US and the World
It is go time, that time of year when farmers across the great North American Corn Belt are busy planting their crops. Weather has been a detriment across much of the US Corn Belt as wet weather has farmers out of the fields in the southern, central and eastern US. With the USDA projecting a big soybean acreage this year and a reduction of corn acreage, weather will be the final determinate. For the week ending on May 14, 2017, the USDA had begged US corn planting at 71% and US soybeans planted at 32% just slightly behind normal.
On May 10th the USDA released its latest WASDE (World Agricultural Supply and Demand Estimates) report. The May report is always the official first look at new crop ending stocks. In this report the USDA set 2017/18 new crop corn ending stocks at 2.11 billion bushels, which was consistent with pre-report estimates. The USDA also maintained its current production number for this year at 14.065 billion bushels. Old crop ending stocks were pegged at 2.295 billion bushels.
The USDA projected new crop 2017/18 soybean-ending stocks at 480 million bushels, which was 88 million bushels less than what it been projected. The USDA maintained the 2017/18-soybean production at 4.255 billion bushels. The old crop soybean ending stocks were reduced to 435 million bushels, which were down 10 million bushels from their April report. The USDA also projected new crop wheat production at 1.25 billion bushels, which is down 25% from last year. However, this estimate did not factor in the recent heavy snow and cold weather in the US Southwest plains.
On May 19th, corn and wheat futures were higher than the last Market Trends report. Soybeans futures were slightly higher. July corn 2017 futures were at $3.72 a bushel. The July 2017 soybean futures were at $9.53 a bushel. The July 2017 Chicago wheat futures closed at $4.35 a bushel. The Minneapolis July 2017 wheat futures closed at $5.55 a bushel with the September 2017 contract closing at $5.62 a bushel.
The nearby oil futures as of May 19th closed at $50.33/barrel down from the nearby futures of last month of $49.62/barrel. The average price for ethanol on May 19th in the US was $1.70 a US gallon up from last month at $1.82 a US gallon.
The Canadian dollar noon rate on May 19th was .7383 US down from the .7404 US reported here last month. The Bank of Canada’s lending rate remained at 0.50.
In Ontario planting continues after an uneven start to the season. Wet weather and cold soils limited planting progress in many parts of the province in late April and early May. However, in mid May the planting window opened up across Ontario with many farmers hitting the field. Generally speaking, there was some early planting in the deep south west of Ontario, but the season is later throughout most of the rest of the province. For instance in the “far east”, planting season has mostly been delayed. Needless to say, even though there has been a delay in planting it is far from concerning. Of course, much will depend on weather in late May to get this crop into the ground.
With the delay in corn planting across some areas in Ontario, the new crop soybean basis has been responsive to this concern. As always, the Eastern Ontario corn basis is usually higher than the rest of the province and this is telling with some Eastern Ontario bids up to a $1.20 over the December versus $.95 in Southwestern Ontario. The old crop bids for corn are somewhat similar, but basis has really not moved significantly in a month. The Canadian dollar in the 72-74 cents range has been a continued stimulus.
Of course much of this concern about new crop corn basis comes from the eventual crop mix within Ontario. Expectations now are for a crop similar to last year with a Statistics Canada estimate of 2.2 million acres. However, as of May 19th, that is all theory now especially with some planters halted. This may result in risk premium included in the new crop basis as we go ahead.
Old crop corn basis levels are $.50 to $1.16 over the July 2017 corn futures on May 19th across the province. The new crop corn basis varied from .95 to $1.20 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.75 cents to $2.90 over the July 2017 futures. New crop soybeans range from $2.40-$2.80 over the November 2017 futures level. The GFO cash wheat prices for delivery to a terminal on May 19th were $4.94 for SWW, $4.94 for HRW, $4.94 for SRW and $5.82 for Red Spring Wheat. On May 19th the US replacement price for corn was $5.45/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
We are kind of in the “grain pricing twilight” zone as we head into mid June. History tells us that some of the best marketing opportunities are often within this time period when the crop is being planted and made in the United States. If you believe in that history this is clearly the time to consider placing new crop standing orders. Risk management can sometimes be a measured thing. For farmers marketing grain, this would mean hedging over a timeline, where critical crop progress is being defined. There are no guarantees; there is much price risk ahead.
The one-day black swan event in Brazil caused soybean prices to tank $.30 in one day. It also precipitated the most widespread domestic Brazil soybean selling in many years. When Brazil President Michel Temer was accused of taking bribes concerning the Brazilian meat packer JBS, supposedly caught on audiotape, the Brazilian currency tanked 8% in one day. In a world awash in grain, it was the consummate selling signal. For Ontario producers watching futures prices, it was an example of how a Black Swan event can shake market prices.
