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Market Trends Report – November & December

US and the World

It is almost post-harvest.  In the United States as of November 9th both corn and soybeans had less than 10% of their acreage yet to harvest.  It has been a good year for crops, but not as good a year as maybe we once expected.  Covid 19 infections continue to soar on both sides of the border, which has put a certain pall on farms throughout this crop year.  As we move ahead, that continues as we forge ahead to put a capper on this crop year.  On November 8th the USDA chimed in with their latest WASDE report further clarifying how the grain world will be shaped as the weather grows colder. 

In the November USDA report, the market was caught somewhat caught off guard by rather big cuts in US domestic production.  The USDA lowered US domestic corn yield by 2.6 bushels per acre, a reduction of 215 million bushels down to 14.5 billion bushels.  This was accentuated by an increase in US corn exports up 325 million bushels from their October estimate.  This would boost 2020/21 exports up to 2.65 billion bushels, which if realized would be at record levels.  Harvested corn acreage was kept at 82.5 million acres.  The stocks to use ratio was reduced to 11.48% down significantly from the 14.8% recorded in October.

USDA pegged US soybean production at 4.17 billion bushels based on a reduction of 1.2 bushels per acres from their October report.  The reduction in yield came mainly from Illinois, Iowa, Indiana, Ohio and Nebraska.  This yield reduction ratcheted down ending stocks by 100 million bushels putting ending stocks at 190 million bushels.  The Brazilian soybean crop was left at a whopping 133 MMT, Argentina reduced to 51 MMT.  Total Chinese demand for soybeans remained at 100 MMT.  USDA kept 202/21 US wheat production at 1.826 billion bushels unchanged from last month.  Global wheat consumption was increased slightly due to increases in Europe and China.  China is set to import more wheat than they have since 1995-96.

On November 13th, wheat, soybeans and corn futures were higher than the last Market Trends report.  December 2020 corn futures were at $4.10 a bushel.  The Jan 2020 soybean futures were at $11.48 a bushel.  The December 2020 Chicago wheat futures closed at $5.93 a bushel. The Minneapolis December 2020 wheat futures closed at $5.54 a bushel with the September 2021 contract closing at $5.87 a bushel.

The nearby oil futures as of November 13th closed at $40.13/barrel down from the nearby futures of recorded in the last Market Trends report of $40.60/barrel. The average price for US ethanol on November 13th in the US was $1.63 a US gallon up from the $1.59 recorded in the last Market Trends report.

The Canadian dollar noon rate on November 13th was .7606 US, slightly lower than the .7613 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

In Ontario harvest is continuing as we head into the late stages of November.  Weather for soybean harvest deteriorated on October 19th with two weeks of drizzly and cloudy weather across Ontario.  Many farmers were done soybeans and corn harvest kicked into high gear.  However, starting on November 2nd, there was a 10 day stretch of “late September weather”, which almost completely gave soybean producers the chance to finish and greatly reduced moisture in corn.  Generally speaking, it’s been a good fall for harvest activity.

Ontario basis levels have been maintained with a slight increase in corn and soybean basis levels.  This is partly due to the increase in futures price levels amid heavy farmer selling.  The Canadian dollar continues to flutter around the 76 US cents level which continues to add stimulus to Ontario cash grain prices.  As mentioned last month, Ontario grain prices are at their highest at a time of year, where they are usually the lowest.

Final yields should be good for both Ontario corn and soybeans, although corn yields have been tempered in some areas.  Test weights have also varied across the province, as the September 20th frost did have some effect.  Wheat had a good start in September and looks good across much of southwestern Ontario.  The early November “summer weather” provided an added window for wheat planting that many farmers took advantage of.  One million acres of Ontario SRW wheat should be in the cross hairs.

Old crop corn basis levels are $1.25 to $1.55 over the December 2020 corn futures on November 13th across the province.  The new crop (2021) corn basis varied from $0.90 to $1.25 over the December 2021 corn futures.  The old crop basis levels for soybeans range from $2.87 cents to $3.08 over the January 2021 futures.  New crop soybeans (2021) basis levels range from $2.45-$2.53.  The GFO cash wheat prices for delivery to a terminal on November 13th were $7.34 for SWW, $7.53 for HRW, $7.34 for SRW and $6.83 for Red Spring Wheat. On November 13th the US replacement price for corn was $6.06/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

We got here with our eyes wide open with soybean prices as of November 13th at $14.50 and corn at $5.40 plus.  Selling into a rising markets after months of low prices has been a welcome respite for farmers used to lower values.  As we move ahead, nothing much changes.  Standing pricing orders for both old crop and new crop grain are always helpful.  Farmers need to keep those eyes wide open and immerse ourselves in factors which will affect our grain prices moving forward.

Who could imagine when American soybean ending stocks topped 1 billion bushels in early 2019, we’d be down to 190 million at the end of 2020.  At the same time, we have the rather bizarre movement of soybeans into Brazil from the United States.  Let that sink in for a minute.  The world’s largest producer of soybeans shipped so many overseas to China that local crushers needed to import American soybeans into Brazil in early November.  That’s akin in some ways to importing snow into Canada in January.  These are interesting times in grain markets and heading into 2021 I don’t know if we can top that. 

Clues can be seen in deferred soybean futures spreads.  In fact, looking at spreads on all grain contracts can indicate what demand might be doing.  In the run up in prices, the nearby soybean futures prices have shown a big inverse between them.  In other words, the Nov/Jan soybean spread actually rose to 25 cents at one point.  That indicated that the market was demanding the beans immediately.  This has eroded over time and as of November 13th, the spread between January and March is now even.  It indicates that longer term soybean demand is slowing.  Markets have great ways to bringing us back to reality.

