US and World
Amid the COVID-19 related news farmers have been busy in the fields across the greater North American corn belt. As of May 10th, 67% of American corn has been planted and 38% of American soybeans.
During the week ending May 16th, that certainly increased, despite cold weather, planters moved quickly. There have been some issues with wet weather in the Eastern Corn belt, but progress is so much better than 2019. COVID-19 news events are changing quickly as are the problems. Farmers are scrambling to safely plant this crop amid a demand picture fractured by COVID-19.
As we head into June, the greater economy is opening up. Agricultural commodity demand should start the long march back.
On May 12th the USDA released their latest WASDE report.
The May report always offers the first detailed forecast for the US grain year ahead. The USDA is projecting a 2020/21 corn crop to come in at a whopping 15.99 billion bushels, which will lead to an unprecedented 3.318-billion-bushel corn ending stocks at the end of this year.
This is huge and may result in a projected ending corn stocks to use ratio of 22.4%. This was based on 97 million acres with a yield estimate of 178.5 bushels per acre. Despite the COVID-19 problems, USDA boosted usage in this crop year with feed and residual at 6.05 bbu, ethanol at 5.2 bbu and exports at 2.15 b bu.
For old crop corn, USDA pegged ending stocks at 2.098 bbu, up 6 million bushels from the April report.
U.S. soybean production is pegged at 4.125 bbu based on 83.5 million acres and a trendline yield of 49.8 bushels per acre. The new crop ending stocks came in at 405 million acres, less than pre report estimates.
Old crop soybeans stocks went in the other direction with the USDA raising ending stocks to 508 million bushels, an increase of 100 million bushels over April. USDA pegged Brazilian production at 124 MMT, which is slightly less than last month. Projecting further out to the Brazilian 202/21 year, the projection is 131 MMT, an acknowledgement of the consistent growing potential in Brazilian soybean country.
Argentinian soybean production was projected at 51 MMT, 1 MMT less than last month. The USDA projected total 2020 wheat production for 2020 to be 1.866 bbu, less than the 1.920 bu bushels produced in 2019.
On May 15th, corn and soybean futures were higher than the last Market Trends report. Wheat futures were higher. May 2020 corn futures were at $3.19 a bushel. The July 2020 soybean futures were at $8.38 a bushel.
The July 2020 Chicago wheat futures closed at $5.00 a bushel. The Minneapolis July 2020 wheat futures closed at $5.06 a bushel with the September 2020 contract closing at $5.17 a bushel.
The nearby oil futures as of May 15th closed at $29.43/barrel up from the nearby futures of recorded in the last Market Trends report of $16.94/barrel. The average price for US ethanol on May 15th in the US was $1.34 a US gallon up from the $1.20 recorded in the last Market Trends report.
The Canadian dollar noon rate on May 15th was .7095 US, lower than the .7097 US reported here om the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
In Ontario corn planting is 90-95% planted as conditions in late April and early May were ideal in many parts of the province. However, it was very cold with snow inundating many areas of the province on May 10th.
In fact, many agronomists advised pulling the pin on May 6th as extreme cold and rain were predicted. There was little if any corn or soybeans emerged during that time. As of May 15th, some farmers are done planting both corn and soybeans.
However, at the same time, some have chosen to wait based on the cold temperatures. Rain has also inundated SW Ontario as of May 15th. Still, we are way ahead of progress compared to 2019.
COVID-19 continues to affect Ontario agriculture and the Ontario grain economy. The Grain Farmers of Ontario surveyed members and one of the findings said 24% of respondents are experiencing cancellations or delays of existing grain contracts.
This is serious business for Ontario grain farmers as basis values hold no sway if contracts are canceled or delayed. It is a very uneven time with price transparency with some grain contracts being a casualty of COVID-19.
It is the Black Swan, we never expected and as we move forward, hopefully the grain stakeholders will be able to work with farmers to get grain moved.
The implications for basis are not good, but hopefully this will be a Covid19 flash in the pan. As it is, old crop corn basis levels have decreased for corn delivered and increased for new crop corn form last month. Ontario grain demand continues to be fractured based on lower feed demand and ethanol production. This is starting to change in the US and a return to normalcy in Ontario cannot come soon enough.
Old crop corn basis levels are $1.25 to $1.40 over the July 2020 corn futures on May 15th across the province. The new crop corn basis varied from $0.90 to $1.45 over the December 2020 corn futures.
The old crop basis levels for soybeans range from $2.85 cents to $3.04 over the July 2020 futures. New crop soybeans range from $2.70-$2.86 over the November 2020 futures level. The GFO cash wheat prices for delivery to a terminal on May 15th were $7.20 for SWW, $7.41 for HRW, $7.20 for SRW and $6.51 for Red Spring Wheat. On May 15th the US replacement price for corn was $5.07/bushel.
You can access all of these Ontario grain on the Daily Commodity Report.
The Bottom Line
It has been a tough 8 weeks of lockdown for Canadians and farmers have taken some of that brunt. Risking your lives for the sake of the food supply was never supposed to be part of the deal, but it is what it is. With June in the cross hairs, Canada’s Premiers are looking at ways of opening the provinces. Staying healthy remains the priority. Salvaging our economy is also a priority. Finding a way to do it all safely remains an elusive goal. However, we move one, with planters set to roll into June in Ontario.
This is not 2019 with regard to planting conditions. Last year in the United States, approximately 14 million acres of corn and soybeans, which were expected to be planted were not and went into the US Prevent Plant program. In 2020 planting is ahead of schedule and all these acres are in play again. 16 billion bushels of corn and 4.125 billion bushels of soybeans projected don’t lie. The Coronavirus is rough for sure, but big grain supplies are overwhelming that effect and still dominating our grain price structure.
