US and the World
Simply put, the world has changed over the last few weeks. War is a terrible thing and a major war on the European continent is unprecedented for commodity markets over the last 70 years. It goes without saying that there was always much risk associated with market prices surrounding the tensions with Ukraine and Russia. However, what we have now is a white-hot war with indiscriminate bombing of infrastructure and civilians in a major grain exporting part of the world. All bets are off. Markets have responded by going much higher with violent volatility, something not surprising when war projections actually come true. With smoke still rising and missiles flying over Ukraine it was almost an afterthought that the USDA released their March WASDE report. Our commodity world continues to evolve, and the USDA was trying to make some sense of it.
As a preface to the report the USDA stated “Russia’s recent military action in Ukraine significantly increased the uncertainty of agriculture to supply and demand conditions in the region and globally. The March report represents an initial assessment of the short-term impacts as a result of this action.” With that, the USDA decreased Russia’s wheat exports by three million metric tonnes and Ukraine’s wheat exports by 5,000,000 metric tonnes. They said this because they expected vessel transportation to be constrained by the conflict and the imposition of economic sanctions. Yes, there were vessels hit by missiles and worse. Clearly, even the USDA said we’re in uncharted water.
The USDA lowered corn ending stocks by 100 million bushels to 1.44 billion bushels which was a little less than was expected. USDA held steady on production at 15.115 billion bushels based on last year’s corn yield of 177 bushels per acre. This pushed total supply to 16.375 billion bushels as total usage was increased to 14.935 billion bushels. Usage was increased because of an increase in US corn exports up approximately 75 million bushels and an increase in corn domestic use by 25 million bushels. The USDA left Brazilian corn production unchanged at 114 million metric tonnes while lowering Argentina’s expected corn output by 1,000,000 metric tonnes to 53 million metric tonnes.
On the soybean side of the Ledger the USDA lowered old crop ending stocks to 285 million bushels which was 40 million bushels less than February’s estimate. This was due to an increase in export demand. The USDA also lowered Brazilian production by 7 million metric tonnes while Argentina’s crop was trimmed by 1.5 million metric tonnes 227 million metric tonnes and 43.5 million metric tonnes respectively. The USDA actually lower Chinese soybean imports by three million metric tonnes. The USDA actually lowered domestic wheat ending stocks but of course this was all thrown in flux by the problems in Ukraine and Russia. The USDA made a special note of wheat imports being lowered for Turkey, Egypt, the EU, Afghanistan, Algeria, Kenya, Pakistan, Tanzania and Yemen based on the prospects of export sending from the Ukraine and Russia.
On March 11th, corn, soybeans and wheat futures were higher than the last Market Trends report. July 2022 corn futures were at $7.28 a bushel. The December 2022 corn futures was $6.55. The July 2022 soybean futures were at $16.51 a bushel. The November 2022 soybean futures were at $14.91. The March 2022 Chicago wheat futures closed at $10.77 a bushel. The Minneapolis March 2022 wheat futures closed at $11.02 a bushel with the September 2022 contract closing at $10.45 a bushel.
The nearby oil futures as of March 11th closed at $109.33/barrel up from the nearby futures recorded in the last Market Trends report of $93.10/barrel. The average price for US ethanol on March 11th in the US was $2.53 a US gallon, up from the $2.24 last month.
The Canadian dollar noon rate on March 11th was .7862 US, lower than the .7873 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate increased to 0.50%.
Spring cannot come soon enough for those of us who prefer the warmer weather and of course for Ontario farmers itching to get back on the land. There has been some activity with placing clover onto wheat fields in southwestern Ontario. However, it will be a few more weeks before there will be widespread field action as well as nitrogen application. Warmer weather as spring dawns will surely tell us much more about the health of many wheat fields in Ontario.
