US and World
It is that time of year again when combines are rolling. However, uneven weather in parts of the American corn belt and Ontario has delayed harvest. There is nothing particularly unusual about this as we have it every year. US crops are huge coming off the fields and the market will certainly be making further adjustments. The final determinant on yield will come in the January USDA report. However, the October USDA report released October 12th helped to re-focus the trajectory of grain prices as we head into the end of the 2017.
In the October 12th report USDA increased US national corn yield to 171.8 bushels per acre, an increase of 1.9 bushels per acre over their September estimate. This put 2017/2018-corn production at 14.28 billion bushels on the high-end of pre-report estimates. The USDA also pegged corn-ending stocks at 2.34 billion bushels, which was up 5 million bushels from their September estimate. This number was a bit of a surprise especially with which dry weather throughout the American Midwest the summer.
USDA estimated soybean production to be at 4.431 billion bushels, which was a decrease from their September estimate. This was based on a .4 bushel/acre cut in US national yield down to 49.5 bushels per acre. However, the US soybean harvested acreage is at a record high of 89.5 million acres, which was up 1% from the USDA September estimate. The US domestic soybean ending stocks were also pegged at 430 million bushels, which was down 45 million bushels from their September estimate. This was generally looked at as bullish on report day and soybeans responded by going up $.26 a bushel. US domestic wheat stocks were set at 960 million bushels, which was 27 million bushels higher than their September estimate.
On October 13th, corn and wheat futures were lower than the last Market Trends report. Soybeans futures were higher. December corn 2017 futures were at $3.52 a bushel. The November 2017 soybean futures were at $10 a bushel. The December 2017 Chicago wheat futures closed at $4.39 a bushel. The Minneapolis December 2017 wheat futures closed at $6.15 a bushel with the September 2018 contract closing at $6.33 a bushel.
The nearby oil futures as of October 13th closed at $51.45/barrel up from the nearby futures of last month of $49.89/barrel. The average price for ethanol on September 15th in the US was $1.65 a US gallon down from last month at $1.75 a US gallon.
The Canadian dollar noon rate on October 13th was .8008 US down from .8209 US reported here last month. The Bank of Canada’s lending rate increased to 1.0%.
In Ontario, harvest has been in full swing across the province. However, rainfall starting on October 5th has held things up. Soybean yields have been variable across the province, generally speaking a little bit less than last year. Droughty conditions in summer in some areas have impacted the soybean yields. Many wheat fields got planted right after the combine rolled through early in late September and early October. As of mid-October many of these fields have emerged and look very good. There will be a renewed effort to get wheat planted once the weather clears and the ground dries up.
Basis levels have been maintained since the last Market Trends report. The Canadian dollar has dropped off the $.82 level and is currently fluttering near the $.80 level as of October 13th. This has helped maintained basis levels across the province for both corn and soybeans. However, it is a far cry from where it was last May as cash basis was eroded by the increase in the Canadian dollar. As always, Ontario farmers are focused on the dollar’s value and its effect on Ontario cash grain prices.
As we move through harvest basis conditions may change locally depending on the quality and availability of corn. Statistics Canada is estimated that Ontario corn will be 169.5 bushels per acre. If this is the case at over 2 million acres, the corn supply Ontario will be burdensome into the future. However, those numbers seem optimistic at this time. As we move into harvest newer information will refocus the Ontario corn supply equation.
Old crop corn basis levels are $.60 to $1.10 over the December 2017 corn futures on October 13th across the province. The new crop corn basis varied from .50 to .85 over the December 2017 corn futures. The old crop (crop being harvested now) basis levels for soybeans range from $1.75 cents to $1.87 over the November 2017 futures. New crop soybeans range from $1.60-$1.70 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on October 13th were $5.11 for SWW, $5.36 for HRW, $5.23 for SRW and $6.55 for Red Spring Wheat. On September 15th the US replacement price for corn was $4.79/bushel. You can access all of these Ontario grain in the marketing section at Grain Farmers of Ontario.ca.
The Bottom Line
It is still a bearish time for grain prices even though the October 12th USDA did shine a bit of light on the soybean market. The report was actually quite bearish for corn, increasing yield as well as ending stocks. However, in many ways it’s not new news. The August USDA report was the surprise of the market and we have been digesting this big crop for a while. Demand for all three crops remains extremely strong at record levels.