USDA is always an arbitrator of market intelligence.   There is always much controversy, and this seems to be increasing, especially when corn and soybean stocks numbers have been so off along with estimates of exports.  At the present time (Nov 13) corn is $9.80 a bushel on the Dalian exchange om China.   Intuitively, it seems reasonable that these American corn export numbers continue strong there.  However, at the same time, USDA increased China’s corn ending stocks to 7.54 billion bushels, quadruple where American corn ending stocks sit.  Clearly, there is consternation.   On the other hand, the reality is Chinese grain numbers are a mystery.  As farmers, we need to take that into account.

Commodity Specific Comments

Corn

Corn was a bit later than soybeans getting in on the higher price party and as we head into December the speculators are still long in the market expecting it to go higher.  Lower yield from USDA in the November report certainly added to the effervescence in corn prices, as the production estimate was lower than the trade expected.  How likely is that lower yield trend to continue into the final January 2021 report?  Futures spreads should hold some clues to that in the next few weeks.

US corn exports have been on fire currently running at record levels.  This is a very good thing and is likely to continue into December although the price hurdle is much higher.  Demand for pork in China could be one facet of renewed corn export demand in a post Covid domestic Chinese landscape.  African Swine Fever has retreated into the rear-view mirror, which bodes well for corn demand.

The December corn contract is currently priced 9 cents below the March 2021 corn contract which is considered bearish.  Seasonally, corn tends to top out in June and bottom in early October.  Obviously 2020 was an outlier year to that.  The nearby corn contract is currently in the 65th percentile of the past five-year price range. 

Soybeans

Soybeans advanced 90 cents on the futures over the last two weeks preceding November 13th.  Who predicted that?  Of course, that’s not a fair question, but it shows the volatility in the market and the futility of making predictions.  On April 21st, 2020 January soybeans closed at $8.51 and on November 13th at $11.48.  We’re looking at a gift horse in the mouth.  These are great prices compared to where we’ve been.

This soybean market activity has been furious and violent in a market environment where US yield has been decreasing.  At the same time, soybeans have been furiously planted in South America, where everything has not been ideal.  There are lot of drought areas showing up as La Nina is set to manifest itself.  Keep in mind, when looking at soybean prices, Brazil and Argentina are in your back yard too. 

The January and March soybean contracts spreads are currently even reflecting a market that is still demanding soybeans right now.  Seasonally, soybeans tend to peak in early July and bottom out in October.  In 2020, this was completely set on its ear, although, looking at new crop, it should be kept in mind.   The nearby January 2021 soybean contract is currently priced in the 86th percentile of the past five-year price distribution range. 

Wheat

Wheat futures prices have decreased slightly over the last few weeks preceding November 13th.  However, how do you keep the wheat bull fed every day when the crop is going into dormancy.  That issue will surely remain until we head into January.  However, global stocks are down and there have been weather issues in Russia and Argentina.  With both corn and soybean prices in rare air, it’s certainly helping wheat prices to some extent.

In Ontario, the good fall weather surely helped get a lot of wheat planted.  In fact, there were quite a few acres of wheat planted with nice November weather.  $7 plus wheat prices always serve as a good round number for Ontario farmers.  The Canadian dollar will continue to be one of the chief drivers of these domestic Ontario wheat prices.

The Bottom Line (cont.)

The Canadian dollar is the great default for Ontario grain farmers, and this will continue as we move forward.  The biggest difference now is where once it saved us from lower domestic prices, higher grain futures have helped to sustain Ontario basis levels at a time, when they can drop off.  You can argue there are issues in Ontario basis levels especially when futures prices spike higher like they did in the first two weeks in November and basis didn’t follow accordingly.  Needless to say, basis values reflect the value which determines when grain is moved, bought or sold.  In a volatile grain futures environment, basis needs to be watched closely.  As is, a Canadian dollar at 76 cents US is consistent with the last few years and continues to be good for Ontario prices.

The elephant in the room over the last months and years has been the American administration and its effect on agricultural trade.  Announcing tariffs and trade action through twitter was damaging in 2018 to long fought for agricultural markets.  In fact, American farmers were receiving upward of $28 billion in market facilitation payments over the past year for trade injury partly caused by American action.  With the election of a new American administration, it should be different and trade relationships with allies like Canada will likely be less eventful.  As is, the Phase One agreements with the US and China are set to be fulfilled. As is, the US and China are still not back to 2017 agricultural trade levels.   Nobody wants to go back to July 2018 again, when agricultural markets convulsed on abrupt trade retaliation.

With farmers in Ontario and Quebec closing out harvest it’s important to be reminded we can’t put the weather in the rear-view mirror.  Just as weather is important to a healthy and vibrant crops in Eastern Canada, it’s the same in South America.  There has been dry weather in parts of southern Brazil and parts of Argentina leading up to November 13th.  However, widespread rain has been predicted after.  In other words, there is an aspect of a “weather market” still very apparent, and as the snow flies here, keep that in mind, the big crop in Brazil and Argentina needs benign weather.  Any variation on that theme will result in big price movement.

Grain prices are at high levels compared to the recent past.  For those farmers holding old crop grain, it is what it is.  As I said, we got here with our eyes wide open.  At the same time, as we look ahead, new crop 2021 values are approximately $5 for corn and $13 for soybeans.  The challenge for Ontario farmers is to adjust your risk management horizon on where you feel comfortable and be very aware of the market forces going forward into 2021.  These are good prices.   Putting our future grain marketing plans into action will surely need to be a priority moving forward.   

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