Market Trends Report for October-November 2018

US and World

Combines are rolling across the American Midwest, Ontario and Quebec. Big crops are creating grain piles all over farm country amid some of the worst harvest weather in years. Heavy rains have inundated parts of Iowa and many other US states causing all types of harvest problems. It is one of the biggest crops ever in the United States. How big is the real question especially with the damaging harvest weather. On October 11th, USDA weighed in with their latest crop estimates.

The USDA decreased the US national corn yield pegging it at 180.7 bushels per acre with total production coming in at 14.8 billion bushels. This was a decrease from 181.3 bushels per acre that the USDA have predicted last month the USDA also said expected harvested acreage would be 81.8 million acres of corn which is down 1% from 2017. The new crop ending stocks were pegged at 1.813 billion bushels, which also reflected the 138 million extra bushels on hand from last year documented in the September grain stocks report.

The big news from USDA came in the soybean complex, where the USDA said farmers would harvest 53.1 bushels per acre of soybeans, up from 52.8 bushels per acre they had predicted last month. This put overall soybean production at 4.69 billion bushels, about the same as last month. The new crop soybean ending stocks have ballooned up to 885 million bushels, which is up 40 million bushels from last month. The 885 figure is huge reflecting the big production but also the problems with a lack of Chinese demand. US ending stocks for wheat were forecast to be 956 million bushels, up 21 million bushels from last month. Globally, wheat production was lowered by 2.08 MMT, reflecting some of the problems in Europe and Australia.

On October 13th, corn, soybeans and wheat futures were higher than the last Market Trends report. December 2018 corn futures were at $3.73 a bushel. The November 2018 soybean futures were at $8.67 a bushel. The December 2018 Chicago wheat futures closed at $5.17 a bushel. The Minneapolis December 2018 wheat futures closed at $5.96 a bushel with the September 2019 contract closing at $6.18 a bushel.

The nearby oil futures as of October 13th closed at $71.34/barrel up from the nearby futures of last month of $68.99/barrel. The average price for ethanol on October 13th in the US was $1.50 a US gallon the same as last month.
The Canadian dollar noon rate on October 13th was .7674 US, remarkably the same .7674 US reported here last month. The Bank of Canada’s lending rate remained at 1.25%.

Ontario

In Ontario harvest weather has varied across the province with heavy rains inundating some production areas. This has caused widespread problems as harvest has been delayed in many areas of the province. Of course, this tends to pile up at this time of year is a delayed harvest means of delayed wheat planting, which is never optimal. For instance, in the deep South West of Ontario many producers are questioning whether they will get any wheat planted in 2018.

With the delayed soybean harvest in parts of Ontario, many producers have switched over to corn. In fact, it is started the harvest dance in some areas, were corn is harvested in the morning and soybeans possibly in the afternoon. Yields have been impressive especially on the soybean side. The hope is to get an extended window of sunny, windy weather to bring the soybean crop in. As of October 13th, it looks like wheat acreage in Ontario this year may be cut back substantially.

Corn basis values for the crop coming out of the field have fallen from their September levels, which reflects the switchover from old crop to new crop. Ontario soybean basis levels of actually increase from last month reflecting the unique situation of US soybeans being so much cheaper than Canadian sourced soybeans. In theory, all Canadian soybean should be shipped out and replaced with cheaper US soybeans for domestic consumption. Needless to say, it is resulted in higher Canadian soybean basis values.

Old crop corn basis levels are $0.65 to $1.30 over the December 2018 corn futures on October 13th across the province. The new crop corn basis varied from $0.80 to $0.95 over the December 2019 corn futures. The old crop basis levels for soybeans range from $2.60 cents to $2.90 over the November 2018 futures. New crop soybeans range from $1.89-$2.00 over the November 2019 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on October 13th were $6.28 for SWW, $6.48 for HRW, $6.28 for SRW and $6.59 for Red Spring Wheat. On October 13th the US replacement price for corn was $5.28/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/.

The Bottom Line

It might be rainy in the American Midwest, but the crop is still there and these are bearish times.  It looks like as of now, the seasonal lows in both corn and soybeans were made in September.  However, it is probably not all blue skies ahead especially at a time when the trade war continues to rage between the United States and China.

A ray of hope for some type of breakthrough may exist when President Trump meets with Chinese leader Xi Jinping at the end of November in Argentina during the G20 meeting.  Soybean export demand from the United States into China has almost been nonexistent.  This is been reflected in a moribund cash market for soybeans especially in the Dakotas, where usually soybeans are shipped to Pacific Northwest ports destined for China.  That door has been slammed shut and basis has backed up across American farm country.

