Market Trends Report – January & February 2021
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US and the World
2021 represents a new day. With Covid numbers still at extremely high levels, the world flexes to respond. With vaccines here there is hope for better times ahead. In the grain world January represents that time of renewal, although crop production in the southern hemisphere never stops. In this modern age we are able to monitor crop progress like never before. Finding out grain stocks and deciphering grain movement might be a little more difficult. However, each January, the USDA releases their “final report” on the previous crop year releasing a data dump with such hype it rivals the Stanley Cup Finals, Grey Cup and Vanier Cup combined.
On January 12th the USDA threw a bomb into the mix. USDA lowered US domestic corn production by 3.8 bushels per acre down to 172 bpa. This dropped total production down 325 million bushels down to 14.182 billion bushels. In addition to this, USDA actually trimmed the old crop carryover by 76 million bushels, thus lowering corn supply by 400 million bushels. USDA lowered both feed and ethanol at a respective 50 and 100 million bushels. USDA also lowered corn exports by 100 million bushels. The stocks to use ratio was reduced to 10.6%. Corn futures reacted by going up the limit on the day.
The USDA lowered soybean production to 4.135 billion bushels, a reduction from December based on a 35-million-bushel decline and a half bushel decline in national yield to 50.2 bpa. Soybean ending stocks came in at 140 million bushels, which came within trade expectations. The USDA maintained their estimate of Brazilian soybean production at 133 MMT but reduced Argentinian soybeans production by 2 MMT to 48 MMT. Wheat was left as a bit of an enigma, as US wheat production was left unchanged from the December report. However, USDA boosted US domestic wheat feed and residual usage. This combined with lower production in Argentina and increased global consumption of wheat, helped the wheat supply and demand equation.
On January 15th, wheat, soybeans and corn futures were higher than the last Market Trends report. March 2021 corn futures were at $5.31 a bushel. The March 2021 soybean futures were at $14.16 a bushel. The March 2021 Chicago wheat futures closed at $6.75 a bushel. The Minneapolis March 2021 wheat futures closed at $6.43 a bushel with the September 2021 contract closing at $6.59 a bushel.
The nearby oil futures as of January 15th closed at $52.46/barrel up from the nearby futures of recorded in the last Market Trends report of $46.57/barrel. The average price for US ethanol on January 15th in the US was $1.71 a US gallon up from the $1.47 recorded in the last Market Trends report.
The Canadian dollar noon rate on January 15th was .7857 US, higher than the .7831 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
Ontario grain prices are higher than they were in December and this is partly related to basis expanding mostly based on futures prices going up. We’ve had exports into the UK, but also corn moving into Ontario from the United States. Ontario ethanol plants are booked. Old corn crop prices of $6.75 to $7.00 can have that effect.
Farms aren’t homogeneous across Ontario. However, farmers wherever they are know higher prices. As of January 15th, new crop soybeans are approximately $14.68 and new crop corn is $5.55. This is forcing conjecture in farm country regarding what to grow in 2021. At these price levels it could shift acres into soybeans and away from other more speciality crops like edible beans, sweet corn and vegetables. Needless to say, the situation is fluid, and spring weather will likely determine much of that.
Questions about Ontario crop pricing will surely dominate moving forward. There is a divergence between old crop and new crop values based on where end users are with the different scenarios. When will this come together? We know historically one of the best times to price both old crop and new crops is in June, but this year so different. In the past, we’ve seen big premiums for corn in early fall based on old crop values. The same could surely be had for old crop soybeans this fall. However, it is January 2021 and there are a plethora of market factors to play out in the next 8 months. A bird in hand sometimes is worth so much more than seeing one fly by later.
Old crop corn basis levels are $1.39 to $1.49 over the March 2021 corn futures on January 15th across the province. The new crop corn basis varied from $0.95 to $1.26 over the December 2021 corn futures. The old crop basis levels for soybeans range from $3.35 cents to $3.51 over the March 2021 futures. New crop soybeans basis levels range from $2.69-$2.74. Ontario SRW wheat prices are in the $7.80 range on January 15th, new crop values slightly lower. On January 15th the US replacement price for corn was $7.41/bushel. You can access all of these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
When it comes to Ontario crop prices, we’re into some very rare air. The last time soybean futures were at these levels, the Canadian dollar was at par and there was a negative $1 basis. There is no true measurement on how much old crop is in Ontario bins. However, $17.50 old crop prices are a conversation stopper. Needless to say, nobody knows where prices will go. Commodity markets often get violent when the party is over.
However, nobody knows when the party will be over and in a 2021/22 sense, whether it will end. Things are bullish right now. When looking at soybean futures spreads all the way out, they are inverted, in fact, the May-July futures spread is showing an inverse of 13.75 cents. This shows the willingness of commercial traders to pay more to get soybeans sooner. The old days of what’s the rush to buy beans is long over.
