Market Trends Report – May & June 2022
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US and the World
It has been a frenetic start to the planting season across the greater North American corn belt. Dry hot weather in the US southwestern plains is damaging the standing wheat crop, while wetter weather in the northern central plains is presenting the possibility of shifting corn acres into soybean acres at this early stage. It is that time of year when everything is possible as planters roll. As of May 9th 22%, of US corn had been planted, which was behind last year’s pace by 42%. Soybeans were 27% planted, also behind last year’s progress. However, in the last week of May this has surely changed. On May 12th the USDA released their latest WASDE report.
The USDA pegged domestic US corn production at 14.46 billion bushels and the US domestic soybean crop at 4.64 billion bushels which was in pre report estimates. The US domestic wheat production was pegged at 1.729 billion bushels an increase from last year. However, USDA reduced global wheat production lower based on the production decreases expected in Ukraine, Australia and Morocco. In the case of Ukraine, the USDA projected Ukraine’s corn and wheat production would be less than half of normal, which reflects their war situation.
Corn usage in the US is projected to be 14.565 billion bushels which is down 370 million bushels from last year. However, it is still higher than production and when everything was said and done USDA is still predicting ending stocks to be 1.44 billion bushels, the same as their April report. Soybean production is still set at 4.64 billion bushels reflecting the record 91-million-acre planting estimate and a trendline yield of 51.5 bushels per acre. The soybean old crop ending stocks were reduced to 235 million bushels, while new crop soybean ending stocks were pegged at 310 million bushels. On the global new crop side, the USDA is predicting an increased in soybean stocks assuming no drought in the US, Brazil and Argentina this coming year.
The world situation in wheat continues to be an anomaly. The war in Ukraine has changed the calculus. Even though wheat is grown everywhere, with Ukraine wheat cut so drastically world ending stocks remain tight and price is buoyant. It is a difficult situation and monitoring the war progress tells us a lot about the wheat fundamentals situation.
On May 13th, corn and soybeans futures were lower than the last Market Trends report. Wheat futures were higher. July 2022 corn futures were at $7.81 a bushel. The December 2022 corn futures was $7.48. The July 2022 soybean futures were at $16.46 a bushel. The November 2022 soybean futures were at $14.98. The July 2022 Chicago wheat futures closed at $11.77 a bushel. The Minneapolis July 2022 wheat futures closed at $13.35 a bushel with the September 2022 contract closing at $13.30 a bushel.
The nearby oil futures as of May 13th closed at $110.49/barrel up from the nearby futures recorded in the last Market Trends report of $102.07/barrel. The average price for US ethanol on May 13th in the US was $2.74 a US gallon, down from the $2.76 last month.
The Canadian dollar noon rate on May 13th was .7720 US, lower than the .7873 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate increased at 1%.
Ontario
In Ontario there were some crops planted in late April and early May, but the real starting block happened in the week of May 8th when planting really hit its stride. A week of unusually warm, sunny, dry weather put planters in the ground from Windsor to the Quebec border. Both corn and soybeans were put in the ground in good conditions, which may lead to record acreage this year in Ontario.
Of course, it hasn’t been a regular spring rush. Producers are being challenged by high fertilizer prices and in some cases tariff charges. On top of this with the season being concentrated in the week of May 8th, supply constraints were accentuated leading to some challenging management times. Needless to say, good weather is what it is, and planting continues. There will always be challenges, it’s just 2022 presents some unique realities.
Basis levels have increased for both corn and soybeans as well as wheat. This is partially a reflection of the bullish nature of the futures market and the enhanced values that we see. On top of that the Canadian dollar sinking to 77.20 US has projected positive basis levels higher than almost any time before. In many ways, it’s risk on, all year.
Old crop corn basis levels are $1.65 to $2.08 over the July 2022 corn futures on May 13th across the province. The new crop corn basis varied from $1.45 to $1.72 over the December 2022 corn futures. The old crop basis levels for soybeans range from $4.75 cents to $4.91 over the July 2022 futures. New crop soybeans basis levels range from $3.66-$3.92 over the November 2022 futures. Ontario SRW wheat prices are in the $14.19 range with new crop for this year currently fluttering near $14.38 across the province. On May 13th the US replacement price for corn was $10.31 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
The risk on nature within this grain market continues. Over the last several weeks and months we have seen higher upon higher prices based on a whole myriad of factors that have shortened the grain market. Of course, this exploded with the war in Ukraine and Russia. It is difficult to say, where we go from here as there is so much risk ahead aside from these geopolitical concerns.
What I’m referring to is the weather. In parts of Minnesota and the upper Midwest some farmers have not turned a wheel as rain continues to inundate their spring season. At the same time in American wheat country, it is hot and dry, while the eastern corn belt has seen good planting progress. Looking at the grain complex on the global stage, we need a big crop this year. However, as farmers we know the crop weather often defines that, so here we are. In 2022, we need Mother Nature to play nice and if she does not prices will likely go much higher.
That might depend on assumptions from old “grain fundamentals”. That is, maybe pre 2021 grain fundamentals. We know that our world has changed, as Covid and the war have changed the way grain moves. We also know that there is a real possibility of famine this year in some places in the developed world because of grain shortages. It means as we go ahead, we need to re calibrate our risk management continually. It’s a very challenging risk management horizon.
