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Market Trends Report – March & April 2021

US and the World

     It beginning to smell like spring again.  Although we might be a few days away from that, the land is starting to buzz with activity especially in the southern portions of the great North American farm belt.  It is still the winter of Covid one year on, but when it comes to our grain markets one year on, any resemblance of a year ago is gone.  Markets exploded out of their Covid funk from a year ago and we’ve never really looked back.  As we blow the dust off the planters and drills for another year, we’ll see if the great demand surge with 2020/21 grain markets can continue.

     The USDA chimed in with their latest WASDE report on March 9th.  There was little change from the February WASDE report.  The USDA might be trying to keep their powder dry until the end of March when they release their prospective plantings report.  On March 9th, USDA kept corn endings stocks at 1.502 billion bushels, while maintaining production at 14.625 billion bushels.  USDA maintained corn exports at 2.6 billion bushels with a stocks to use ratio of 10.2%.

      The situation on the soybean ledger remained very much the same from February.  Ending soybean endings stocks were maintained at 120 million bushels with production still set at 4.135 billion bushels.  The USDA increased the Brazilian soybean crop to 134 MMT, but actually reduced the Argentinian crop to 47.5 MMT.  The global ending stocks for wheat were reduced 3.03 MMT, this came mainly from reduced stocks from China.

     On March 13th, corn, soybean and wheat futures were higher than the last Market Trends report.    May 2021 corn futures were at $5.39 a bushel.  The May 2021 soybean futures were at $14.13 a bushel.  The May 2021 Chicago wheat futures closed at $6.38 a bushel. The Minneapolis May 2021 wheat futures closed at $6.38 a bushel with the September 2021 contract closing at $6.51 a bushel.

     The nearby oil futures as of March 12th closed at $65.61/barrel up from the nearby futures of recorded in the last Market Trends report of $59.47/barrel. The average price for US ethanol on March 12th in the US was $1.90 a US gallon up from the $1.78 recorded in the last Market Trends report.

     The Canadian dollar noon rate on March 12th was .8004 US, higher than the .7867 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

    In Ontario the calendar says it’s still winter, but most of the snow has left the Ontario farm scape.  Winter wheat looks good in Ontario’s southwest as its greened up with warm weather in early March.  It won’t be long before there will be a lot more activity on Ontario farms.  The wheat crops is a big one, estimated by OMAFRA at about 1.22 million acres.  How this will play out in 2021 Ontario corn and soybean acres will be important.

     That certainly will take shape in the next few weeks.  With $15 plus new crop soybeans in the mix, it seems apparent that soybeans might find favour this spring.  However, there are good prices for all crops, which should serve as a backdrop for Ontario’s own acreage war this spring.  It’s hard to imagine Ontario corn below 2.2 million acres grown last year.  However, new crop soybean prices will be challenged to push bean acres over 3 million Ontario acres.  Our own Ontario grain fundamentals of supply and demand depend on how these acreages change.

     Almost lost within these new prices levels is the new 80 cent Canadian loonie which has had a dampening effect on local basis at a time of high prices.  The Loonie has risen about 2 cents over the last month, putting it over 80 cents which we haven’t seen in couple years.  It usually reacts in an inverse fashion to where the US greenback goes.  Interest rates on both sides of the border are very unlikely to rise, at least until 2023.  However, needless to say, nobody knows if 80 cents US will hold.  It’s still a “low dollar”, which inherently helps Ontario cash grain prices.

    Old crop corn basis levels are $1.27 to $1.54 over the May 2021 corn futures on March 12th across the province.  The new crop corn basis varied from $0.87 to $1.31 over the December 2021 corn futures.  The old crop basis levels for soybeans range from $3.20 cents to $3.55 over the May 2021 futures.  New crop soybeans basis levels range from $2.58-$2.95.  Ontario SRW wheat prices are in the $7.63 range on March 12th, with new crop values in the $7.29 range.   On March 12th the US replacement price for corn was $7.35/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

    If the market is like a river, 2020/21 represented a time when the river was small and then turned into a raging torrent of water.  A year ago, the dearth of Covid battered markets as prices headed south to a point in July, where we were at a loss for when things would turn around.  However, a combination of both supply and demand events have turned that quiet river into a much wider torrent.  With both US corn and soybean supplies on a ventilator now, the question is what happens next.  Will the river grow even wider?

      Part of that puzzle is taking place Monday March 15th.  No, their likely won’t be any black swan swoop down driving prices violently higher or lower.  However, the CME has increased position limits for speculators starting on that day.  On that day, speculators will be able to trade upward of 50% more contracts.  It’s a huge infusion of capital into the agricultural commodity markets at a time when there is a lot of Covid stimulus sloshing around in the economy.  It means greater volatility, more violent lows and highs. It’s a double-edged sword.  The river is getting much wider.

    This is all takin place in front of the March 31st USDA Prospective planting report, which traditionally been a firecracker within the market, often, but not always sparking big price action.  However, with more speculation in the market (a wider river), some of that USDA hype can be muffled.  Needless to say, the market wants more US corn and soybean acres.  With high prices, the question is how many acres for each crop, and will it be enough in 2021?

