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Market Trends Report – October & November 2021

US and the World

     Combines are rolling across the greater North American corn belt.  In the United States as of October 12th approximately 41% of corn harvest had been completed.  At the same time about 49% of American soybean harvest had been completed and this was certainly increased in the week toward October 17th.  Of course, there are variations on the theme some areas of the eastern corn belt have been wet including Ontario and Quebec.  It is a big crop coming off in the United States and the marketplace is reacting accordingly. How big is this crop and how will it impact prices going forward?

     The USDA weighed in on October 12th with their latest WASDE report by raising both corn and soybean estimates.  On October 12th USDA pegged domestic corn yield at 176.5 bushels per acre with total production coming in at 15.019 billion bushels.  This increased the old corn crop carryover to 1.236 million bushels, bringing total supply to 16.280 billion bushels for the 2021/22 crop.  This was also affected by the USDA lowering old crop production by 71 million bushels down to 14.111 billion bushels.  On a worldwide basis, the USDA increased global stocks 3.51 million metric tonnes from September.

     On the soybean side of the ledger, the USDA increased domestic soybean production to 4.448 billion bushels by raising national average soybean yield to 51.5 bushels per acre.  These projections were higher than pre report estimates, which sent soybeans down on USDA report day.  The 2021-2022 soybean ending stocks figure was raised to 320 million bushels, an increase from the 185 million bushels estimated last month. The USDA also increased the old crop production estimate, which added to the increased new crop ending stocks number.  The USDA also dropped the 2021/22 US wheat production to 1.646 billion bushels, down 51 million bushels from their September report.  Wheat prices responded upward on report day.

       On October 15th, soybeans futures were lower than the last Market Trends report. Corn and wheat futures were higher.   December 2021 corn futures were at $5.25 a bushel.  The November 2021 soybean futures were at $12.17 a bushel.  The December 2021 Chicago wheat futures closed at $7.34 a bushel. The Minneapolis December 2021 wheat futures closed at $9.80 a bushel with the September 2022 contract closing at $8.28 a bushel.

     The nearby oil futures as of October 15th closed at $82.28/barrel up big from the nearby futures recorded in the last Market Trends report of $69.72/barrel. The average price for US ethanol on October 15 in the US was $2.49 a US gallon up from the $2.44 recorded in the last Market Trends report.

     The Canadian dollar noon rate on October 15th was .8078 US, higher than the .7917 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

    In Ontario corn and soybean harvest continues, but with huge challenges from weather.  As of October 17th, about half of the Ontario soybean harvest is complete with lower-than-expected yields compared to last year. At the same time wet weather has moved into the province and it has been particularly challenging to get into soybean harvest fields. Some farmers have changed over to corn and this harvest dance will likely continue into November. Ontario farmers need lots of sunshine and wind to dry harvest fields out.

      Having said that, basis levels have improved for soybeans through harvest at Ontario ports and were sustained for corn. The rule of thumb for Ontario soybeans is that 2/3 are exported and 1/3 is consumed domestically.  There are active markets for Ontario soybeans in Europe and other places, especially at a time when American exports have been slowed at the US gulf.  The vegetable oil market has been hot on a global stage, and this has helped Ontario soybean demand.

     It is a changing and evolving marketplace especially as COVID continues to affect our supply chains. You could make the argument are we trading commodities or are we trading supply chain?  In other words, getting the world’s commodities where there are needed it’s not as seamless as it once was and if traders can make that happen through whatever means, bulk loads versus container loads, getting it done is the bottom line.  As this wet fall continues, it will be a challenge to continue that successfully.  A huge Ontario corn crop may ultimately pressure Ontario corn basis lower to fit that narrative.

     Old crop corn basis levels are $1.05 to $1.98 over the December 2021 corn futures on October 15th across the province.  The new crop corn basis varied from $.85 to $1.35 over the December 2022 corn futures.  The old crop basis levels for soybeans range from $2.30 cents to $2.56 over the November 2021 futures.  New crop soybeans basis levels range from $2.15-$2.36.  Ontario SRW wheat prices are in the $8 range with new crop for next year currently fluttering near $8.43 across the province.   On October 15th the US replacement price for corn was $6.95 /bushel.  You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

      It is a very big crop in the United States and the October 12th USDA report helped to substantiate that.  It has been a year with good prices.  That has certainly helped producers lock in good prices overtime.  The USDA report had a bearish tone for prices.  Have the harvest low prices been printed?  Seasonality tells us that they might be.

     The crop might be big, but it is still not in the bin.  This might seem academic, but there are issues in North American harvest fields as of October the 15th.  Reports from the combine are telling us that both corn and soybeans might be coming in better than expected.  However, the large wet weather event which is affecting the progress of the Ontario harvest is manifesting itself in the eastern US as well.  In order to get the big crop, we still need good weather and that is yet to be determined when and if it will come.

     With the supply of both corn and soybeans being robust, the demand picture going forward will remain key to getting this crop out the door. Exports to Mexico of American corn have been good and we’re looking for more.  Chinese demand is also expected to be strong, but with higher prices this year it may not be as strong as a year ago.  COVID related constraints on demand are also out there.  This might be especially true for agricultural commodities that are traded in containers during this current worldwide shortage.

