US and World
Across the US corn belt American farmers are starting to harvest another huge crop. The growing season was uneven with widespread drought in the Northwest plains and quite a wet start in the Eastern corn belt. This was accentuated by somewhat dry conditions in mid-summer, but it looks like good genetics and modern farming methods have won out. As we careen into October, US farmers are set to harvest their third-largest corn crop and the largest soybean crop ever.
On September 12th the USDA released their latest estimates of US crops. USDA estimated US corn production would come in at 14.184 billion bushels, with an average yield of 169.9 bushels per acre. This was seen as a bit of a shock to the market as traders were expecting lower yield estimates. The USDA also increased 2017/18 ending stocks to 2.335 billion bushels, up 62 million from their August report. This US crop is approximately 6% less than last year with the yield 4.7 bushels per acre lower.
The USDA estimates for soybeans came in at 4.431 billion bushels, which will be a record. The USDA actually bumped yield up half a bushel from their August forecast at 49.9 bushels per acre. The USDA also kept 2017/18 ending stocks at 475 million bushels. Globally, soybean production was pegged at 348.44 MMT, a slight increase from August. World ending wheat stocks for 2017/18 were lowered slightly to 263.1 MMT.
On September 15th, corn and wheat futures were lower than the last Market Trends report. Soybeans futures were slightly higher. December corn 2017 futures were at $3.54 a bushel. The November 2017 soybean futures were at $9.68 a bushel. The December 2017 Chicago wheat futures closed at $4.49 a bushel. The Minneapolis December 2017 wheat futures closed at $6.21 a bushel with the September 2018 contract closing at $6.30 a bushel.
The nearby oil futures as of September 15th closed at $49.89/barrel up from the nearby futures of last month of $48.82/barrel. The average price for ethanol on September 15th in the US was $1.75 a US gallon down from last month at $1.79 a US gallon.
The Canadian dollar noon rate on August 11th was .8209 US up from .7883 US reported here last month. The Bank of Canada’s lending rate increased to 1.0%.
In Ontario soybean harvest has begun in some locations in southwestern Ontario. Generally, the Ontario crop is about 10 days to two weeks later than normal. Warm weather in mid September was welcome and will continually be welcome to take the Ontario corn crop to black layer. Generally speaking, this Ontario corn crop has the potential to be about the same as last year at approximately 160 bushels per acre. However, this will greatly depend on a long warm open fall.
Basis levels for grain have been pressured because of the increase in Canadian dollar value going into October. A four-cent rise in 30 days has a huge impact on the soybean and wheat basis, a quintessential example of managing our foreign exchange risk in Ontario. Also too, corn prices at import levels are apparent for industrial use in Ontario. As we move into October there will be a transition on these cash corn prices as our supply becomes harvestable. Producers will need to monitor these corn basis levels very closely.
Ontario wheat producers were somewhat fortunate this summer to be harvesting wheat at the same time as a multiyear price spike hit the market. Ontario wheat prices have retreated again, partly because of lower futures, but also our Canadian dollar. As soybean harvest ramps up in Ontario, wheat will be going in the ground, but at these prices it is hard to fathom a big Ontario acreage. An open, dry and warm fall may change that equation for wheat acreage.
Old crop corn basis levels are $.69 to $1.10 over the December 2017 corn futures on September 15th across the province. The new crop corn basis varied from .62 to $1.05 over the December 2017 corn futures. The old crop basis levels for soybeans range from $1.35 cents to $1.50 over the November 2017 futures. New crop soybeans range from $1.25-$1.52 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on September 15th were $5.11 for SWW, $5.35 for HRW, $5.23 for SRW and $6.48 for Red Spring Wheat. On September 15th the US replacement price for corn was $4.82/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
It remains a bearish time for grain futures markets. However, one of the biggest differences this time around is the Canadian dollar is not providing the cushion it once did. The rise in the Canadian dollar since May 2nd has impacted cash grain prices in Ontario more than futures variability over the last 6 months. With harvest upon us, it’s time to recalibrate and refocus our marketing plans.
Commodities our out-of-favor as an investment vehicle and it is been this way for quite some time. Investment capital has fluttered into the stock market and it remains at very high to record levels. In many ways, their needs to be a real supply and demand reason for grain prices to go higher and investment capital to get back into commodities.
That may come in the form of La Nina, which typically is very bad for South American grain production. Soybean planting will be ramping up in Brazil this October and weather reports of Brazil crop conditions have to be monitored closely. If La Nina manifests itself in a big way in South America, it could mean a complete reversal of where we are now. Of course, that is a big if.