As farmers, we all know what record high diesel prices are doing. We all know what higher oil prices are doing. It is challenging our management to do more with less. However, those prices also reflect on soybean oil which can be a follower of those markets. Crush margins remain very strong and any agricultural commodity which has a “oil” component will be buoyant in 2022.
Commodity Specific Comments
Corn
In its May 12th report, the USDA reduced their corn yield number by 4 bushels per acre from their February baseline of 181 bushels per acre down to 177 bushels per acre. This may be a more realistic projection based on the early weather problems this crop is facing. At the present time there are very difficult issues getting crop into the ground in Minnesota, Wisconsin, North Dakota in northwestern Illinois. As we all know, later planning usually means lower yields in a year where we need all the corn we can get.
These weather issues are also bringing to the fore a possibility of “prevent plant” acres in the United States. This reflects a situation where US producers can put acres aside which they cannot get planted and receive a prevent plant benefit. In the past like 2019 there has been substantial acres put in this program. With the price of corn as it is and the bullish market situation any big prevent plant acres in 2022 would add explosiveness to the corn price.
The July 2022 corn futures contract is currently $0.23 above that September 2022 corn contract which reflects a very bullish situation for commercial demand. Seasonally, we know that corn prices tend to peak in early June and bottom in early October. The current active nearby futures contract is currently priced in the 92nd percentile of the past five-year price distribution range.
Soybeans
Soybeans are bullish and that is partly reflected by the record number projected to be planted in the United States this year of 91 million acres. The USDA in the May 12 report increased both the crush and exports in soybean demand for the coming year. Clearly, in this situation an increase focused on double crop soybeans will be in the works in many U.S. states.
China remains the elephant in the room with regard to soybean buying and even though they’re buying slightly less than last year on the world stage, tighter ending crop supplies in Argentina and Brazil will likely send them to the United States very soon. It is no secret that we need a good crop this year in the United States and any further planting delay will have an impact on the November 2022 soybean futures contract.
The July 2022 soybean futures contract is currently $0.51 above the Aug 2022 contract which reflects strong bullish commercial demand. Seasonally, we know that soybean prices tend to peak in early July and bottom out in October. The nearby soybean futures contract is currently in the 88th percentile of the past five-year price distribution range.
Wheat
Wheat has been a dominant subject in the commodity complex ever since the start of the Ukraine/Russia war and it will continue. The USDA took the first step in reducing the Ukraine crop in its May 12th report and it is likely to continue to massage those numbers. At the same time hot weather in the United States and India is reducing the potential for a big global crop. For instance, in the United States new crop ending stocks are actually already projected to be lower than the old crop ending stocks we have now. Wheat futures resemble a firecracker economy. With the wheat world as it is in turmoil, the potential for violent volatility will be there.
In Ontario the 600,000 Ontario wheat acres that may remain from last year continue to grow but could surely use some moisture to continue that development. Herbicide and fungicide applications are taking place on a crop that is currently in the $14.30 range. These are unprecedented wheat prices, but of course nobody knows where the market firecracker will go off next.
The Bottom Line (cont.)
Geopolitical concerns regarding the lack of grain are now being reflected at the highest level of government. For instance, the Canadian foreign minister has been quoted as working toward a way to export Ukrainian wheat. This isn’t happening in a vacuum as other nations are doing the same. At the same time the American government is looking to increase their domestic production of both wheat and soybeans through a President Biden initiative sent to congress. This initiative looks to increase commodity loan rates for crops such as soybeans, wheat, rice and pulse crops, but not corn or cotton. There would also be a $10 an acre crop insurance subsidy paid to farmers who double crop soybeans and wheat. There has been no similar proposal here in Canada, but it shows how short these markets are when proposals come along from government to boost agricultural production.
As always, the Canadian dollar continues to have a big effect on our domestic Ontario grain prices. The US dollar has been strong and partly because of this the Canadian dollar has been weak and sinking down to .7720 US cents on May the 13th. This continues to have the effect of boosting old crop and new crop values for grain. When is the last time we have seen an almost $5 plus Canadian basis for soybeans in Ontario at some locations? The Canadian dollar is a large part of that and will continue to be valued in an inverse relationship with the US dollar.
This is also taking place in an atmosphere where interest rates are headed upward and usually this would mean an increase in the value of the Canadian dollar. That reality still may happen depending on the size of interest rate increases. However, the US Federal Reserve has signaled that they will be doing the same thing which is often bullish for the US dollar. As it is, in turbulent times the US dollar is often stronger in any regard. Usually that means it is bad for agricultural commodity demand, but that is very unlikely in 2022.
It is an uncertain time as crops go into the ground. Of course, this is happening all over the northern hemisphere as well as in Ontario. The challenge for Ontario farmers is to manage all this risk and it is substantial in 2022. At this stage in May of 2022 standing pricing orders will surely still be helpful, but keep in mind this is such a different grain marketing theatre. There will be many marketing opportunities ahead. Daily market intelligence will remain key.