Nearby soybean futures at the $10 mark is significant especially on a year with a record crop at harvest time. The focus soon will shift to South America where a new soybean crop is being planted in Brazil and soon to be Argentina. Planted acres are expected to increase in Brazil, but not necessarily yield vs. the record levels of last year. If dry weather comes to South America and Brazil production is cut back below 100 MMT, then all bets are off for soybean futures prices. This drama will lay itself out in the next few months.
In the October 12 USDA report, the Brazilian soybean ending stocks came in at 184 million bushels. For the next growing season USDA is pegging Brazilian ending soybean stocks at 90 million bushels. Without declining supply in the background, it makes any weather concern going forward in Brazil a principal trigger on pushing soybean futures higher.
The increased corn yield in the United States coming out of the October 12 USDA report is testament partly to the productivity of modern corn hybrids. This past growing season was extremely uneven and dry in many parts of the Midwest. However, harvest yields are strong even in some areas of dry weather. This has put cash prices on the ground in the United States slightly over $3 a bushel. In many ways, one must consider how profitable this is and its implications for planting intentions in 2018.
Commodity Specific Comments
The corn market is range bound in a much smaller range than over the last nine years. In other words, the corn market behavior tends to resemble the market pre-ethanol, when prices didn’t move in high ranges. For instance this year there have been predictions of $5 or $6 corn futures. The futures range is more like $3.35 to $4.25
Corn has been range bound, but it is a low range, not good if you are a corn bull. On the December daily chart we see a continuum of lower highs and lower lows over time. This is definitely not bullish either short term or long term. Distant corn futures continue to show big carries.
The December 2017 March 2018 future spread is currently -13.75 cents, which is considered bearish. The December contract is currently priced in the lower 10% of the market’s five-year price distribution range. Seasonally, the corn market tends to trend up through the first week of November.
One thing that the October 12th USDA did to the soybean market is taking a bit of fear out of it. There was no increase in yield or ending stocks, which some analysts had been predicting. With soybeans closing of the $10 mark on the Friday after, there was some renewed optimism in a bearish grain environment.
Central Brazil is dry and this remains a source of concern for anybody wanting to short the soybean market. The trend in soybeans is up as well as December soybean meal, reflective of the robust demand and concerns in South America.
The November 2017 January 2018 soybean futures spread these -10.5 cents, which is considered bearish. The November contract is currently priced in the lower 34% of the last five-year price distribution range. Seasonally soybean futures tend to trend up through the first week of December.
Thankfully for Ontario producers, wheat prices spiked at harvest time this past year. This was partly due to the drought in the American Northwest plains causing problems in the spring wheat market. This spilled over onto the Chicago SRW market. However, since then the wheat market has returned to its more bearish ways with onerous stocks worldwide and shrinking acreage in the United States.
Ontario acreage is likely in flux in the fall of 2017 because the soybean crop is later than usual and now is affected by wet weather. It is simply a bit more difficult to get all the wheat acres intended in the ground this fall. With that in mind, it is unlikely that Ontario wheat acres will reach 1 million, more likely around the 800,000-acre mark.
Commodity Specific Comments (cont.)
In Ontario, Statistics Canada has estimated Ontario average corn yield of 169.5 bushels per acre. If this comes to fruition it would be a record corn yield pushing Ontario supply to unprecedented levels. However, Ontario corn acreage of over 2 million is up for debate as well as yield, as Ontario has had an uneven growing season too.
How this affects Ontario corn basis levels is up for debate. At the present time there is American corn coming into Ontario, but is this is unlikely to continue based on the Ontario supply just now being harvested. It will depend on how reluctant Ontario farmers are to sell $4 corn. If they are reluctant, US corn will be brought in to satisfy industrial and feed users. It is always a constant dance with Ontario cash prices with US replacement price.
The Canadian dollar has fallen back to .8008 as of October 13th and this will continue to play a role in the Ontario cash grain market. Last May when the loonie was 72 cents, in hindsight, flat pricing regardless of futures or basis made sense. Hindsight is always 20/20, but as Ontario producers, we must be ready to adjust our marketing with the volatility of the Canadian dollar. Ontario soybeans and wheat prices are always the most affected, corn not as much. At times, flat pricing works within our Ontario marketing environment.
There is still a world of hurt out there with regard to big crops coming out of the field. However, despite that, demand continues unabated and continues to grow. At a certain point, there will be a hiccup in supply, which will send prices higher. A soybean futures price of $10 might be gift wrapped this harvest season. The challenge for Ontario farmers is to measure all of these different marketing factors. There will be many 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.