Basis levels have actually increased for both corn soybeans and wheat since the last market trends report. This is mainly a reflection of increased futures market levels and the Canadian dollar. However, Ontario is not immune from the volatility of war markets. This volatility has been so violent at times with limit up moves, it wouldn’t be surprising if the cash market could not keep up. For the most part, it has but it would not be unusual for the cash market to detach from futures on successive limit up days.
We still have many of the same issues that we had with the Covid induced supply restraints. However, Ontario farmers will surely be seeing more of those problems especially when it comes to sanctioned goods coming out of Russia or Ukraine. For instance, shipping into Hamilton may be affected by these sanctions as well as freight rates turning into one way versus two way. In other words, there is much uncertainty in the transportation world with hard western sanctions applied to Russia. Transportation costs are in flux, and this will definitely affect basis levels as we move ahead through 2022.
Old crop corn basis levels are $1.40 to $2.20 over the July 2022 corn futures on March 11th across the province. The new crop corn basis varied from $1.10 to $1.45 over the December 2022 corn futures. The old crop basis levels for soybeans range from $4.03 cents to $4.79 over the July 2022 futures. New crop soybeans basis levels range from $3.20-$3.45 over the November 2022 futures. Ontario SRW wheat prices are in the $12.35 range with new crop for next year currently fluttering near $11.32 across the province. On March 11th the US replacement price for corn was $9.86 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
We are dealing with war markets. This is a difficult thing because nobody knows how long the war will go on and whether it will expand into other countries. The volatility that comes out of these extraordinary circumstances are not normal and do not reflect the reality of grain fundamentals. However, as farmers we must measure how these events will affect grain prices and that is the exceedingly difficult thing to do because we have not been here before. War in Europe will do that.
The war will certainly be distracting to the true fundamentals of grain. However, there is much to talk about especially the scenarios in both South America and China and how that will be affecting our grain prices as we go into spring 2022. Bear in mind, China has not bought any American corn lately but has been an active buyer of both old crop and new crop soybeans. We need to continue to monitor that in the next few weeks especially as acreage considerations become more focused in the United States.
As far as South America is concerned the dryness in Brazil over the growing season did reduce the crop quite significantly versus what we have become accustomed to. For instance, we have always been used to Brazilian soybean crops getting bigger than expectations and exactly the opposite happened this year. That has tightened things up with regard to supply at a time when the Covid related supply constraints are still very real. Keep in mind that this market wants more of everything. That means more from South America and from North America and everywhere else.
From a technical standpoint it is easy to ignore the grain fundamentals as all of our grain futures contracts are in an inverse situation. This is certainly true for old crop but also to some extent for new crop as well. What this means is that commercial interests want your grain now or as soon as you can grow it. This did tighten things up earlier as we all know, but it is still with us. Add a war on to this mix where 30% of the exportable wheat is produced and it is just so much more bullish.
Commodity Specific Comments
Corn prices remain at very high levels reflecting the high demand of the last several months. This was reflected in the last USDA report which reduced ending stocks. There will also be a tussle going on into March 31st with regard to how many acres USDA intends to print as this market wants more corn, soybeans and wheat.
In Brazil the second Brazilian corn crop has been planted in the last 30 to 45 days and is still being planted to some extent. They have got good rains there in the Safrinha growing areas and everything looks good even though the USDA did reduce their crop production slightly. The corn market will be fixated on the Safrinha Brazilian crop in the next few weeks.
The May 2022 corn futures contract is currently priced $0.34 above the July contract which is an indication of bullish demand for corn. Seasonally, corn prices tend to peak in early June and bottom out in early October. The nearby May 2022 corn contract is in the 96 percentile of the past five-year price distribution range among the highest prices in the last nine years.
With all the market action concentrating on the Black Sea regions with missiles flying toward apartment buildings it’s easy to lose the fact that the Brazilian crop grew smaller over the last growing season. Where once the USDA was looking at a Brazilian crop of 134 MMT it’s now down by private estimates into the low 120 MMT range. This has helped boosted the soybean price along with the fracture in the market dynamic in the Black Sea.
