US and World
What is a record crop is now coming off in the US corn belt. Where the old axiom has always been rain makes grain, the 2014 season might have redefined that. While we in Ontario had what we would consider a cold summer, delaying our crop maturity our friends in the United States cornbelt enjoyed moderate temperatures, especially nights that were below 80°F. This essentially boosted production substantially with the state of Illinois actually looking at a 200 bushel per acre corn statewide yield this year.
This was substantiated in the recent October 10 USDA report. In this report the USDA increased its corn production estimate to 14.5 billion bushels and it's soybean estimate to 3.9 billion bushels, both records. This is being done on 83.1 million acres of harvested corn and 83.4 million acres of harvested soybeans. We have been hearing about record crops for many weeks and months now and USDA has backed that up.
The demand is still very strong for both corn and soybeans. However, it is like a supply tsunami. The USDA increased new crop corn ending stocks to 2.081 billion bushels, which was less than what the trade had expected. The corn ending stocks to use ratio sits at 15.2%. The ending stocks for soybeans were reduced to 450 million bushels from 475, but almost 4 times higher than last year. The soybeans stocks to use ratio is at 12.6%. Wheat ending stocks in the USDA report were trimmed both for the US and world reports. The US wheat stocks to use ratio remains at 27.5%.
On October 10th, corn, soybean and wheat futures prices were lower than the last report. Corn futures as of October 10th had the December 2014 futures at $3.34 a bushel. The November 2014 soybeans were at $9.22 bushel. The December 2014 Chicago wheat futures closed at $4.98 a bushel on October 10th. The Minneapolis December 2014 wheat futures closed on October 10th at $5.53 a bushel with the July 2015 contract closing at 5.83 a bushel.
The nearby oil futures as of October 10th closed at $85.82/barrel down from the nearby futures of last month of $92.27barrel. The average price for ethanol on October 10th in the US was $2.03 a US gallon vs. last month at $2.36 a US gallon.
The Canadian dollar noon rate on October 10th was .8947 US down from the .9029 US reported here last month. The Bank of Canada's lending rate remained at 1.00%.
In Ontario the fall is started in earnest across the province. Wet conditions in much of Ontario have delayed harvest. Some producers have struggled to get wheat in the ground. However, there is still time for this and producers are hoping for good harvest weather into the end of October and into mid-November to get things done.
Soybean yields have been quite healthy this harvest season. In some instances white mold has taken a toll on yield. Also too, as of October 11th the majority of soybeans are still in the field awaiting good harvest weather. A series of frost across the province on October 10 and 11th will likely make harvesting easier.
There has been some early corn taken off across the province. The cold summer is certainly causing issues in those harvest fields. There is a wide variability of grades with test weight issues being part of the problem. There has also been widespread frost in September in Eastern Ontario which is adding to some of the variability in quality. Some corn has not even reached black lawyer as of Canadian Thanksgiving weekend. As it is, the Ontario corn harvest this year is likely to be challenging because of the different planting dates and the cold summer making maturity such an issue. Producers need to be cognizant of this as they make their marketing plans.
We knew the crop was late and we knew that we were importing corn from the United States as we descended into October. We continue to import corn and it will remain that way until Ontario supply finally comes on stream. Basis levels will be fluid, especially if there are test weight issues in the offing.
Old crop corn (for the crop coming off now) basis levels are .30 to .55 over the December 2014 corn futures on October 10th across the province. The new crop corn basis varied from -.05 to -.10 under the December 2015 corn futures. The old crop basis levels for soybeans as of October 10th range from .38 cents to $1.14 over the November 2014 futures. New crop soybeans range from $0.15 to .62 over the November 2015 soybean futures. The GFO cash wheat prices for delivery to a terminal on October 10th were $5.71 for SWW, $5.82 for HRW, $5.32 for SRW and $5.71 for Red Spring Wheat. On October 10th the US replacement price for corn was $4.94/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The rubber is hitting the road. The October USDA report reflected some of the very good harvest results that were finding in the United States. With the projected corn yield to be 174.2 bushels per acre and soybeans at 47.1 bushels per acre we are finally getting to the enormity of what is the 2014 crop. While the moderate summer has been tremendous for corn and soybean yields keep in mind that the October report was taken from surveys in late September and early October, when few actual yield results were in. It's never over till it's over and as combines are rolling we should have a better appreciation for what is coming out of US fields.
It is hard to spin a positive forecast from these big yields in the United States. For instance, in the October USDA report, there was actually a drop in harvested corn acreage down 700,000 acres of from September. The futures market reacted by its continual spiral down, not seeming to matter in this year when everything is coming up yield positive. There is also the issue of lower test weight corn, which surely may turn up in the northern US corn belt. This may reduce the US corn yield further as time goes on. However, it is unlikely that that will be realized for quite some time possibly after the January final USDA report.
The US dollar index has also been a detriment to futures prices for all commodities over the last few weeks, currently trading at 86.031. The US dollar index is a measurement against a basket of other world currencies and as its value goes up is more difficult to pay for these commodities in the world's default currency. This serves as a drag on demand and in this current price structure is not very positive. The global economic outlook is not very good, with the exception of the American economy, which is starting to really fire on all cylinders. This is good for the US dollar and a negative for commodities going forward.
