Market Trends Report – January & February 2023
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US and the World
Here we are in a new calendar year and a new set of possibilities and opportunities for grain farmers across Ontario and the greater North American corn belt. The winter of 2023 has been somewhat benign in many parts of the corn belt, but it is likely still that we will receive the wrath of a Canadian winter. However, at the same time in South America it is midsummer, and crops are growing actively and being impacted by many weather anomalies. At the same time grain is moving through different channels around the world in that unending journey to satisfy consumption. Keeping score of all of this is incredibly challenging. The USDA chimed in with their latest “final” numbers on the 2022 crop year on January the 12th.
USDA dropped corn production 200 million bushels down to 13.730 billion bushels, which is the lowest in three years and below what analysts were expecting in their pre report estimates. U.S. National corn yield now sets at 173.3 bushels per acre, but the USDA also cut harvested acreage by 1.6 million acres. The total supply now stands at 15.157 billion bushels with total usage coming in at 13.915 billion bushels. This usage was down 185 million bushels from December. The export demand for corn was down 150 million bushels, the USDA setting it at 1.925 billion bushels. Corn ending stocks settled out at 1.242 billion bushels.
American farmers produced 4.276 billion bushels of soybeans in 2022 with a lower harvested acreage and a lower national average of 49.5 bushels per acre according to USDA. The yield reduction came mainly from lowering previous estimates in Missouri, Indiana, Illinois and Kansas. USDA has set soybean ending stocks at 210 million bushels this was partly because of the 55 million bushel cut in export demand which is reflected because of lower import demand from China and a higher export forecast from Brazil. Brazilian soybean production was actually increased to 153 MMT, while the Argentinian forecast was cut quite severely down to 45.5 MMT from the previous estimate of 49.5 MMT. The USDA left wheat production unchanged in the United States at 1.65 billion bushels with a national average yield of 46.5 bushels per acre.
On January 13th, corn, soybeans and wheat futures were higher than the last Market Trends report. March 2023 corn futures were at $6.75 a bushel. The December 2023 corn futures contracts sits at $5.98. The January 2023 soybean futures were at $5.27 a bushel. The November 2023 soybean futures stood at $13.93. The March 2023 Chicago wheat futures closed at $7.43 a bushel. The Minneapolis March 23 wheat futures closed at $9.17 a bushel with the Sept 2023 contract closing at $8.90 a bushel.
The nearby oil futures as of January 13th closed at $79.86/barrel up from the nearby futures recorded in the last Market Trends report of $71.02/barrel. The average price for US ethanol in the US was $2.38 a US gallon, up from the $2.36 last month.
The Canadian dollar noon rate on January 13th, 2023, was .7468 US, up versus the .7337 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate increased to 4.25%.
Ontario
In Ontario benign weather has set in after a particularly brutal stretch of weather before Christmas, where high winds and cold temperatures and snow made things difficult across the province. However, that was followed by milder temperatures into January with much of the province without snow cover. However, in eastern Ontario this is different with lots of snow on the ground toward the Quebec border. This open weather in some parts of the province have helped producers continue to harvest corn such as in York region. It is Canadian winter and there surely is much more to come.
Even though there is still a bit of corn to be harvested, the final numbers on the Ontario harvest have been published by the Ontario Ministry of Agriculture and food. What we had last summer was corn yield at 166 bushels per acre in the soybean yield at 48 bushels per acre. This is reflective of a drier than normal growing season in much of the province, but not all. Dryness was very apparent in parts of the deep southwest as well as eastern Ontario. As it is, these estimates are lower than many of the private crop forecasts done earlier. At the end of the day, on a provincial basis it was lower than what many people had expected.
The Canadian dollar has gained throughout the month of January currently sitting at .7468 cents US on January the 13th. On December the 16th the dollar almost dipped under $0.73 US, but settled at .7303 US. Basis values erode under any scenario where Canadian dollar gains in value. As we look ahead any move up in this value will erode some of the futures gains that we may or may not see especially in soybeans and wheat. It is just a reminder of the tremendous balance we have as farmers in Ontario of capturing that Canadian basis value with future price rallies.
Old crop corn basis levels are $0.95 to $1.61 over the March 2023 corn futures on Jan 13th across the province. The new crop corn basis varied from $1.25 to $1.40 over the December 2023 corn futures. The old crop basis levels for soybeans range from $4.60 cents to $5.17 over the January 2023 futures. New crop soybeans basis levels range from $3.98-$4.35 over the November 2023 futures. Ontario SRW wheat prices are in the $9.90 range. On January 13th the US replacement price for corn was $9.25 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
Have we reached a seminal moment within this grain market different than the last couple of years? Is it a time where prices go lower more often than they go higher? Or is it simply a time where we can expect more bearishness in the market considering the big crops in South America and the drop in demand that we have seen in both corn and soybeans from the USDA January report? Is it time to be more defensive with our marketing decisions?
It may be. However, there are still some flies in the ointment toward the bullish side of the equation. For instance, it is no secret that Argentina weather has been instrumental in the last few weeks of market action. Think of it as mid-July in North America. That is exactly the type of weather that is impacting parts of Argentina and Brazil at the present time with all the resultant price volatility. As of now, this weather variable remains a bullish factor, but we all know what can happen when the rains come. The drought is over. Until that happens a keen eye on South American weather will remain a key variable in our marketing decision process.
This will affect both corn and soybean prices. The US equivalent price for corn at the Dalian exchange in China was $10.92 as of January 13th. China will continue to need corn, but bigger supplies will not be able to be procured from South America until the Safrinha crop is harvested in July. With drought currently the news in Argentina, and July still far off, that leaves lots of room for volatility in corn prices.