As it is, soybean prices are quite high and did approach record levels but so far have not got there. With the dryness in Brazil, we need more soybeans and even though the USDA is predicting less Chinese imports their demand is still huge. They will buy every soybean that Brazil has in addition to the American soybeans that have been bought recently and the new crop orders that have also been recently placed. Of course, as we head toward March 31st the soybean price action will certainly be in play to garner as many soybean acres as possible this year.
The May 2022 soybean contract is currently priced 26 cents above the July which indicates the very bullish situation for soybeans. Seasonally, soybean prices tend to peak in early July and bottom in early October. The nearby May contract is currently in the 91st percentile of the past five-year price distribution range, about the highest in the last nine years.
Wheat is in the marketing crosshairs because of the war in Ukraine. It will also be traded almost on a daily basis on the reality where we don’t really know what is going to happen. Most of the wheat in Ukraine is winter wheat so it’s already planted, but nitrogen will have to be applied and management due diligence. At the present time that is just a theory, and the market will trade accordingly. As is in the United States it is dry through the central plains. So, wheat has issues, big issues. In Ukraine, it’s to such an extent that most of the crop could be lost.
That will have obvious implications for what happens to Ontario cash prices for wheat. The price of wheat as of March the 11th is approximately $11.32 a bushel, which is about $3 higher than last year but about $1.50 less than it was the week previous. The volatility is unlikely to change as long as there are missiles flying through the air in the Ukraine. in the next few weeks, we should have a pretty good idea of how much Ontario wheat will make the light of day in 2022. However, from a global perspective and how that might affect our prices; the fog of war has clouded everything over.
The Bottom Line (cont.)
The Canadian dollar continues to tread sideways and down, which means it’s an added stimulus to Ontario cash grain prices. It is an interesting time because this is taking place at the same time when the US dollar has been moving upward. What makes it even more hard to understand is how the current war stance is affecting this foreign exchange. For instance, in times of trouble the world moves to buy the US dollar which is generally negative for the Canadian dollar. At the same time, we have very stringent sanctions being enacted on Russia that involved the world’s financial system. There will be some blowback from this economically making it even more difficult to project foreign exchange values. It is hard to imagine the US dollar going down in this scenario which is negative for the Canadian dollar and positive for Ontario cash grain prices.
As with everything in agriculture, change is the only constant we know and in 2022 that seems to be on steroids. For instance, the blowback I just mentioned has been accentuated by our Deputy Prime Minister, Chrystia Freeland, who mentioned the possibility of negative consequences from sanctions on Russia. On the farm we all know that might mean issues with fertilizer pricing and availability as well as shipping even into places like Hamilton, Ontario. This will not only have an effect on our bottom line, but also on our grain basis levels moving forward. However, predicting what that might be is a non-starter.
Typically, in a normal year we will look at the March 31st USDA planting intentions report as an important moment for grain prices. What will the American farmer plant this year in a time where the market wants more of everything? The early indication from USDA in February was 92 million acres of corn and 88 million acres of soybeans. Both of these numbers are probably not enough to satisfy the current grain market demand. We can all guess what that might be, and it would just be a guess. However, if one of those numbers is far below expectations it would not be unusual to see quite explosive price movement on that day. The computer algorithms will be dialed in.
These are not easy times as almost everywhere as we turn on our media there is dark news from Ukraine. To turn away is not an option either, even though that’s what we might feel like from time to time. The same can be said about daily grain market intelligence due diligence. It’s all part of keeping our eyes open and looking at things we don’t necessarily want to see. Those grain market algorithms will continue to trade anyway, and we need to be up to speed. The challenge for Ontario grain producers is to stay strong, keep those eyes open, and monitor all the different factors that will be affecting our grain prices. Have those standing pricing orders ready to hit. There will be many great marketing opportunities ahead.