     If the weather gods do cooperate over the next month and the crop does get in the bin, surely farmers are peaking into next year to determine what to plant based on 2022 realities.  Of course, we are not there yet but looking ahead there is going to be quite a competition for acres next year whether that be oats, canola, sunflowers, Milo, sorghum, cotton as well as corn and soybeans. Good prices will do this.  In fact, it is true around the world.

Commodity Specific Comments

Corn

    As we harvest corn it is not lost on anybody that it is expensive to grow especially in a COVID supply chain limited market.  When you add inflation to the mix the picture becomes even more clouded, and it makes you wonder how many farmers harvesting corn now will plant more corn in 2022?  Input prices are very high at the present time.

    It is difficult to know that right now. the bottom line is we’ve got over 15 billion bushels of corn that must find its way to end users.  Ethanol demand is strong, which is a very good thing and Mexico has been a big buyer of US corn.   Having said that, the December 2022 corn futures price is $5.23 a bushel, a very healthy price. 

     The December corn futures contract is currently priced 8.5 cents below the March contract, and this is considered bearish for new crop corn.  Seasonally, corn prices tend to peak in early June and bottom in early July and in retrospect that is almost exactly what has happened in 2021.  The nearby December futures contract is currently in the 51st percentile of the past five-year price distribution range.

Soybeans

     The October 12th USDA report came across as bearish for soybeans pushing up the new crop ending stocks figure to 320 million bushels.  This is a reflection of a better soybean crop being harvested in US fields.  Even with the higher ending stocks number for new crop soybeans it still puts us in a situation where there is a possibility of running out of beans next year.  Keep your perspective.  The price of soybeans is still much higher than it was a year ago.

     Soybean prices are not leading the commodity sector like it once was, but it still has some wind in its sails.  Expect demand to remain strong and the Chinese to come in and buy in the next month.  Vegetable oils are hot and agricultural commodity markets and soybean oil is the same way certainly benefiting from crude oil being above $80 a barrel.  The spectre for increased demand for renewable diesel is a shining light in the future for American soybean production. As we move ahead, we need to keep these things in mind.

     The November soybean contract is currently priced 17 and three quarters cents below the March 2022 contract, which indicates bearishness for new crop soybeans.  Seasonally, soybean prices tend to peak in early July and bottom out in October and that may be where we are this year.  The nearby November contract is currently priced in the 49th percentile of the past five-year price distribution range.

Wheat

     The wheat complex took a bit of a bullish turn after the USDA report on October 12th. As always, you must consider the different supply and demand scenarios for each class of wheat and its regional production areas. $10 spring wheat is a real thing in the northern US plains after the terrible drought that they had this past year.  Higher prices for SRW wheat also offer profitable opportunities for wheat producers.  The difficulty is getting the proper weather to get things planted.  There was always competition from other global players

     In Ontario the weather has been brutal for getting wheat planted. It is also being incredibly harsh for the wheat that was already in the ground with much of it in the southwest of the province having absorbed 8 inches or more of rain since soybean harvest has commenced.  It is likely that Ontario wheat acres will be much smaller this year unless there is a complete turnaround in the weather going into November.

The Bottom Line (cont.)

     The Canadian dollar has risen three cents since the last Market Trends report and this has been a negative for Ontario and Quebec cash prices.  This has taken place despite a rising U.S. dollar which usually causes the opposite effect. The US dollar has fallen off in the last couple days and will need to be continually watched to give clues for where the Canadian dollar will go.  Recently the American inflation rate was announced at 5.1% compared to the Canadian inflation rate of 4.1% in August. Both numbers are much higher than expected and you can only wonder when central banks will respond by raising interest rates, which ultimately will boost our respective currencies value.  So far, central banks have resisted that temptation, but it needs to be watched closely.

     There is a potpourri of other factors that are helping the grain market now. Soybean prices have retreated over the last few weeks, and this may get the Chinese to open their crush plants sooner than expected.  At the same time the difference between Chinese corn prices in American corn prices Is about the same as it was last May.  Chinese corn prices are now cheaper than wheat and this has raised their feed usage. This bodes well for both corn and soybeans demand.  At the same time Minneapolis wheat is the highest it’s been in nine years. 

     As the calendar turns over to November it will certainly be important to keep abreast of harvest progress. In Ontario and Quebec, the harvest has been difficult because of wet weather and wet ground conditions.  As of October 15th, much of the greater North American corn belt finds itself in the same condition. as stated earlier, this weather factor may influence prices. However, as we get into November, we should have a better picture of where these grain prices may be headed.  by that time, we should know if the demand forecasted out of China comes to fruition. 

     Any grain market is fluid and 2021 is no different than any other.  It is always difficult to know exactly where price will go, case in point is what happened last year at this time when prices were headed straight up into June of 2021.  That is over with now and we have a whole new set of market factors weighing on the grain complex.  The challenge for Ontario grain farmers is to re-calibrate and refine those grain marketing plans.  Amid the challenges of the wet fields this fall we had and do have a marketplace which is providing profitable prices.  Daily market intelligence will remain key.  Risk management never grows old.

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