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Market Trends Report – October & November 2022

US and the World

     It is that time of year again when combines roll into the night as harvest is taking place across the great North American corn belt. It has been an uneven growing in some areas with pockets of dryness evident in an otherwise good growing season.  As of October 11th, 44% of American soybeans have been harvested and 33% of American corn has been harvested. With good weather evident throughout the United States for harvest these numbers will be set to improve greatly as we go into the end of October. We are still looking at big crops coming out of the United States for 2022.

     USDA released their latest WASDE report on October 12th.  The October report sometimes can heavily influence prices as it is a reflection of actual harvested results. In this report the USDA cut US corn production by 49 million bushels to 13.895 billion bushels after cutting yield .6 bushels per acre to 171.9 bushels per acre.  At the same time the USDA lowered US domestic soybean yield by .7 bushels per acre to 49.8 bushels per acre. This put domestic production at 4.313 billion bushels.  Both of these production estimates were within trade expectations.

     The US corn production number of 13.895 billion bushels was a three-year low for US corn production. On the demand side of the equation ethanol demand was lowered by 50 million bushels and exports were also lowered by 125 million bushels. This was offset to some extent by an increase in feed seed and residual demand by an increase of 50 million bushels.  The 2022/2023 corn ending stocks are now projected to be 1.172 billion bushels, which is a 10 year low.  USDA kept Brazil corn production at 126 MMT and Argentina at 55 MMT. 

     USDA left soybean ending stocks for 2022/2023 at 200 million bushels.  On the demand side of the ledger the USDA increased soybean crush by 10 million bushels but lowered the export demand by 40 million bushels. South America continues to be the leading player in world soybean markets. The USDA increased Brazil’s expected production by 3 MMT to 152 MMT for the crop being planted now.  That is a huge number, which is expected to get bigger in subsequent years.  US wheat production was pegged at 1.65 billion bushels in October with total acres harvested at 35.5 million acres.

      On October 14th, corn and wheat futures were higher than the last Market Trends report.  Soybeans were lower.  December 2022 corn futures were at $6.89 a bushel.    The November 2022 soybean futures were at $13.83 a bushel.  The December 2022 Chicago wheat futures closed at $8.59 a bushel. The Minneapolis December 2022 wheat futures closed at $9.84 a bushel with the Sept 2023 contract closing at $9.53 a bushel.

     The nearby oil futures as of October 14th closed at $85.61/barrel up slightly from the nearby futures recorded in the last Market Trends report of $85.11/barrel. The average price for US ethanol on October 14th in the US was $2.53 a US gallon, down from the $2.60 last month.

     The Canadian dollar noon rate on October 14th, 2022, was .7217 US, down sharply versus the .7527 US reported here in the last Market Trends report. The Bank of Canadas lending rate increased to 3.25%.

Ontario

 In Ontario good harvest weather has helped push soybean harvest close to the finish as of October 16th. We have also seen some of the first corn taken off in Ontario fields. As we all know weather was variable this past year and so are yields. Some areas in southwestern Ontario are below average but generally speaking in eastern Ontario it is normal crop or above average. Farmers will surely be hoping for more of the same weather going into November.

      The good harvest weather has helped wheat planting across the province. Often times, good weather in the fall is the litmus test on how much we get planted and this year it looks to be well over 1,000,000 acres of wheat. In fact, the weather has been so good there are some people talking about record acreage up over 1.3 million acres of wheat planted this fall.

     The Canadian dollar at $0.72 has been helping sustained basis levels during harvest time especially for soybeans. The lower Canadian dollar is totally reflection of the strong U.S. dollar that continues from last month. In fact, a 3 cent drop in the Canadian dollar puts it at its lowest level in several years, good thing for Ontario grain prices. 

