market conditions as temperatures rise will surely be more volatile.
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.