Of course it’s hard or nearly impossible to predict any black swan event affecting grain futures prices. However, uneven weather is getting the US crop off to a less than stellar start. Trend line yields in corn now seem more likely than above average. Tough planting conditions do make a difference. However, the phrase “hot and dry” usually trumps tough planting conditions. We are not there yet and producers will need to measure if that phrase becomes a marketing factor.
Lost within market action over the last several weeks has being the decrease in the value of the US dollar. From a high of approximately 103.5 at the start of 2017, it has dropped to 97.03 on the US index as of May 19th. This recent drop can be considered a stimulus for grain futures prices and may possibly create a short-term stimulus for a market rally. When the world’s default currency gets cheaper, simply put, it’s good for agricultural commodity prices.
Commodity Specific Comments
The corn market continues in a sideways range with lots of supply around the world. For instance the Safhrina corn crop is now being harvested in northern Brazil and much of this corn from Argentina and Brazil will be coming onto the market. This factor along with large supplies of American old crop corn is keeping the July futures prices at bay.
It cannot be ignored some of the weather problems going on in the United States. For instance Illinois corn is rated 42% good to excellent as of May 14th, but this is down from 72% last year. It’s still early, but trend line yield in the United States may be difficult to attain based on these early weather related new crop production scenarios.
The July 2017 September 2017 corn futures spread is -7.25 cents as of May 19th, which is considered neutral. The July corn futures contract is currently priced in the lower 37% of the five-year price distribution range. Seasonally over the last five years the July corn contract tends to trend down through August.
It is difficult to paint a bullish scenario for soybeans especially with the large supplies currently on world markets. The scandal in Brazil, which precipitated an 8% decrease in the Brazilian currency led to one of the largest selling days in Brazil over the last few years. It showed that currencies really matter especially in such a competitive world for agricultural commodities.
The upside to soybean prices is difficult to see especially in futures. However, seasonally the weather will impact soybeans into August, while the corn window is much shorter. The USDA in their May 19th report showed ending stocks very much the same next year as it is this year and prices to be similar or lower.
The July 2017 August 2017 soybean futures spread is -1.25 cents as of May 19th, which is considered bullish. The soybean futures market over the last five years seasonally shows the old crop tends to trend up through late June. The July soybean futures contract is currently priced in the lower 21% of the last five-year price distribution range.
Wheat is currently being harvested in Texas and other parts of the southern US with lower yields and quality issues. Also too, with rain inundating much of the southern Midwest quality issues will surely be a concern affecting wheat futures. However, in Europe and the Black Sea region, which produces 50% of the world’s wheat, conditions are good. The funds are short wheat and even with 25% less American production expected prices have been range bound between $4.20 and $4.40 per bushel.
In Ontario amid the raindrops and tough soil conditions producers have managed to get their wheat side dressed and sprayed with fungicide. Much of Ontario wheat starting in southwestern Ontario will be heading out within the next 2 to 3 weeks. Weather during this critical time for wheat will surely impact the yield going into summer. The Canadian dollar continues to be a stimulus for Ontario cash wheat prices.
The Bottom Line (cont.)
The Canadian dollar continues to be the stimulus for Ontario cash prices. On May 5th it actually traded in the $.72 range in comparison to January 31st when it was trading in the $.77 range. Like the Brazilian Real and the US dollar, currencies matter here too. It is always difficult to know where our loonie is headed although it is usually inverse to US dollar moves. Key factors to watch are the Bank of Canada interest rate announcements along with interest rate movement at the US Federal Reserve.
As we look ahead from a pricing perspective crop progress in the United States is important. It is uneven now, but we’ve seen that so much in the past. The American propensity to produce grain is vast. In Ontario at the same time crop conditions may have an impact on future new crop basis values. In this critical time period daily market intelligence supplemented with standing marketing orders can be very helpful to capture market opportunities.
Clearly, grain stocks are still onerous based on the May 10th USDA report. The new crop ending stocks of 480 million bushels of soybeans and 2.110 billion bushels of corn are projected. However, ethanol demand at 5.5 billion bushels is a record and total corn demand of 14.645 billion bushels is too. Despite the onerous surpluses and projected surpluses, a tenuous argument could be made there is a fine balance between supply and demand. Any upset in this fine balance to the supply side will send prices higher.
Of course geopolitical events can affect all of this moving forward. We saw that to some extent with the Brazilian scandal and its effect on soybean prices. The Trump administration continues to challenge present trade agreements. North Korea remains a problem. The US Federal Reserve will likely raise interest rates again soon. There are a myriad of market factors aside from the weather and supply and demand that may affect our prices. The challenge for Ontario farmers as they plant their crops is to consider all of these marketing factors. Market your grain where you are comfortable and profitable. There will be profitable marketing opportunities ahead.
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.