The wheat market is always difficult to measure as production is everywhere and demand is everywhere. The USDA actually pegged the global wheat ending stocks down 192.6 MMT, which is down from their September estimate. However, production increases in places like Russia this past year have kept any price nervousness at bay. Wheat is simply adding to the bearish environment in grains.
Commodity Specific Concern
The October USDA report pushed yield much higher to 14.475 billion bushels and of course this is the story that makes headlines. However, it is pertinent to know that demand was also boosted to 13.655 billion bushels, a huge number. Feed and ethanol were both boosted up at 5.375 and 5.125 billion bushels respectively. Yes, the stocks to use ratio is also up at 15.2%, but this is always good in a bearish market environment to have great demand.
Of course we all want to know if the lows are in and of course the answer to that question is nobody knows. However, seasonally and the corn price usually reaches a low in the 1st week of October, something now which is in the rearview mirror. Yes, ending stocks are projected at 2.081 billion bushels, so price will have a fight on its hands. Needless to say, if history proves out, maybe it's uphill from here. Of course the smart bet is sideways.
The future spread in the December 2014 to March 2015 corn contract is bearish at -12.75 cents. The December contract is trading in the lower 4% of the 5 year distribution range reflecting just how cheap corn is now compared to the last 5 years. Yes, commercials are bearish as there is lots of market carry into the summer. However, sometimes that carry disappears as time moves on.
Soybeans aren't the wildcard they used to be. The October USDA report pegged soybean production at a record 3.927 billion bushels. There are even private estimates out there over 4 billion bushels. Of course ending stocks are projected at 450 million bushels, over 4 times bigger than what we had this past year. So it's easy to be bearish with soybeans and there is likely underside to the current price.
The underside to the current price has to do with the ending stocks as well as possible future yield increases by USDA. There are also projected planting increases in places like Argentina and Brazil, which is starting planting now. This all adds to the nervousness in the soybean complex. With corn prices being low, there is also the realization there might be even more soybean acres next year in the United States. It's all a theory now, but everything is pointing at least for the moment as negative for soybeans.
The November 2014 January 2015 soybean futures spread is now somewhat neutral at -.0 $.08. The soybean market tends to trend up in the month of October possibly reflecting this neutral position. However, just like the other grains soybeans are bearish with the November contract currently trading in the lower 5% of the five-year price distribution range.
Of all the grains in the October USDA report, wheat was the most bullish in a very bearish market situation. Cuts in the global wheat ending stocks are always welcome from a price perspective. However, the carry in the future spreads continues to weaken looking out into 2015. The Chicago wheat market usually trends up through the end of October. So maybe there is hope for a more bullish situation to develop in wheat.
Of course the question on the minds of everybody in Ontario is getting wheat in the ground. A late start to harvesting in many areas has delayed wheat planting and ground conditions continue to be a challenge. Weather into the end of October will certainly determine whether Ontario wheat acreage gets back over 1 million.
The Bottom Line (cont.)
The rubber might have hit the road, but as we all know in the farming business changes are only constant. It's the same for agricultural commodity prices. Yes, this is a very bearish market environment. The coolish summer has been the prescription for record grain production, but keep in mind it will not stay this way. The agricultural economics inherent in the grain complex will determine shifts in plantings and production. Then add weather to the mix, and marketing opportunities will surely come along. Stay positive, don't let short term price projections cloud your long-term future.
As a huge mitigating factor in grain price projections in Ontario this year continues to be the Canadian dollar trading under $.90 US. This essentially is cushioning some of the optics behind the price decline and it actually may continue raising cash price bids in Ontario. This is also a big factor when determining hedging strategies and price goals. With the US dollar surging, pressure will continue on the Canadian loonie.
The cash price environment in Ontario will also surely be affected by the quality of this year's corn crop. For instance with frost hitting much of Eastern Ontario's corn early the vestiges of low test weight corn are very real. With the lateness of the crop in southwestern Ontario, some of the same test weight issues may surely result in lower grades. In this market environment there may be cash price anomalies offered for corn and on the flipside discounts applied. Producers need to have a strategy to deal with cash bids. A strong warm month of weather would mitigate much of this. However, this is Canada and although it's happened before, its unlikely.
It surely is a fluid market environment, but different in one significant way, that is the anchor of corn and soybean ending stocks. They are so significant, we can't “demand” our way out of them. There will be no war for acres next year because end users know the supply will be there unless there is a drought tsunami. Normal years will begat normal years. It'll take an act of God on the weather front to lower supply. Eventually, that will happen.
The immediate challenge ahead in Ontario is to get our crop in the bin and wheat in the ground. In many parts of Ontario, its been a late start to harvest and with that comes many marketing opportunities. Early corn harvest has been one of them. It's not easy this fall, its been several years since we've seen these lower prices. Precision focus on cash bids and futures markets on a daily basis will help give context to our marketing decisions. There will be opportunities ahead. The hard part is measuring the market factors to capture those moments. We got here with our eyes wide open and its no time to shut them now.
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.