US and the World
It is go time. In fact, it’s go time with a vengeance across the greater US corn belt, as bright warm weather has hastened both corn and soybean planting progress. As of May 3rd, 46% of US corn had been planted and soybeans are ahead of schedule as well. With good weather in the days since then, planting is well on its way. Per usual this time of year, seasonality tells us that prices will be volatile, and markets certainly reflect that. With the huge run up in grain prices over the last 8 months and with speculative limits raised at the CME, as we move ahead, volatility will continue to be sharp.
On May 12th, the USDA released their latest WASDE report. USDA lowered corn ending stocks for the year 2020-2021 to 1.257 billion bushels, which was below pre report trade expectations. Total corn usage is pegged at 14.870 billion bushels after the USDA raised corn exports by 100 million bushels, but maintained ethanol demand at 4.975 billion bushels, while lowering feed, residual and industrial use by 5 million bushels. On the new crop side 2021-22, USDA pegged total production at 14.99 billion bushels with total use being 14.765 billion bushels, with projected ending stocks rising to 1.507 billion bushels. This was higher than the pre report trade estimates. USDA also reduced the drought stressed Brazil Safrinha corn crop down to 102 MMT, down from 109 MMMT last month.
On the soybean side of the ledger, USDA left US ending stocks at 120 million bushels. On the new crop side, the USDA is projecting soybean stocks to come in at 140 million bushels. Of course, much of that is based on their earlier projection of a US soybean crop projected at 4.4 billion bushel with planted acreage at 87.6 million and a trendline yield estimate of 50.8 bushels per acre. Looking out further, Brazil’s next crop is projected at another record 144 MMT. USDA wheat projections were right where the trade expected. Winter wheat projections is expected to be 10% higher than last year.
On May 16th, corn, soybean and wheat futures were higher than the last Market Trends report. July 2021 corn futures were at $6.43 a bushel. The July 2021 soybean futures were at $15.86 a bushel. The July 2021 Chicago wheat futures closed at $7.07 a bushel. The Minneapolis July 2021 wheat futures closed at $7.62 a bushel with the September 2021 contract closing at $7.67 a bushel.
The nearby oil futures as of May 16th closed at $65.37/barrel up from the nearby futures recorded in the last Market Trends report of $63.13/barrel. The average price for US ethanol on May 16th in the US was $2.50 a US gallon up from the $2.09 recorded in the last Market Trends report.
The Canadian dollar noon rate on May 16th was .8255 US, higher than the .7998 US reported here in the last Market Trends report. The Bank of Canada’s lending rate remained at 0.25%.
It has been a volatile Ontario price environment over the last month for farmers. Prices for soybeans reached record levels over $20 a bushel, while new crop smashed through the $17 barrier. Old crop corn also pushed through the $8 and $9 level in some cases, while new crop corn prices broke through $7. As farmers ramped up activity in the field, standing orders were hitting. In this volatile market environment, having those standing orders ready at very profitable levels can be a very good thing.
Corn planting got out of the gate early in Ontario with lots of April planting, then a week of more wet and cool weather slowed things down. However, starting on about May 8th, both corn and soybeans continued to be planted setting up Ontario crops for a good start. Dry weather is welcome at this time of year to get crops in the ground, but invariably rain will be needed as temperatures heat up.
That weather picture in Ontario will be key per usual to make good crops and help determine basis levels. As of the middle of May, old crop basis levels have increased over last month for old crop, but have been more tempered for new crop, as the Canadian dollar has gained almost 3 cents in the month versus the US dollar. The run up in futures prices can sometimes mask this and that’s what has happened over the last month.
Old crop corn basis levels are $1.62 to $1.80 over the July 2021 corn futures on May 16th across the province. The new crop corn basis varied from $.95 to $1.40 over the December 2021 corn futures. The old crop basis levels for soybeans range from $3.30 cents to $3.95 over the July 2021 futures. New crop soybeans basis levels range from $2.55-$2.70. Ontario SRW wheat prices are in the $8.57 range on May 16th, with new crop values in the $8 range. On May 16th the US replacement price for corn was $8.43 /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
Crop prices are at very profitable levels, bringing a new level of management to our risk management horizons. At these price levels, there is also the very real scenario of volatility, we haven’t seen before, especially considering the new speculative trading limits and daily price limits at the CME. Is this the scenario where we took the price escalator up and the elevator shaft down? That’s an old axiom, which likely doesn’t hold under these demand scenarios. Needless to say, price volatility will likely be as you’ve never seen before.
The challenge of course is to manage your risk, which has become easier at these elevated price levels, but the same themes apply. There is always a balance for Ontario farmers between grain futures levels and Canadian dollar value, and then there is the balance with weather, never knowing how things are going to turn out. Expectations can get emotional, and when it comes to crop prices, round numbers can be like that. As we move ahead, measuring our risk in a price environment where acres and yield are in flux with weather, can be helped with standing pricing orders.
China partly hold the keys into this price picture. We had become accustomed to thinking about China having an insatiable appetite for soybeans. Then came along the US China trade war under the past administration. Corn was never a really a big part of that China buy equation. However, that changed in 2020/21 as China purchased 891 million bushels of American corn, which surprised. As of May 16th, the China Dalian exchange is trading corn near $11 a bushel, which doesn’t inspire confidence that they will produce their own corn needs domestically. That bodes well for future US corn demand.