     For 2021, initial crop insurance guarantees in the US are corn at $4.58 and soybeans at $11.87, which are the highest since 2014.  The soybean to corn ratio is at its highest level since US crop insurance policies were developed.  Typically, this means, the split between soybean and corn acres are almost evenly split.  Last year, the US had 83.1 million acres of soybeans and 90.8 million acers of corn.  This year, USDA’s February outlook projection was 92 million corn acres and 90 million soybeans acres.  Where is it going to come from?  Every marginal acre in the US will need to be planted.  It makes this coming spring’s planting situation incredibly important.  The demand is there.

Commodity Specific Comments

Corn

    Corn futures prices have been range bound as the market is waiting for the next big thing.  May corn has been dancing around between $5.30 and $5.60 for about six weeks now.  $6 corn futures seems like a stone wall far off in the current situation unless there is some type of a weather issue going forward, either in North or South America.

    It’s been a wet harvest in parts of Northern Brazil pushing back soybean harvest by about 10 days, which also delays the Safrinha corn planting.  Needless to say, the corn market needs acres as we go into the planting season, especially at a time when new crop soybean prices are screaming for physical soybeans.

     The May 2021 corn contract is currently priced 10.25 cents above the July contract, which is considered bullish.  Corn prices usually top out in June and bottom in October, a scenario which wasn’t followed in 2020. The nearby May corn contract is currently in the 87th percentile of the past five-year price range.

Soybeans

     In North America, we simply need more soybeans.  With the Brazil crop coming off, the path across the oceans to Asia is about to hit high gear.  It’s pretty clear at this stage, that the US will be importing Brazilian soybeans as well as Argentinian soybean meal into the American southeast in 2021.  American supplies are on a demand ventilator for now.

     Soybeans continue to shift into South America.  In ballpark terms, the Americans produce about 4.1 billion bushels of soybeans and Argentina and Brazil produce about 8.2 billion bushels, not counting Uruguay and Paraguay.  That effectively shuts out any more exports from the United States until later this year.  USDA increased the Brazilian crop to 134 MMT in their last report, another record.  Expect this to continue next year and beyond.

     The May 2021 soybean contract is currently 10.75 cents above the July 2021 contract, which is considered bullish.  Seasonally, soybean prices tend to peak in July and bottom out in October.  2020 was an exception to that rule.  The nearby May contract is currently in the 93rd percentile of the past five-year price range. 

Wheat

     Wheat futures prices topped out in the third week in February and per usual, there is wheat filling in the gaps around the world.  Australia and Argentina have had good crops.  At the same time, droughty areas in the US are getting rains as I write this on March 14th, which should help.  Conditions are also favourable in other wheat growing regions around the world.  Keep in mind, “wheat” is made up of several different classes and each has its own distinct supply and demand table.  It’s not quite the commodity we think it is.

      In Ontario, wheat is starting to green up and nitrogen will surely be going on into April.  With 1.122 million acres of wheat, there could be some attrition of this as spring gets closer.  $15 new crop soybeans might do that.  However, Ontario new crop cash prices, which have been over $7.30 plus all winter might cool those jets.  Generally speaking, but not always, prices decline as we get closer to harvest.  Needless to say, 2020/21 has been a different year.  The new 80 cent US Canadian loonie will dampen Ontario basis levels.

The Bottom Line (cont.)

     Last March the Canadian loonie dipped below 70 cents US, vs this past week where it actually closed over 80 cents US.  It’s been a slow yearlong rise incrementally.  Covid was the catalyst a year ago to new lows, and since then the Canadian dollar continues to react in an inverse fashion to the movements of the US dollar.  However, who knows the road ahead, as interest rates for the moment have been taken off the table as a US dollar stimulus.  Basis levels for soybeans are almost the same as they were a year ago in Ontario based on foreign exchange.  That’s counterintuitive to some, but not for others.  Our continuing challenge as Ontario grain farmers will be to balance grain futures prices with Canadian dollar values.

    In this current grain market environment, it’s easy to get lost in the bullish market structure that still permeates the market even at a time when the Brazilians are harvesting a record crop.  At the same time, the Brazilian Real is about 6:1 to the US dollar, a very effusive level for Brazilian producers.  At the same time, futures spreads remain bullish, but they are getting less so.  On March 12th, the old crop soybean futures spread between May and July lost 5.5 cents per bushel on the week.  In the new crop realm, the spread between November 2021-January 2022 was almost even.  In other words, it’s not as bullish as its once way.

     Keep in mind, we have huge production risks ahead to bring more supply into the pipe.  Typically, there are spring rallies and typically late June can be a turning point for markets.  At the same time, African Swine Fever might not be as in the past as we once thought in China.  There have been rumblings of that.  Then there are a host of other geopolitical concerns plus Covid which can weigh in.  If we do get past Covid this year, its likely, we’ll see huge economic growth numbers moving ahead, as there is so much pent-up demand waiting in the wings.  That will be good for food demand.  There are so many variables in the mix at this early point in the crop year.

     The challenge for Ontario farmers is to continue to work and hone their marketing plans.  There is lots of profit on the table now with old crop corn at $6.80 and new crop values at ¢5.70.  Old crop soybeans are at $17.50 plus and new crop soybeans over $15.  At the same time, it’s likely farm inputs will feel the inflationary pressure of more crop acres going into the United States and beyond.  Yes, it doesn’t necessarily get easier, just more complicated.  Daily market intelligence will remain key.  There will be many marketing opportunities ahead.  

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