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Market Trends Report – July & August 2021

US and World

     Is the crop made or is it about to be made?  Or will hot and dry weather currently forecast for the American Midwest take the corn and soybean crop down like it has in Western Canada and the high plains of the United States?  It’s that time of year again when the drama is clearly with the weather in the fields across the great North American corn belt.  July moisture is important for corn pollination.  August rains usually make soybean yields.  As we move ahead, farmers have set the table for a good harvest.  Will it get to the finish line with good rains and benign weather?  We are close.  The next few weeks will tell.

     On July 12th USDA released their latest WASDE report which reflected the new acreage numbers which had been released on June 30th.  The USDA pegged domestic corn production at 15.165 billion bushels, based on the updated June 30th acreage figure of 92.7 million acres with a yield unchanged of 179.5 bushels per acre.  2021/22 corn ending stocks were pegged at 1.432 billion bushels, which was an increase over June.  USDA also raised the old crop corn ending stocks to 1.082 billion bushels reflecting the higher feed and residual use coming out of the June 30th report.  As expected, USDA reduced the drought ravaged Brazil corn production to 93 MMT, down from 98.5 MMT predicted last month. 

    The USDA left US soybean production unchanged at 4.405 billion bushels based on a yield of 50.8 bushels per acre.  USDA left all their supply and demand estimates unchanged, along with old crop ending stocks.   On the wheat side of the ledger, spring wheat production came in at 345 million bushels below pre report estimates and 41% less than last year.  Yield is set at 30.7 bushels per acre which would be the lowest since 2002.  Winter wheat did better with production increased from June by 4% and better than last year by 16%. 

      On July 23rd, corn and soybean futures were lower than the last Market Trends report.  Wheat futures were higher.   September 2021 corn futures were at $5.47 a bushel.  The November 2021 soybean futures were at $13.51 a bushel.  The September 2021 Chicago wheat futures closed at $6.84 a bushel. The Minneapolis September 2021 wheat futures closed at $9.09 a bushel with the September 2021 contract closing at $7.70 a bushel.

     The nearby oil futures as of July 23rd closed at $72.07/barrel down from the nearby futures recorded in the last Market Trends report of $75.16/barrel. The average price for US ethanol on July 23rd in the US was $2.28 a US gallon down from the $2.41 recorded in the last Market Trends report.

     The Canadian dollar noon rate on July 23rd was .7952 US, lower than the .8095 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

     Wheat harvest has progressed across Ontario from a very early start in and around Canada Day.  However, it’s been a very wet slog thru wheat harvest especially for farmers in the deep southwest of Ontario, which has been inundated by rain almost daily.  Quality has suffered with grade discounts and sprouts, something rarely seen in Ontario soft red wheat fields before this year.

     Wheat yields have been across the board with some areas posting big yields of 100-125 bushels per acres and even higher in some cases, while others not so much.  Where rain has been a daily occurrence, yield and quality suffers with every rain event.  Discounts get steeper.  However, in a year when corn is expensive, feed wheat is highly competitive with corn in feed rations, lessening the pain for some wheat producers.  It has also been moved into Quebec where transportation has warranted.  As of July 23rd, its wheat harvest continues across the province.  In the early days of harvest lots of double crop soybeans were planted. 

     Ontario is a big place, which means from a crop perspective, it’s not homogeneous.  Where crushing flooding rains destroyed a damaged many crops in Chatham Kent, other areas were dry or received just about the right amount of rain.  Big crops of both corn and soybeans are still possible in Ontario, which will define the basis markets to come.  The western Canadian drought will surely free up shipping resources from Thunder Bay into Ontario and Quebec later to help export what might be a big crop.  However, there is August weather to contend with yet.

         Old crop corn basis levels are $2.80 to $3.00 over the September 2021 corn futures on July 23rd across the province.  The new crop corn basis varied from $1.05 to $1.47 over the December 2021 corn futures.  The old crop basis levels for soybeans range from $4.15 cents to $4.61 over the September 2021 futures.  New crop soybeans basis levels range from $2.97-$3.23.  Ontario SRW wheat prices are in flux the spot price in SW Ontario approximately $7.95.   On July 23rd the US replacement price for corn was $8.90 /bushel.  You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

      Prices have retreated from the exuberance after the release of the June 30th USDA acreage revisions and weather now dominates whether the crop is made.  At this point it looks like the US corn crop is close to made but will surely pivot on weather the rest of the way.  States like Illinois and Indiana might be poised to set yield records.  However, this will be balanced by lower yielding corn coming from dryer weather in western areas such as the Dakotas and Minnesota.

     With corn futures at $5.47 a bushel and soybeans at $13.51 a bushel as of July 23rd, can demand be maintained to sustain these prices?  These prices are high historically won’t be maintained unless China comes back in the market and maintains their demand.  The US is expecting 102 millions tonnes, but it maybe not be able to be maintained.

      Like in Ontario, feed wheat is replacing some corn at these price levels and the same thing is happening around the world and in China.  There also has been a decrease in hog profitability in China.  This has changed the game to some extent from late last year and earlier this year as demand for soybean meal has collapsed in China.  As these hog margins have declined, so has demand for soybean meal and soybean imports.  China might have had an insatiable appetite for soybeans in the past, but higher price levels have certainly tempered some of that enthusiasm.