That represents the opposite side of the coin when it comes to China’s geopolitical concerns. We all want peace, but what happens if China invades Taiwan? That would be the Black Swan nobody in the west would want, but is often repeated by American grain analysts. Nobody wants a scenario where China goes away again. Take Brazil for example, just finished harvest of another record soybean crop with next year’s projection set for another. (144 MMT) Without China, that’s just a big cheap pile of beans. That’s part of the reason why whether we’re referring to corn or beans, China is so key to sustaining grain demand and maintaining some bottom to grain prices.
Commodity Specific Comments
USDA spoiled a bit of the corn party when they projected higher than expected ending stocks at 1.507 billion bushels. New crop corn dropped 88 cents on the week. Can corn futures prices be maintained in the $6 or even the $7 range under a scenario where corn ending stocks are growing? Of course, all the crop isn’t even in the ground yet, but for the moment, the trend is leaning the other way.
What happens if there is a lot more corn than the 91.1 million acres USDA has already projected with a trendline yield of 179.5 bushels per acres. As prices have built this spring, projections have expanded by private trade analysts. For instance, what happens if this corn acreage number goes up to 94-96 million acres and we get a better than trendline yield number? It’s all a theory now but sustaining $6 corn futures would be difficult.
The December corn futures contract is currently priced below the March 2022 contract, which is considered bearish. Seasonally, corn tends to peak in early June and bottom out in October. The nearby July corn contract is now back to the 79th percentile of the past five-year price range.
Soybeans remain a story without an ending. As it is, USDA increased ending stocks to 140 million bushels, but this is a far cry from the over 1-billion-bushel carryout we had 2 years ago, when China tariffed US soybeans. Expect the soybean complex to remain tight as we move ahead.
Some of that will surely depend on weather and a possible increase in soybean acres, vs the 87.6 million acres projected by USDA. What happens if these acres increase substantially, or the even better question might be what if they come in around 88 million acres and we have a bad soybean year? Clearly, price rationing will be happening again.
The November 2021 soybean contract is currently priced at 29.75 cents above the March 2022 soybean contract indicating a bullish indication of demand. Seasonally, soybean prices tend to peak in early July and reach maximum tank in October. The nearby July soybean contract is currently priced in the 91st percentile of the past 5-year price range.
Wheat prices have fallen back as of May 16th, but are still at very high levels, not seen for the past 7 years. $8 wheat to Ontario producers doesn’t lie and it also doesn’t happen very often. There is some drought in US wheat areas, which should impact price as we move ahead. However, sometimes wheat follows corn and corn futures are teetering as we head into the time where Ontario wheat will start to come into head in early to mid-June. Overall, global wheat projections rarely change, as there is wheat grown in so many regions of the world.
In Ontario, the SRW wheat crop looks very good, with split nitrogen and fungicide applications going on. Frosts have been a bit of an issue across Ontario as this can be touchy with regard to fungicide application. As we move into June, more fungicide will be going on during pollination. With prices where they are in the $7 and $8 range, Ontario farmers will surely be looking on with anticipation.
The Bottom Line (cont.)
It is no secret that the Canadian dollar reached a six year high last week, which generally is seen as a negative to Ontario cash grain prices. In February 2021, the Canadian dollar was trading briefly at approximately 77 cents US before almost reaching 83 cents US in the week of May 8th. At the same time, we were seeing elevated corn, soybean and wheat futures, which mitigated the optics of Ontario cash prices. This has taken place, largely, because the US dollar has declined since March. The Bank of Canada governor maintains they will not raise interest rates in response to a post Covid economic recovery. That put modest brakes on the loonie. Needless to say, watching the interaction between the US dollar and Canadian dollar is key.
Keep in mind, grain futures prices are not near record levels, and you also could make an argument that these prices are not higher in nominal values vs bull market runs of the past. If you did any inflation adjusted look backs in 2012 or 2008 or further back, we aren’t close to bull markets of the past. However, as you perceive that, keep in mind, this is encouraging production elsewhere as end users start to substitute or look elsewhere. Will the US produce 170, 180 or 185 bushels per acres of corn? There is so much to keep in mind.
There are geopolitical concerns almost everywhere, Taiwan, the Middle East, Ukraine, the list goes on and on. However, there is also a big one which we’ve been dealing with for over a year which is the continuing spectre of Covid. It’s not over, but health experts in the United States, Canada and other parts of the world are saying we’re getting to a better place. Regrettably in places like India and other places in the third world, it remains a big problem. In a post Covid world, which we are promised, big economic growth numbers will follow, which should be good for grain demand. The hard part is getting there and with Covid numbers still very bad in Ontario, this thing remains a puzzle in so many ways.
Did you take risk off the table? How could you not at these elevated price levels?0- However, it’s a challenge as nobody knows what grain prices will do. All we can do is immerse ourselves in market factors and the make the best marketing decision for our farms. As I’ve said many times, risk management never gets old. Clearly, 2020/21 is a different time, a place where we got here with our eyes wide open. Profitability is never a bad thing on the farm. As we move ahead, daily market intelligence will remain key. There will be many marketing opportunities ahead.