At the same time in China the price of soybeans is $19.89 a bushel at the Dalian exchange. So far in 2022/2023 China soybean buying has increased 15% from a year ago currently at 984 million bushels. This has taken place even though it’s been an uneven time geopolitically and with a big Brazil crop in the offing. Despite the specter of a slowdown in China demand, at the present time it’s not quite happening.
Commodity Specific Comments
Corn
There are lots of questions about corn prices. For instance, how do we sustain corn prices in an environment where USDA says demand is down 185 million bushels? With all the technology we have to measure yield and acres, why did the USDA miss 1.6 million acres last month or the month before? In such an environment, what are the odds of $8 corn returning? There are so many questions.
Answers to these questions are continually blowing in the wind this winter. However, we know that seasonally corn tends to go up into the February USDA report and even higher into mid-June. Needless to say, it would be good to fix the corn export problem even though Brazil is starting to step up big time, especially with their corn exports to China. There’s lots of bearishness to go around when it comes to corn and the bullish factors are beginning to diminish.
The March 2023 corn contract is currently 1.5 cents above the May 2023 corn contract which is a bullish indication of commercial demand. Seasonally, corn prices tend to peak in early June and bottom out in October. The nearby March 2023 contract is currently in the 71st percentile of the past 5-year price distribution range.
Soybeans
The soybean complex is not quite like corn, but we also saw yield go down as well as acreage from the USDA. We know the USDA lowered Argentinian soybean production down to 45.5 MMT. At the same time, we know about the big crop in Brazil predicted to be 153 MMT from USDA. On a global level, soybean stocks are still building even with all of these setbacks.
At first glance, that would seem like soybean prices are due to come down, with the latest iteration of higher prices going up being a metaphorical sugar high. However, it is still a moving target. On the US domestic front there are many crush plants being built to take advantage of the biodiesel boom forged by U.S. government policy. So far, USDA has not raised US domestic crush to reflect this, but we can expect it to increase 200 million bushels per year in the next few years. That is a significant demand boost for US soybeans.
The March 2023 soybean contract is currently 1/2 cents above the May contract which is a bullish sign of commercial demand. Seasonally, soybean prices tend to peak in early July and bottom out in early October. The nearby January soybean futures contract is currently in the 74th percentile of the past five-year price distribution range.
Wheat
The USDA actually set US quarterly wheat stocks less than expected and the wheat fundamentals within the United States remain tighter than they have been in a long time. On a global level it is the same way except that Australia is producing what could be a record crop this season and you know the rest of the story. Wheat is either planted or harvested every month of the year and filling any supply shortfalls is always temporary. Chicago wheat is currently $7.53, which historically is good, but $1.50 lower than it was last October the 10th. The Ukraine Russia war will continue to offer the possibility of much higher wheat future surprises.
In Ontario the low Canadian dollar is taking that $7.53 Chicago futures price and giving Ontario farmers close to $10 a bushel for their wheat now and into next summer. Ontario has about 1.3 million acres of wheat which was planted last fall, much of it as of mid-January without any snow cover. As always, especially this time of the year its difficult to discern what this may mean come spring. However, with memories of $15 cash wheat in our heads from last summer, it’s going to be difficult to take less. However, that is the nature of the agricultural economics within our agricultural commodity markets. It is difficult to know where these wheat prices are going.
The Bottom Line (cont.)
It almost seems like a broken record but the Canadian dollar at .7468 cents US continues to add stimulus to Ontario grain prices. In fact, as always, the effect on soybeans and wheat is much more acute than it is with Ontario corn prices. The Bank of Canada has signaled that there will be fewer interest rate increases in the future and this along with a declining U.S. dollar might mean more of the status quo for the Canadian dollar. However, looking ahead with possible recession predictions coming to fruition the value of the Canadian dollar is not lending itself to a big gain in value. As always, it’s value will remain largely in an inverse relationship to the value of the US dollar. That will surely react to whatever the US Federal Reserve decides in 2023.
Even though the January USDA report did itemize some lower demand in both corn and soybeans, long term future spreads are still telling a bullish story. Having said that, we are going into a time where the South American crop size might define the story going forward. However, some market factors like soybean crush continually tell an optimistic story. For instance, on January 13th the value of crushed soybeans exceeded uncrushed soybeans by $3.24 a bushel in the United States, which represents one of the highest premiums on record. It just goes to show despite more bearish signals on the horizon ahead, this market has enough bullish items to keep its dynamism intact.
With the war in Ukraine and Russia going into its 12th month now it is easy to get complacent about how this conflict will continue to impact the price of grain going forward. Unfortunately, we have become accustomed to the bombings, the missile strikes, the killing and the hate generated in that part of the world over the last several months. We’ve also become accustomed to at least some grain movement in the Black Sea. Keep in mind, it’s important to realize that this conflict continues live in technicolor. It still represents a major piece of news for unknown volatility in our present grain market scenario. Thinking it is over with regard to grain is a mistake. A stray nuke or some other problem in that area could set grain prices ready to explode.
The road ahead for Ontario grain farmers will continue to challenge with one eye on the value of Canadian dollar and the other on grain futures values finding the right balance. We all know that with old crop seasonality, it generally tops out in February in front of the USDA reports with new crop generally in June and July. In the meantime, there is just so much that can happen with South America weather at the present time being top on that list. With so many variables in the mix standing pricing orders sitting at your elevator or processor can be an effective way to capture quickly generated marketing opportunities. Selling grain is a natural thing for farmers. Doing it in an orderly way in this price volatile environment makes it more taxing. Keep in mind risk management never gets old. As always daily market intelligence will remain key. There will be many marketing opportunities ahead.