South American weather continues to be problematic, despite the USDA pegging Brazilian soybean production at 133 MMT a new record. CONAB, the Brazilian crop agency has the crop pegged at 133.7 MMT, up from 124.8 million tonnes last year. The Brazilian corn crop is pegged at 102.5 MMT which is down from earlier in the season. In many ways, it’s hard to believe these crops don’t force prices down. However, we got here with our eyes wide open. Brazilian soybeans will likely start replacing American beans to Asia in the next 3 weeks. As is it, daily market intelligence from South America will be part of the price puzzle over the next month.
The January 12th USDA report was in some ways an indictment of the USDA reporting itself. Why did there need to be such an adjustment with the stroke of the pen? Why weren’t these adjustments made earlier? Why was the 2019 corn crop so overestimated in retrospect? An indictment might be too strong of language, as the data collection is complex at the best of times and the players within the USDA fluid and changing always. Keep in mind, USDA always resets the goalposts and as farmers, we need to keep this in mind.
Commodity Specific Comments
Corn has been somewhat of a bystander to soybeans, but after the January report, you can see, it wasn’t quite so. Essentially with the stroke of the pen, USDA shaved off 400 million bushels from last year’s crop. How does that happen and why wasn’t it caught in December? It is what it is, and the corn futures spreads did tell that story, and prices have risen accordingly.
Needless to say, the USDA report also said we lost 250 million bushels from the demand side of the ledger. If prices continue at these high levels, it doesn’t bode well for ethanol, US exports which are behind the pace of actual shipments to hit the USDA export target.
The March 2021 corn contract is currently a half cent below the July 2021 contract, which is considered bullish. The nearby March corn contract is currently in the 96th percentile of the past five-year price distribution range. Seasonally, corn prices tend to peak into June. However, prices now are at six-year highs.
We all know about soybeans, the world wants them and if things keep happening as they are, the world will run out. However, that never happens as Brazil is set to harvest their record crop, despite the uneven dry weather. However, price movement will continue to be volatile and violent.
In many ways, we all know soybean prices will come back down to earth. However, we still don’t know when. It’s like a card game going forward, as one card is unveiled, then there is a new set of realities to deal with. Right now, the November 2021 soybean futures is 60 cents above July 2022 soybeans. That tells you how deep this dynamic soybean demand is.
The March 2021 soybean contract spread over July 2021 is now 16 cents which indicates bullish demand. Seasonally, tend to peak in early July and bottom in early October, However, that didn’t quite mirror 2020, but eventually we’ll get back to it. The nearby March soybean contract is currently in the 97th percentile of the past 5-year price distribution range. That in itself, tells you prices are very high compared to usual.
The news in the wheat market involves Russia and the enactment of an export tax on Russian wheat exports. This tax will be 82 cents a bushel in February and $1.65 in March. Why do this? It has everything to do with keep food inflation under control in Russia, kind of a hearkening back to Soviet times. However, it is what it is, and wheat prices have responded accordingly.
In Ontario, new crop prices for SRW into the summer of 2021 are in the $7.50 plus range, much higher than previous years. As it is, there might be acreage shifts moving into spring, in spring wheats as well, as corn, soybeans and other crops jostle for acres. Price and quality go hand in hand with Ontario wheat, but of course in Ontario, this crop has to get through winter first.
The Bottom Line (cont.)
A constant during the run up in grain prices over the last four months has been the decline in the US dollar. When the US dollar declines, it usually has the effect of increasing demand for agricultural commodities as foreign currencies can buy more grain. It was no different this time. Of course, at the same time, it boosted the value of the Canadian dollar, which usually means lower basis values in Ontario. The loonie has climbed to the 79-cent level on this move with 80 cents clearly in the cross hairs. As is, with future prices rising significantly, the cash price effect in Ontario has been muted this time around. However, if the Canadian dollar heads into the 80-cent range, it should start to bite into Ontario cash grain prices.
It cannot be left unsaid that the change in the American administration will certainly change the agricultural landscape in the United States and with that, our price outlook. The Trump administration with its overt “America first” policy led to disruption with American shipments of soybeans into China, as well as corn into Mexico and several other trade related events. It was extremely damaging to all grain farmers in North America, but Market Facilitation Payments of $28 billion plus lessened the blow to US farmers. Unfortunately, Ontario farmers didn’t have the agricultural safety net to buffer the price drop.
There was more. The Trump administration weakened ethanol demand by granting SRE (small refiner’s exemption) for ethanol blending. This was on going into the last weeks of the American administration. Ethanol corn usage has now dropped to below 5 billion bushels of corn. Much repair needs to be done, not only to the ethanol file, but also to the trade file. Will the Biden administration work toward that end? Only time will tell, but Presidential announcements via Twitter are likely over. A more stable environment for agricultural policy is likely in the offing.
It is a long and winding road. November 2021 soybeans as of January 15th are $11.97, November 2022 soybean futures are $10.59. It tells the story that the world continues, and risk management never grows old. The risks out two years aren’t the same as the nearby months. In Ontario, we’ve got some very good cash grain prices. Amid the Covid pandemic, the wheels of the agricultural economy keep turning. As we move ahead into 2021, there will be many marketing opportunities ahead.