The elephant in the room changed a bit in mid-May. China remains the elephant in the room with regard for demand for agricultural commodities. It seemed like the China US trade Phase 1 agreement signed earlier was the bridge to the long way back as China has been buying soybeans. However, President Trump in the week of May 10th threatened to cancel that agreement based on the origins of the Coronavirus. Soybean futures retreated on the news and the rhetoric has been rising ever since. Simply put, we need Chinese demand and the accusations from the American President were not helpful. As of May 15th, the Phase 1 agreement between the US and China might be unraveling.
We know what COVID19 did to oil demand. However, its changing slowly, as the United States, Canada and other economics start to open up. China’s industrial production is actually up from April, and all of this points to better projections for oil prices. In fact, in the United States, gasoline demand has increased reflecting the new driving behaviour. As tough as its been for ethanol, maybe this is the start of the road back.
Commodity Specific Comments
The May 12th USDA report seemed to downplay the damage to corn demand from the Covid19 issue keeping demand components fairly solid. Everybody knows oil has cratered, then gas, then ethanol, so keeping ethanol demand at 5.2 billion bushels seemed to be somewhat of a flyer. However, despite the problems, oil and gasoline are on the rebound and the apocalyptic projections about corn demand might have been too dramatic. The USDA is surely taking that stance.
It’s also May when lot of corn has yet to emerge and becoming too negative with all the weather risk ahead maybe too onerous. We are usually moving into a time where new crop corn pricing is very attractive. However, 2020 is a different year with the Covid19 issues. Still, weather holds the key for production fields. The US has been on a winning streak with corn production over the last several years, and we’ll need to see if that continues.
The July 2020 September 2020 corn futures spread as of May 15th is -.0375 cents which is bearish. Seasonally, corn prices tend to trade up into June, but unfortunately Covid19 has upset that behaviour. The nearby corn contract is currently at its 7th percentile of the past five-year price range, making for significantly cheap corn prices.
China has the soybean market on eggshells. They have bought soybeans this year, but not as much as was expected by the Stage 1 agreement between the United States and China. Brazil has been the big beneficiary, but demand should be shifting back for American soybeans. However, the high US dollar makes these beans more expensive further hurting soybean demand.
The 49.8 bushel per acres projection from USDA on May 12th will be adjusted further as we go along. However, keep in mind, soybeans aren’t as bearish as corn and a 1- or 2-bushel decline in 2020 US yield will push soybean ending stocks below 350 million bushels. In other words, we aren’t too far away from supply problems, which have the potential to send soybean prices higher. A growing season with lots of weather risk will help determine this.
The July 2020 August 2020 soybean futures spread is -.0225 cents, which is considered sideways. Seasonally, soybean prices tend to trade higher into early July, but again, Covid19 has changed that game. The nearby spot contract is currently trading in the 11th percentile, which is very cheap.
Wheat futures lost ground in the week ended May 15th, as the world is still awash in wheat. However, per usual, weather will need to be watched in case a little excitement gets added. Its currently ok in the major wheat growing areas of the world, but as usual, we need to keep abreast of weather conditions in the Black Sea area. Dryness in this area as well as the US can influence wheat futures across all classes.
In Ontario, wheat has suffered from extreme cold and snowy condition on May 10th across much of the province. How this will impact wheat yield is yet to be determined, but it has not been optimal. The Canadian dollar value fluttering in the 70 to 71 cents US level has helped keep Ontario wheat prices buoyant, with old crop prices over $7.30 bushel, with new crop for July near $6.30 a bushel.
The Bottom Line (cont.)
In Canada we have become used to the unpleasant reality that the food supply chain has been fractured. Keep in mind this is not a singularly Canadian experience. It is happening in foreign countries as well. In China for instance, which is a huge buyer of agricultural commodities, there are issues with food supply lines. State run and private companies are being encouraged to buy higher volumes of soybeans, corn and soybean oil as the risk to a second wave of infections is very real. (According to Reuters) Sure, Brazil seems like this inexhaustible supplier, but there can be problems too. As we move forward, as farmers we need to measure where the problems may be and how this might affect market prices.
Uncertain times are rough for the Canadian dollar, as of May 15th touching .7095 US. This continues to create an Ontario cash market stimulus. With a staggered reopening of the greater Canadian economy, you’d think at some point there would be renewed strength in the Canadian dollar. However, during this Covid19 time, the US dollar is King. The value of the Canadian dollar moves inversely to the value of the US dollar. This has helped Ontario grain growers over the last several years. When it changes someday, the true degree of lower grain prices will hurt.
As it is, the Canadian dollar is a thinly traded currency most of the time and certainly now. Needless to say, flat pricing for grain remains a good strategy for Ontario grain growers to make a profit. Standing pricing orders are fine tools as well, especially at a time of crisis when grain futures and foreign exchange volatility is high. As we move ahead, all of this will remain, along with different geopolitical factors which will surely affect grain movement. Finding our way in a healthy manner will continue to be a priority at this time. Then there is weather which will surely determine how much grain gets produced in Ontario this year.
As the weather gets warmer, we surely hope to get this crop in the ground. As of May 15th, new crop corn is approximately $4.25 bu and new crop soybeans are $11.25bu. Those aren’t retro prices, but they might seem that way, with the Canadian dollar doing the heavy lifting. There are faint signs of hope now as governments reduce restrictions and the economy starts to open. It will eventually show up in grain markets. Despite the surpluses apparent in any discussion of grain fundamentals, certainty is in short supply too. Daily market intelligence will remain key. There will be many marketing opportunities ahead.