China continues the dynamic demand for soybeans. They recently announced the new ethanol initiative 2020 to power cars and help reduce pollution. This will amount to approximately 1.8 billion bushels in additional Chinese corn demand by 2020. Increased Chinese production and old crop stocks will likely satisfy it. Wheat is also used in the ethanol processing in China. They are heavy buyers from the Black Sea region.
Commodity Specific Comments
Many people are asking whether we’ll get a pre-harvest bounce in corn futures prices as the last few years have seen corn futures bottom before harvest. Of course, nobody knows, but corn stocks are onerous and some analysts say an expectation of $3.75 to $3.95 per bushel might be all that can be expected. If combines roll and the yield isn’t there, that might be part of the higher price equation.
There is also the thought that corn may follow soybeans if South America has some planting issues. It is dry now in Brazil, but wet in Argentina. If the soybean complex sees a rise in prices, it is likely that corn would follow. Needless to say, it is the third-largest corn crop ever in the United States and there are a lot of “what-ifs” that need to be answered to get prices higher.
The December 2017 March 2018 corn futures spread is -12.5 cents, which is considered bearish. The December contract is currently priced in the lower 14% of the market’s five-year distribution range. Seasonally the corn market tends to trend down through the first week of October.
The soybean crop in the United States is going to be a record by a country mile even though the yield is going to be slightly less than last year. Soybean demand continues unabated currently projected at 4.326 billion bushels. US exports are up as well as soybean crush. This is the saving grace for soybeans.
The increase in the Canadian dollar since May 2nd has resulted in about a dime appreciation against the US dollar. It has been a combination of a declining US dollar and rising Canadian interest rates. This was akin to throwing gas on a fire, but it has resulted in our soybean basis decreasing about $1.40 a bushel since May. Clearly, this is an example of how our cash price volatility is greater sometimes than futures price range over time.
The November 2017 January 2018 soybean futures spread is -10.25 cents, which is considered bearish. The November soybean contract is currently priced in the lower 33% of the last five-year price distribution range. Seasonally old crop soybeans tend to trend down through mid-October.
The wheat market has come down from summer highs, which was spurred by the drought in the American Northwest plains. Wheat stocks are still very onerous, but keep in mind that China holds about 48% of world wheat stocks. Take them out of the equation and it puts wheat stocks in a bit more precarious stance. Needless to say, there is still a lot of wheat in the world and Russian production continues to ramp up. It is likely that North American production continues to get smaller in 2018.
In Ontario, wheat will be planted as soon as combines roll. Even though the price has retreated lately there was opportunity to lock in 2018 wheat at $6/bu earlier in the summer. For those producers comfortable with the risk, it certainly looks good now. However, there will be many marketing opportunities ahead for wheat. It is a long way from payday in 2018.
The Bottom Line (cont.)
The Bank of Canada has doubled their interest rates over the last two months. This had the effect of doubling down on the Canadian dollar, which has been rising as the US dollar has been falling. The Canadian economy is growing at an annualized rate of 4.5%, which is adding fuel to the loonies rise. This has been very negative for Ontario cash grain prices. This foreign-exchange volatility will likely continue further challenging our grain marketing plans.
There certainly could be regional variability within Ontario with regard to basis values in corn this fall. Yes, we are hoping for a wide-open fall, but if it does not happen it is likely basis anomalies will show up. The Eastern Ontario corn basis continues to be stronger. This is a historical pattern and with Québec corn production looking to be down, it even might strengthen going into 2018. However, it is likely that the typical Ontario price pattern of too much supply in the fall and winter will impact the corn basis this fall and into 2018.
As of September 15th, both corn and soybeans nearby futures are above their lows. (Aug 31st $3.44 corn Aug 16th $9.21) Of course, there are a few possible black swans swimming around. North Korea remains a rogue state with nuclear missiles. The US President has mused about not trading with any country that trades with North Korea. Simply put, these things talked about “out loud” would have huge ramifications for US soybeans. NAFTA talks are continuing. A market firecracker may lie within.
As we move into October, we’ll have a much better idea about crop size both in the United States and in Ontario. It will be intriguing to see if corn and soybean futures stay above their lows. In Ontario basis levels should give some real clues on both the quantity and quality of Ontario corn reaching maturity. South America will be in their planting season. La Nina may be manifesting itself. The challenge will remain to recalibrate and refocus our marketing plans based on many of these marketing factors. Daily market intelligence will remain key. Despite our present bearish price environment, history tells us 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.