US and World
In the United States corn harvest is 27% complete and soybean harvest 42% complete as of October 5th. Good weather in the United States has led to some good harvest progress. It has been a year where market watchers have been keen to see USDA numbers as early wet weather issues in the US corn belt caused much uncertainty in crop size. Despite that, the USDA has been the harbinger of big crops this year consistently estimating good yields for both corn and soybeans. The October 9th USDA report was being seen as a litmus test to whether late-summer projections of big crops were real.
On October 9th, the USDA confirmed what they have been projecting all summer. The USDA pegged the US national average corn yield at 168 bushels per acre, up half a bushel an acre from last month. The harvested corn acreage was cut back by about 500,000 acres to 80.7 M ac. This harvested acreage figure was at the lower end of the trade expectations. The USDA boosted US soybean yield up to 47.2 bushels per acre up .1 bushels per acre from last month. They also lowered US soybean harvested acreage by 1.1 million acres to 82.4 M ac.
The USDA on October 9th pegged corn-ending stocks for 2015/16 at 1.561 billion bushels, down 31 million bushels from last month. The ending stocks to use ratio dropped slightly to 11.3%. Globally, corn-ending stocks were estimated at 187.83 MMT, which was down 1.9 MMT from last month. The USDA also cut its 2015/16 soybean ending stocks by 25 million bushels to 425 million bushels. The soybean ending stocks to use ratio dropped 11.5%. USDA is projecting their wheat production to be 2.052 billion bushels down 84 million bushels from last month.
On October 9th, corn and soybeans were lower but wheat nearby futures prices were higher than the last Market Trends report. The December corn 2015 futures was at $3.82 a bushel. The November 2015 soybean futures was at $8.85 a bushel. The December 2015 Chicago wheat futures closed at $5.09 a bushel. The Minneapolis December 2015 wheat futures closed at $5.29 a bushel with the September 2016 contract closing at $5.69 a bushel.
The nearby oil futures as of October 9th closed at $49.63/barrel up from the nearby futures of last month of $44.63 all/barrel. The average price for ethanol on October 9th in the US was $1.91 a US gallon vs. last month at $1.84 a US gallon.
The Canadian dollar noon rate on October 9th was .7724 US up from the .7532 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario soybean harvest is progressing well across the province. Good weather has provided a wide harvest window for soybeans, which started in late September. Some areas of the province have completed soybean harvest and started into corn. Yields have been strong in Eastern Ontario and more variable in other parts of the province where heavy spring rains have damaged the crop. The wide-open early soybean harvest has meant many wheat drills were following combines this fall. In some parts of the province like Southwestern Ontario producers who got 0 acres of wheat established in 2014 have all their wheat planted this fall.
Corn harvest has started across the province, but is in its initial stages. The warm open September and early October have provided good drying weather for this crop. Early yield indications are very high with high-test weight corn. It is likely that Ontario corn yield will challenge some of the high values of the last few years. A record yielding corn for Ontario is very possible in 2015.
The melding of basis levels has taken place over the last few weeks. Old crop is now the crop being taken to the elevator, while new crop is the crop you will plant next spring. Basis levels for corn have decreased versus last month. The soybean basis has seen slight erosion from last month reflecting to some extent harvest pressure as well as the value of the Canadian dollar. The Canadian dollar has improved a couple of cents against the US dollar and this will be reflected in basis values.
Old crop corn basis levels are .60 to $1.15 over the December 2015 corn futures on October 9th across the province. The new crop corn basis varied from .55 to $.85 over the December 2016 corn futures. The old crop basis levels for soybeans range from $1.95 cents to $2.15 over the November 2015 futures. New crop soybeans range from $1.52-$2.02 over the November 2016 futures level.The GFO cash wheat prices for delivery to a terminal on October 9th was $8.67 for SWW, $6.47 for HRW, $6.21 for SRW and $5.95 for Red Spring Wheat. On October 9th the US replacement price for corn was $5.23/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
We've got huge crops coming out of the US. In many ways it is a testament to our production technology. In the early spring there was much conjecture from too much rain in the American Midwest. In many ways, this has always put some type of doubt in the market regarding crop size. For instance, as farmers, we know that damaging heavy rains can often reduce our crop health and ultimately our crop yield. However, if the October 9th USDA report did anything, it substantiated previous USDA claims that both the corn and soybean crop in the United States are some of the biggest of all time. Any doubt and conjecture that the damaging weather hit the crop hard in an overall sense is in the rear view mirror.
It is also so different from 2014. Last year we had big crops, but we were coming off a year where the crop was not as big. So in October and November of last year we had inverted futures markets and basis levels were very strong. This year as we head into the later fall we have carry in the futures market with weaker US basis levels. This is also partially reflected in the USDA projected ending stocks of 1.561 billion bushels of corn and 425 million acres of soybeans. The market simply does not want the grain like it did last year. Futures prices have tried to breach $4 corn and $9 soybeans, but they are meeting stiff resistance in and around those levels. Fresh news or some type of weather-related planting problem in South America is needed to boost prices. Farmer slamming the bin door shut at lower levels is also acting as a floor.