     Of course, some might argue they’d be much more enthusiastic about buying American corn and soybeans at cheaper price levels.  There is also the proverbial dance between feed wheat prices and corn and soybean meal.  All this matters, but clearly, there has been an incubation of soybean demand destruction in China at current price levels.  It may return, in fact its predicted by many, but the bottom line is purchase orders and they have been sorely lacking this summer season.

    Aside from the agricultural economics of the price of grains into China, there is also the political tensions, which are constant.  In the post Trump era, China US relations might not be as blustery, but they are still frosty, which always could disrupt the free flow of American grain into China.  The Chinese possess that much market power and with Brazil constantly raising production, they have other avenues.  Presently the Americans and Chinese are holding high level meetings with cyberespionage being high on the agenda.  The agricultural commodity trade is part of that greater discussion. 

Commodity Specific Comments

Corn

     This is the time of year when the corn crop is pollinating, which makes weather very important.  However, it looks like the US crop is a good one except for conditions in the US northern plains.  Will we go over 179.5 bushels per acre or not quite get there.  Clearly, at this point, the crop is close to that and with normal weather going forward, the supply will be there.

     Demand needs to prove its still there like it was earlier this year.  Unfortunately, the signs are not quite like that.  US export commitments have been poor and there has been some cancelations of US old crop corn.  A big crop at these price levels will need all that demand back.

    The December corn futures contract is currently priced 7.75 cents below the March 2022 contract, which is considered bearish for new crop corn.  Seasonally, corn prices tend to peak in early June and bottom out in October.  The nearby corn contract is currently in the 55th percentile of the past five-year price range.

Soybeans

    Soybeans might be the great liars, but in the end, always tell the truth.  Rain in August is the testosterone beans need to bring on bigger production and that is yet to play out.  The lower soybeans acres this year has always been a problem, especially if demand remains constant.  Will the rains come, or will hot and dry take the froth off US soybean yield this year?

     Demand will be key.  There will also be another record crop getting planted starting in October in Brazil.  It’s never safe to assume that supply will be there, but it sure looks to be by the end of the year.  China has hesitated on US new crop commitments lately.  This demand needs to remain dynamic and prove it.

      The November 2021 soybean contract is currently 6.25 cents above the March 2022 contract which is considered bullish.  The nearby soybean contract is currently in the 64th percentile of the past five-year price distribution range.  Seasonally, soybean prices tend to top in early July and bottom in early October. 

Wheat

   From a price standpoint, Minneapolis HRS wheat is the star of the show based on the drought in the US northern plains and Western Canada.  It is brutal with the USDA rating the crop as 11% good to excellent.  How high will this market go, and will it have a further effect of dragging up SRW wheat prices which could benefit Ontario farmers?  Its hard to know, but wheat classes tend to have their own supply and demand fundamentals.  It’s likely the HRS market drags up the SRW market, but not to the same degree.

     In Ontario wheat harvest continues, but has finished mostly in southwestern Ontario.  The constant rain was a problem and quality issues did show up in spades in areas which had excessive rains. There have been some very good yields and combined with prices, still paints a good story for producers who avoided quality issues. 

The Bottom Line (cont.)

     The Canadian dollar lost about 4 cents against the US Dollar from June 1st to July 19th, which helped basis levels in Ontario.  It has been a total reflection of the US dollar gaining at the same time, which generally is bad for grain futures prices.  It represents the constant management challenge for Ontario farmers in balancing futures price movement with Canadian dollar fluctuations.  It may present basis contract opportunities for those who feel futures have topped.  The Bank of Canada has done nothing to signal any future interest hikes.  It will remain a challenge for Ontario farmers to consider, but one eye on the value of the American dollar will surely give clues to where the loonie wants to go.

     Statistics Canada has pegged Ontario soybean acreage at 2.9 million acres with Quebec at 925,300 acres, an increase of 3% and 4.5% respectively.  Ontario corn acreage was reduced by 2% down to 2.1 million acres with Quebec corn acreage down 0.6% to 885,500 acres.  These acreage statistics never vary greatly and with good weather this year will produce big crops, which will need to be moved.  There should be a robust export corn market into Europe, but of course, we might be getting ahead of ourselves.  Good August weather will be needed to push these crops to record territory.  Surely new crop basis levels will partly be determined by how this Ontario and Quebec crops turns out. 

      Lost at times in the fundamentals of grain prices are the logistics of grain movement, both in Ontario and the world.  Simply put, partly because of Covid, moving grain is more expensive as freight costs have risen significantly. On July 23rd, quoting from DTN, the cost of shipping corn from the US Gulf to China was $2.13 a bushel, up from $1.05 at the start of 2021.  That’s double and its negative to grain demand at the lofty price levels that we’ve become accustomed to over the last few months.  It is one thing to have soybeans priced on the Dalian exchange in China at $18.38, but another to ship them there from cheaper locations around the world. 

     Somebody must eat those freight charges, and it often will end up at the producer level until innovation and technology can void that gap.  As summer grows older, Ontario farmers will surely be hoping to bring their crops into the homestretch with good weather.  It’s been uneven so far especially for wheat harvest, but it surely has benefited other crops.  We’ll need rains in August for soybeans and finishing up what looks to be a very good corn crop.  The challenge will be to keep recalibrating those standing marketing pricing orders.  It’s been a good year for that. Risk management never grows old.   There will be many marketing opportunities ahead.   

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