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Market Trends Report – July & August 2022

US and the World

     It is that time of year again when many analysts think the crop might be made. Late July and going into August is always a critical time for crop development and 2022 is no different than any other.  As of July 17th, 64% of US corn was rated as good to excellent, which was one percentage point below last year’s rating at this time.  On July 17th US soybeans were rated at 61% good to excellent, which was down slightly from the previous week. Wheat was 70% harvested in the US which was just slightly behind the five-year average of 71%.  Of course, along with these crop ratings were the geopolitical winds which were overwhelming in many instances in late July. The USDA chimed in with their latest WASDE report on July the 12th.

     On that day the USDA increased corn acreage by 400,000 acres to 89.9 million acres, while holding yield at 177 bushels per acre. This pegged US production at 14.505 billion bushels, which was up 45 million bushels from the June forecast. The USDA raised old crop corn ending stocks to 1.51 billion bushels. New crop ending stocks for 2022/23 were increased 70 million bushels to 1.47 billion bushels. The USDA also maintain Brazilian corn production at 116 million metric tons and Argentina’s production at 53 million metric tons.

     On the soybean side of the ledger the USDA kept planted acreage at 88.3 million acres and national yield at 51.5 bushels per acre which was unchanged from June. This translates to total new crop production of 4.505 billion bushels. Old crop ending stocks for soybeans were pegged at 215 million bushels while new crop ending stocks are estimated to be 230 million bushels.  The USDA increased its estimate of US wheat production to 1.78 billion bushels, which was on the high end of pre report estimates.  Generally speaking, at first glance the July 12th USDA report was slightly bearish for corn but neutral for soybeans and wheat. 

      On July 22nd, corn, soybean and wheat futures were lower than the last Market Trends report.  September 2022 corn futures were at $5.64 a bushel.  The December 2022 corn futures was $5.64.  The November 2022 soybean futures were at $13.15 a bushel.  The September 2022 Chicago wheat futures closed at $7.59 a bushel. The Minneapolis September 2022 wheat futures closed at $9.12 a bushel with the July 2023 contract closing at $8.91 a bushel.

     The nearby oil futures as of July 22nd closed at $94.70/barrel down from the nearby futures recorded in the last Market Trends report of $108.43/barrel. The average price for US ethanol on July 22nd in the US was $2.62 a US gallon, down from the $2.70 last month.

     The Canadian dollar noon rate on July 21st was .7766 US, versus the .7760 US reported here in the last Market Trends report. The Bank of Canadas lending rate increased to 2.5%.

Ontario

     In Ontario winter wheat harvest continues across the province. For the most part early yield reports have been strong and test weight very good as well as quality. The dry sunny weather going into wheat harvest set-up good harvest conditions especially in southwestern Ontario. As July grows older and we go into August, farmers will be hoping for good weather to get the remaining wheat crop off.  Of course, this is always a trade-off between wanting moisture for the row crops.

      The price of Ontario wheat has fallen significantly over the last couple of months and couple of weeks.  This has been a reflection of the greater geopolitical picture especially in Russia and Ukraine.  Needless to say, Ontario wheat prices are still higher than they have ever been. This is a reflection of wheat futures levels but also a Canadian dollar which has been fluttering in the 77 cent US level. Still, there is no denying that the Ontario wheat price has fallen $5 a bushel over the last two months.

     These lower wheat prices have also been reflected in Ontario corn and soybean prices, with corn dropping about $3 a bushel and soybeans about the same.  The Canadian dollar has helped sustain prices but with lower futures levels basis has been eroded to some extent.  How will this translate in the next few weeks with regard to Ontario cash prices?  Much will depend on the size of the crop growing in the field and the weather moving forward. Unfortunately, the dry weather for wheat harvest has had a negative impact on much of the crop across Ontario. Some areas have got rain and some areas have not. Curled up corn is representative in many areas of the province. The soybeans will likely fare better in this drier environment. A widespread rain is certainly needed as we head into August.

      Old crop corn basis levels are $1.65 to $2.00 over the September 2022 corn futures on July 22nd across the province.  The new crop corn basis varied from $1.30 to $1.80 over the December 2022 corn futures.  The old crop basis levels for soybeans range from $5.49 cents to $6.34 over the November 2022 futures.  New crop soybeans basis levels range from $3.33-3.60 over the November 2022 futures.  Ontario SRW wheat prices are in the $9 range and will remain in flux for the next few weeks.   On July 22nd the US replacement price for corn was $8.12 /bushel.  You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

     Grain prices have sunk consistently the last two months, and this continues into late July. Is the party over? It would seem so when you’ve seen a fall from higher prices to this extent although current futures levels are very healthy historically.  We have had quite a run over the last 18 months and it’s hard to tell whether it’s over especially based on all the market factors which are still at play.

     Why did it happen this way?  As with any type of big market move there are many factors at play. However, there has generally been an exit of non-commercial money from the market especially non-commercial money which was in long positions. In fact, the funds long position in the grain market is the lowest it’s been since October of 2020. Take it for what you will but commodities always become an investment vehicle when they’re volatile, especially to the positive side and that’s exactly what we’ve had over the last 18 months.  Even though long-term future spreads still call all grains bullish, it’s unlikely to bring this non-commercial investment capital back into the market at this time.