At the same time where we in Ontario are trying to bring in the soybean harvest our Brazilian colleagues in South America are planting. It has gotten dry in northern Brazil, but we all know it's preferred for planting weather. Needless to say, the South American planting window is moving into full bore. Any weather anomalies there, which affect that production, will have an immediate effect on our grain futures prices.
Geopolitics has also affected the grain complex with the problems that we have seen in Syria. The US dollar has been one beneficiary, but it has also been volatile having dropped to 94.883 on the US index on October 9th versus 96.385 on September 25th. Uncertainty in geopolitics is always bullish for the US dollar, but when it falls it is always good for grain futures prices. With its inverse relationship to our Canadian dollar it is a constant crop marketing challenge to get the balance right.
Commodity Specific Comments
The 168 bushels per acre corn yield projected by USDA in their October 9th report was especially healthy based on early spring weather. Keep in mind the skepticism that has been dashed with regard to that number. In fact, in nine of the last 15 years, USDA yields have actually increased into the January report. Don't be surprised as harvest totals continue to be counted across the American Midwest that this corn yield figure rises into the new year.
The corn demand reality is a bright light in a somewhat dark corn price world. Total demand for corn in the United States now is 13.755 billion bushels. That is huge and is unsustainable with any type of production hiccup at these current price levels. However, as we know that production hiccup has not come, but eventually it will. Corn farmers can at least put that in their back pocket.
The December 2015 March 2016 corn spread is neutral at -.1075 cents US. The December contract is currently trading in the lower 15% of the five-year distribution range. Seasonally, corn tends to trend up through early November.
The USDA boosted the soybean yield up to 47.2 bushels per acre, but this was tempered by a cut and harvested acreage of 1.1 million bushels. This was partially a result of those heavy spring rains in some areas. Compared to past years, the soybean yield is impressive and it is likely to grow into January.
The soybean complexes had a difficult time with the $9 level. When soybeans get too cheap the bin door slams shut seemingly around the $8.40-50 cents level, but $9 and over to $9.20 we see steep resistance. China continues to buy unabated. Demand remains strong, with US usage currently at 3.685 billion bushels.
The November 2015 January 2016 soybean futures spread is -.0475 cents US as of October 9th. The November soybean contract remains in the lower percentages of the five-year price distribution range. Seasonally the soybean futures market tends to tend up from here through early May.
It is always difficult to be bullish on the wheat market with global supplies currently 670 million bushels higher than last year. Canada, European Union and Australia had their supplies maintained by USDA in the October 9th report. There is lots of wheat almost everywhere in the world and this will continue to weigh on prices.
In Ontario, wheat is being planted at a feverish pitch as of October 9th with wide-open weather. It is highly likely that the Ontario wheat acreage which last year was approximately 600,000 acres will breach 1 million this year. For many producers it is about getting back a rotation in southwestern Ontario.
The Bottom Line (Continued)
The optics of pricing grain in Ontario offer a unique window into the extra layer of management we require as Canadian farmers. The value of the Canadian dollar remains low at .7724 cents versus the US dollar but this represents a two-cent increase over the last two weeks as of October 9th. Simply put, corn valued at cash prices of $4.43 to $5.00 in Ontario and soybeans at $10.80-$11 looks much different than grain priced in US dollars to our American friends. So does foreign exchange give us a good price or is it just fooling us? Or is it simply bailing us out against the backdrop of a huge grain price slump?
The answer to that question is certainly varied across the Canadian grain world. For instance, if you contracted grain today for next year and our Canadian dollar moved to par, it would likely make you look like a genius even if you had an aggressive move in grain futures values. At the same time if the dollar moves back to par over the next 18 months with futures values gaining moderately, our cash price might not make any difference. On the contrary, if our Canadian dollar moved toward par with futures values falling significantly, it would be a cash pricing disaster. Thinking hard about this paradigm needs to be top drawer for all Ontario grain farmers.
Basis levels have actually been maintained fairly well even with harvest pressure. The Canadian dollar has helped, but with its recent move back up it is likely to erode Canadian cash values. Usually, at harvest time we export corn to the United States and eventually import it back in. However, it is never as smooth as that and producers will need to monitor that situation closely. Corn basis does not move on foreign exchange to the same extent as Ontario soybean and wheat basis.
So as we move ahead, harvest will continue both in the US and Ontario. Our Brazilian farmer colleagues will be planting soybeans at what many people think will become their biggest crop ever. Yes, the focus on grain surpluses is certainly there, but it never quite works out that way. Time can be a defining factor, because eventually supply gets interrupted in some form or another. That means to a large extent, marketing for Ontario farmers will continue to be a daily challenge. It also means there will be many marketing opportunities ahead. Risk management never grows old and capturing those profit opportunities remains job one.
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.