US and the World
It is a very crucial time for grain production across the greater North American corn belt. Mid to late July is very important for pollination in the corn crop and soybeans are setting up for their pod filling time in August. Leading up to this time it has been somewhat of an uneven weather picture affecting crops. Earlier in July dry weather was dominating the market discussion followed by reports of more widespread precipitation. As it is, it is still a mixed bag of weather forecasts which are affecting the market going into the 1st of August. On July 17th, USDA rated US corn 57% good to excellent, with soybeans rated 55% good to excellent. On July 12th the USDA came out with their latest WASDE report giving us our first indication of where they think yield might be going after the big acreage changes on June 30th.
USDA lowered their corn yield estimate on July the 12th to 177.5 bushels per acre. This was 4 bushels per acre less than their previous yield estimate, but it was slightly above trade expectations. Of course, it followed the increased US corn acreage number of 94.1 million acres reported on June 30th. This is setting up for a corn crop of 15.32 billion bushels. If this comes to fruition it will be the largest corn crop ever beating the 2016 crop. On the demand side the USDA pegged US domestic use at 12.385 billion bushels with exports at 2.1 billion bushels. The old crop corn ending stocks we’re down 50 million bushels to 1.402 billion bushels.
US domestic soybean yield was kept at 52 bushels per acre by USDA. New crop soybean ending stocks were lower to 300 million bushels which was above pre report expectations. With soybean acres set at 83.5 million, total soybean production is forecast to come in at 4.3 million bushels. This puts total supply 185 million bushels lower than last month. USDA kept Brazil and Argentinian production estimates unchanged at 156 MMT and 25 MMT respectively. USDA increased its estimate of all wheat production to 1.739 billion bushels up from 1.665 billion bushels in last month’s report. Winter wheat production is forecast to be up 6% from the June 1st forecast and 9% from 2022.
On July 22nd, corn and wheat futures were higher than the last Market Trends report. Soybean futures were lower. September 2023 corn futures were at $5.27 a bushel. The December 2023 corn futures contracts sits at $5.36/bu. The November 2023 soybean futures stood at $14.01. The September 2023 Chicago wheat futures closed at $6.97 a bushel. The Minneapolis September 23 wheat futures closed at $8.77 a bushel with the Sept 2024 contract closing at $8.33 a bushel.
The nearby oil futures as of July 21st closed at $77.07/barrel up from the nearby futures recorded in the last Market Trends report of $70.64/barrel. The average price for US ethanol in the US was $2.58 a US gallon, up from the $2.55 last month.
The Canadian dollar noon rate on July 20th, 2023, was .7569 US, up versus the .7553 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate increased to 5%.
In Ontario what was a very dry beginning in May and June helping planting progress turned wet in the first part of July, up to that point generally speaking crops were quite good across the big expanse from west to east across the province. However, heavy rains across southwestern Ontario have caused widespread damage to the soybean crop. Simply put, soybeans don’t like wet feet and more rain into mid-July has just made it worse. However, there are other areas of the province that are not as wet where crops are doing well.
The unfortunate part of heavy rains in July is that it can have a damaging effect on winter wheat quality. The big record 1.3-million-acre Ontario wheat crop is being harvested as I write this. Yields have been quite good, but there have been big quality issues across the board because of the heavy precipitation in some of the earlier wheat growing areas. Sprouting and downgrades in red wheat has been very prevalent across much of the Deep Southwest of Ontario. As time progresses producers will be hoping for drier weather to harvest this crop. Hopefully, the Ontario wheat points east from southwestern Ontario will avoid some of the quality damage.
While soybeans are struggling with wet feet in Ontario, corn seems to be doing much better just reaching pollination in some parts of southwestern Ontario. Over the next few weeks producers will be making decisions about spraying the corn in tassels for various pests. Ontario basis levels for both corn and soybeans have increased slightly from last month With Ontario old crop pricing moving to November of 2023. As it is, it looks to be a very big corn yield in Ontario at this point in development, maybe not so much for soybeans.
Old crop corn basis levels are $1.05 to $1.40 over the September 2023 corn futures on July 21st across the province. The new crop corn basis varied from $.90 to $1.15 over the December 2023 corn futures. The old crop basis levels for soybeans range from $4.86 cents to $5.02 over the November 2023 futures. New crop soybeans basis levels range from $3.08-$3.24 over the November 2023 futures. Ontario SRW wheat prices are in the $7.66 range, but in harvest flux. On July 21st the US replacement price for corn was $7.75/bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
It is that time of year when weather matters more than ever. In many ways you could argue that there’s almost a stagger with regard to knowing what actual crop conditions versus what the market algorithms are dialed in at. For instance, market action over the last 30 days has been very volatile as it decides whether it’s wet or dry or whether there is adequate moisture to put this crop in record territory. As of now, the jury is still out on that as the forecast for going into August is for hot and dry conditions.
The conditions as they are toward the end of July are more bullish soybeans and more bearish corn, although the bearishness in corn has lessened over the last couple of weeks. The simple fact of less than expected soybeans and more than expected corn acreage going into July is still having an effect on market prices. Needless to say, risk on yield is still high based on the weather risk. Daily market intelligence especially when it comes to weather forecasts are especially salient at this time of year.