     In many ways, wheat was the commodity that led the way up earlier this year when Russia invaded Ukraine. That’s at cash levels for wheat get as high as $15 a bushel or more in Ontario. Over the course of this time wheat prices have been incredibly volatile and of course have now dropped off below $9 a bushel in Ontario. The war is still raging in the Ukraine, but to some extent the market has absorbed it. On July 22nd, Turkey, Ukraine and Russia signed a deal in Istanbul to make a corridor to export Ukrainian grain. On that news wheat fell $0.40 a bushel on July 22nd.  Unbelievably, the next day Russia launched missiles into the port of Odessa rattling the nerves of everybody in the grand trade. Obviously, as we look ahead there are no right answers here to whether grain will move seamlessly again out of the Black Sea. The market will just have to react to the latest news.

      There have been other factors that have added to the agricultural commodity meltdown.  while the fundamentals of grain don’t seem all that much different than they were a couple months ago, we’ve seen an almost $9 reduction in the price of crude oil futures, lots of talk of recession and China is still dealing with their COVID zero policy. All of this is construed as demand destruction, which have hurt agricultural markets.  We need fresh bullish news to get things restarted again.

Commodity Specific Comments

Corn

     Corn prices continue to be in flux, but we cannot ignore what has happened over the last two months as corn prices have dropped significantly.  At the present time corn is in a weather driven market and with cooler weather predicted for the end of July it might be setting up to reach its yield potential. Typically, at this time of year when traders think the crop has been made, selling the corn makes some sense.

      The July 12th USDA report did not significantly change corn fundamentals, but at the same time the December corn price was down $0.42 on the day, a big move. This would be more usual if there was some type of fundamental change, but it obviously reflects the meltdown in commodities worldwide.  The bull was fed every day for a long time, but alas the bullish news started to run out.

     The December 2022 corn futures contract is currently priced 7 cents below the March 2023 contract, which is a bearish indication for commercial demand for new crop corn.  Seasonally, corn prices tend to peak in early June and bottom out in early October. The nearby December corn futures contract is currently priced in the 50th percentile of the past five-year distribution range.

Soybeans

    The July 12th USDA report did not fundamentally change the soybean picture whatsoever, but like corn, soybeans prices moved down finding it hard to withstand the general meltdown in commodity prices worldwide. August weather will be incredibly important to soybean yield in the United States, and this should be watched over the next few weeks.

     It might be too early to think about this but even with soybeans at the $13 futures level, that is a very good price historically for soybean production and Brazil is poised to pounce.  There are already predictions coming out of Brazil of an increase of 20% over last years planted acreage.  If it comes to fruition, it’ll mean a lot more soybeans, which the world and likely China will need to consume.

     The November 2022 soybean contract is currently priced 9 and a quarter cents below the March which is a bearish indication of demand.  Seasonally, soybean prices tend to peak in early July and bottom out in early October.  The November soybean contract is currently in the 53rd percentile of the past five-year distribution range.

Wheat

    Wheat might have led the charge up in prices earlier this year, but when the bottom fell out it’s been a hard fall. Cash wheat prices are down approximately $6 a bushel in Ontario, and this is reflected across the world. A possible easing of Ukraine wheat stocks hitting the open market have been part of the issue. A recent agreement between Turkey, Russia and Ukraine on moving  these agricultural commodities has helped ease the nervousness in the market. However, it’s still a war zone and the proof will be in the results. 

     In Ontario the challenge will be to get the rest of the wheat harvest off with good quality. Despite the price drop of recent weeks wheat prices are still higher than they were a year ago.  The 77 cent US Canadian dollar has helped ease the pain of the futures price drop.

The Bottom Line (cont.)

     The Canadian dollar has certainly not moved very much since the last Market Trends report and continues to add stimulus to Ontario grain prices. However, the Bank of Canada threw a wrench into the gears earlier in July when they raised interest rates by 100 basis points putting their lending rate at 2.5%. This was in response to inflation reaching over 8% on an annualized basis in May. Usually, any type of interest rate increases such as that is very bullish for the Canadian dollar, but this time around it was not seen this way.  It’s hard to say why other than the fact the high inflation numbers were not good news, but it really is a testament to how strong the US dollar is.  The Canadian dollar usually does not appreciate when the US dollar is strong and that held firm this time.

     As we head into late July and August, we are in the proverbial weather market that we see almost every year. As of July 22nd, the weather is set to turn cooler and wetter over the United States this week although some areas might be shortchanged. The National Weather Service is also talking about a return to hot and dry weather in August, which generally affects soybeans. 

     As we look ahead, aside from weather we’ll be looking for clues to increasing demand for agricultural commodities. At the present time the demand for corn from China from the United States is very low as Brazil is picking up most of that business.  Lower corn prices at Brazil ports are helping.  At the same time soybean crushing margins in China are very good and coupled with a hog herd which is growing bodes well for soybean demand out of Asia. Certainly, these lower prices for soybeans are helping as well.

     It is being a tough early summer for pricing grain in Ontario as producers have watched prices decline overtime. However, there was quite a bit of opportunity to price grain and very profitable levels and there surely will be in the future as we are still at historical highs compared to the past five to 10 years. The challenge for Ontario producers is to maintain daily market intelligence of what both the futures and cash market is doing. Standing marketing orders can be helpful. In the meantime, rain is needed across Ontario to bring this crop home.  Yes, risk management never gets old. There will be many marketing opportunities ahead.

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