Keep in mind; none of this will be easy.  Even if things change tomorrow, grain flows in grain have been disrupted and it would take time to return to what we knew as normal.  The overabundance of soybeans in the United States is real and it will take a long time to bring those stocks down.  There will likely be a big reduction in soybean acres in 2019, but that doesn’t help for sales right now.  Yes, geopolitics matters and in the 2018 soybean market that lesson was laid out plainly.

The reduction in corn yield from USDA was very telling and may reflect further reductions.  For instance, some private crop estimators in United States are pegging corn production in the 14.5 billion range vs. 14.8 from the USDA.  Needless to say, either number is huge and it will likely only affect price marginally if the lower range is right.  Of course, we all know that the USDA changes these numbers indiscriminately and sometimes the final crop numbers are changed right into September of the following year.

Commodity Specific Comments

Corn

The lower corn yield from USDA signaled this big crop might not be getting bigger. In fact, with all the terrible harvest weather in the United States with sprouting taking place at certain locations in both corn and soybeans it presents a likelihood that this corn yield might go down further. The October 11th estimates were taken before much of the heavy rainfall set into the Midwest

US corn is benefiting because it is one of the cheapest feed grains on the world market today. For instance, early shipments in the 2018/19 crop are up 67% from a year ago. We know in agriculture the cheap always wins and at least for the moment this is being reflected an increased demand for US corn.

The December 2018 March 2019 corn futures spread is currently $-.12, which is considered neutral. Seasonally, corn futures prices tend to trade higher from early October into the winter. The December corn contract is currently priced the 33rd percentile of the past five-year price distribution range.

Soybeans

The soybean market has rallied a bit lately reflecting some kind of unusual exuberance. Simply put, when USDA announced that soybean carry out was pegged at 885 million bushels, many traders took that as slightly bullish as some had expected it to go higher. Needless to say, there is nothing bullish about that number.

Clearly, everybody can see that there needs to be less soybeans grown in the United States next year. Those soybean acres will likely go into wheat, cotton and corn. Those ending stocks need to be eroded away to give US soybeans some type of big price appreciation of the future.

The November 2018 March 2019 soybean futures spread is currently $-.27, which is considered neutral. The November soybean contract is currently priced in the 8th percentile of the past five-year distribution range, slightly higher than last month when it was at the lowest price and nine years. Seasonally, soybean futures prices tend to trend upward from October into winter.

Wheat

Production problems in Europe and Australia and other regions of the world have helped reduced global ending stocks for wheat. However, this is not been reflected in increased exports from the United States. Chicago wheat futures seem range bound between $5.10-$5.30 per bushel. As per usual, wheat is grown everywhere in the world and it takes a major calamity to change the futures price.

In Ontario, it doesn’t look good for wheat as of October 13th with wet weather delaying soybean harvest and delaying wheat planting. While 1 million acres is always a noble goal for Ontario wheat farmers, unless the weather breaks into a very warm November, it is unlikely we get there this year. Producers will be hoping for a wide-open late October and early November in order to get that we planted.

The Bottom Line (cont.)

It cannot be emphasized enough that the Canadian dollar in the 76-cent range US has helped Canadian domestic cash pricing of grain.  In the past, I referred to it as a “price mirage” because $11.36 cash price for soybeans in Ontario “sounds” better than a $7.50 US cash price in Indiana, a short drive away.  It’s important to keep in mind the foreign-exchange remains a very important market factor for Ontario farmers to measure.  What happens if our Canadian dollar moves aggressively toward $.90 over the next six months to a year?

We all know the answer to that question.  Our cash prices would move lower depending on what US futures are doing making it much harder.  Generally speaking, the value of the Canadian dollar is usually an inverse of the US dollar value.  However, higher Canadian interest rates can also send the loonie higher and the Bank of Canada has signaled that may in fact happen soon.  It will continue to be a challenge for marketing Ontario grain, which represents a second layer of our risk management plan.

With the trade war between China and the United States raging, there has been some benefit to domestic Canadian soybean prices.  As stated earlier, it is more advantageous to move Canadian soybeans into China and replace those with cheaper American supplies.  This has been happening, but what will not happen is for those American soybeans to be re-flagged and sent to China.  Chinese tariffs apply at the point of origin so there will be none of that.  Our total Canadian soybean production could supply China for maybe 20 days of their annual consumption.  Needless to say, this unique market situation is increasing our soybean basis unusually in Ontario versus previous years.

Canada agreed to a new NAFTA agreement last month, called USMCA.  That is unlikely to affect grain flow, but there is an effective American veto if Canada ever signed a free trade agreement with China.  That is unlikely.  However, its just another nuance of our geopolitical world, which has bit grain prices hard this year.  Our seasonal lows look to be in on futures prices, but maybe not for our basis values, especially on corn.  We’ve got big crops for sure.  The challenge for Ontario grain farmers is to continue to work their risk management strategy within this fluid environment.  There will be more marketing opportunities ahead.  That planning horizon never ends.

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.