Then there is Ukraine and Russia, which is the messiest of variables in the global grain market. In mid-July the bridge to Crimea was bombed and in retaliation the Russians launched drone and missile attacks on Ukrainian agricultural port infrastructure in Odessa. On top of this they withdrew from the Black Sea Grain Accord, which was partially responsible for the big run up in grain futures. Around the same time, the Ukrainian defence ministry said they considered all ships traveling to Russian ports or Ukrainian ports controlled by Russia to be potential carriers of military cargo. At the same time the Russian government warned that ships heading to Ukraine ‘s Black Sea ports could be considered military targets.
Obviously, none of this works from a risk management perspective, especially those that are doing the insurance underwriting. It is also dialed into our grain futures trading algorithms. It will certainly cause volatility in the global market for corn, oil seeds and wheat in the near future. However, it is not new even though it is still messy. Grain from Russia and Ukraine will continue to reach markets, usually that means through large discounts. A resolution to this is increasingly unlikely.
Commodity Specific Comments
There are dry pockets across the North American corn belt which are unusual. For instance, Illinois corn is less than 50% good to excellent with triple digit heat moving in the week of July 23rd. This is difficult to digest at this point because it is so variable. The forecast into August is for very dry hot conditions, which ultimately will likely reduce the wider corn crop.
With the heat dome starting to build in the American corn belt, you could make the argument that the market is lagging behind the reality in the field. In fact, many traders whether they be banks, speculators or others trade USDA numbers and depending on what happens it might be highly likely that futures prices lag behind an ever-decreasing US corn crop. In fact, it might be hard to know this year until the January 2024 US stocks report is released.
The December corn contract is currently priced at 11 cents below the March 2024 contract which is a bearish indication of new crop corn demand. Seasonally, we know that corn prices tend to peak in early June and bottom out in early October. The new crop December futures contract is at the 48th percentile of the past five-year price distribution range.
While the uneven dryness in soybean growing areas is a problem for corn, it is not quite the same for soybeans. The simple fact that acreage is much reduced this year has led to the reality that the current market conditions are fairly bullish for soybean prices. For instance, with November 2023 soybean futures fluttering around the $14.00 level in front of pod filling time, this is very advantageous for soybean producers.
The world is still getting lots of Brazilian soybeans at good prices and this should continue all the way into October when the North American crop comes out. Demand is very strong domestically for US beans. For instance, based on nearby futures prices the value of crushed soybeans exceeds the cost of uncrossed soybeans by $3.47 a bushel which is among the most profitable incentive US soybean processors have ever seen.
The November 2023 soybean contract is currently priced 4 cents above the March 2024 contract which is considered bullish. Seasonally, soybean prices tend to peak in early July and bottom out in early October. The November soybean contract is currently at the 76th percentile of the past five-year price distribution range.
The problems in the Ukraine and Russia with live fire being sent into grain infrastructure might be big news in wheat futures markets, but not so much in North American basis markets where wheat is plentiful. It is a problem for the global south, and it is a problem for the Ukraine, but it simply is a wild card in the North American cash market especially with harvest either ongoing or about to commence.
In Ontario wheat harvest continues. Prices have been highly variable as basis levels will change especially considering the quality problems being experienced in southwestern Ontario. This variability has been violent at times especially considering the problems in Ukraine. For instance, prices spiked about $0.75 a bushel in three days to over $8 a bushel before retreating back to the $7.60 level in and around July 22nd. Over the next several days and weeks farmers will need to watch this market very carefully because of this unusual wildcard volatility.
The Bottom Line (cont.)
The Bank of Canada recently raised interest rates for the tenth straight time. This is certainly caused a concern because it hasn’t had the stronger impact on inflation regarding food and home prices as one might have thought. There is also the concern the string of rate increases might kick in a little later than expected causing some reversal in the progress that has been made. Of course, farmers are concerned about higher interest rates and the effect of the Canadian dollar. The Canadian dollar is usually valued in an inverse fashion to where the US dollar is valued. However, interest rates do matter, and this is partially why the Canadian dollar has been fluttering continually in the 75 and $0.76 range US. In Ontario, the Canadian dollar continues to act as a stimulus turn grain prices.
We know that the American corn crop is at a particular crucial time now because of the hot and dry weather in the 10-day forecast. However, keep in mind the world continues to find cheaper corn prices in Brazil. Harvest progress has been going well in the central part of the country but has been a bit slower in southern Brazil where rain have interrupted progress. The sobering reality is on the supply side of global corn fundamentals, Brazil is making a big difference, and this is only set to increase in the future. In 2023 and 2024, we are certainly seeing that come to fruition.
Brazil of course is also the provider of cheap soybeans on the world market, and we know that this is set to continue. Keep in mind that American soybean demand remains strong domestically. Soybean oil closed recently at its highest level in over a year. The jury is still out on what soybean yield will be, but the price future is brighter than it is for corn. Key to soybean price stability will be a continued increase in production from our friends in Brazil. However, if something suddenly happens there, which is negative, all bets will be off.
The challenge for Ontario farmers will be to continue to balance their price risks with futures prices versus the reality of basis in the Ontario market as we move ahead. It’s hard to know what the Ontario crop will be like, despite the problems at present a good crop should be in the offing especially for corn. This will surely weigh on new crop offerings as we move ahead. As we move into August the focus will be on soybeans and August rains. the ongoing corn pollination will also be important. As it is, the risks associated with what we do will remain. There will be many marketing opportunities ahead. Keep those standing market orders focused and re calibrated. Daily market intelligence will remain key.