     Old crop corn basis levels are $1.85 to $2.08 over the December 2022 corn futures on October 14th across the province.  The new crop corn basis varied from $1.25 to $1.75 over the December 2023 corn futures.  The old crop basis levels for soybeans range from $4.85 cents to $5.00 over the November 2022 futures.  New crop soybeans basis levels range from $4.29-4.48 over the November 2023 futures.  Ontario SRW wheat prices are in the $10.30 range.   On October 14th the US replacement price for corn was $10.41 /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 USDA has substantiated the fact that the US crop is big, but not as big as expected and in fact might be getting smaller.  Futures prices have decreased over the last month and in some ways, it doesn’t seem to be adding up based on lower crop numbers from the USDA. However, much of this was already baked in, dialed into the trading algorithms and it’s put us where we are. It will take some China buying and some South American weather problems to boost these prices further.

     In the United States there are other problems affecting the movement of grain which will have an effect on basis values moving forward. At the present time, river levels along the Mississippi and its tributaries are low and this is making barge traffic more expensive and impeding the movement of commodities. At the same time there is still a threat of a rail stoppage, which would also have a detrimental effect on the movement of grain. 

     The low water levels are something that most likely will not change very soon and it may affect grain exports.  This past week soybean exports actually picked up with China getting back in the market.  Corn exports are down for varying reasons, but a big one is that Brazil is selling corn much cheaper than the United States of approximately $1.30 per bushel. This is true for Argentina and Ukraine as well. It just goes to show that despite all of our production and geopolitical problems, in the end when it comes to agriculture commodities, “cheap” always wins.  It is a very competitive agricultural world.

     The war in Ukraine made “cheap” a relative term.  That certainly continues especially with November 19th being the renewal date for the Black Sea grain initiative put together between Turkey, Russia and Ukraine.  It has been successful from the standpoint of getting Ukrainian grain moving again, but with each Ukrainian victory in the war there will be more pressure from Russia to clamp things down. However, there are even some UN officials who are hoping for an expansion of grain trade past November 19th. Expect some fireworks in the grain trade leading up to that day if Russia spoils the party.

Commodity Specific Comments

Corn

     The USDA report scaled down the US corn crop, and generally speaking, when crops get smaller, they keep getting smaller into January and beyond.  As it is, the market has had trouble breaking above $7 and that will likely remain the case until fresh news comes into the corn market.

     An unsettling problem has been corn demand. US exports are down, In fact 51% less than last year.  Ethanol demand is down too.  Is $7 just too expensive for these markets or is it a momentary change. As is, cash prices throughout the corn belt are higher at this time of year than what history would support.  Basis levels are affecting these sales.  Low river levels in the Mississippi river are raising costs and reducing basis bids which depend on that market. 

      The December 2022 corn futures contract is currently priced 6 1/2 cents below the March contract which is a neutral indication of commercial demand and indicates that harvest is in full swing. Seasonally, corn prices tend to peak in early June and bottom in early October. The nearby December futures contract is currently in the 74th percentile of the past five-year price distribution range.

Soybeans

     Soybeans have drifted lower, but there can be a bullish argument made for beans.  If you look at the vegetable oil sector it’s been buoyant. Both canola and soybean oil have been resilient when it comes to price and that is likely to continue.  In the United States the demand for biodiesel is genuine and will continue to grow.

     As it is American farmers can sell $14.00 soybeans off the combine, which historically is a very good price and almost unprecedented.  It is similar in Ontario with high basis values on soybeans partly based on the lower Canadian dollar.  However, there are issues and one being American exports which have been lagging.  Typically, the October to January period is the peak time for US soybean exports. We need that again because after January most of that business will be going to South America.

     The November soybean contract is currently priced 16 3/4 cents below the March contract which is a bearish sign of commercial demand indicative of harvest time.  Seasonally, soybean prices tend to peak in early July and bottom in early October. The nearby November contract is currently in the 60th percentile of the past five-year price distribution range.

Wheat

     The wheat market has had the heavyweight of a strong U.S. dollar tempering wheat futures. Ever since we’ve had the “Putin rally” in wheat after the Russian invasion in February of 2022 wheat prices have tried but failed to get back to those lofty levels. At the present time Russia has a lot of wheat and it wants to sell it even at discount prices. Ukraine’s done well too.  There is still lots of geopolitical risk here as we are still dealing with a large production area within a war zone. The world waits to see if the Russians will honor a continued transit route out of Ukraine for Ukrainian grain.

      In Ontario it has been a wheat planting Disneyland as producers have taken advantage of an open fall to plant wheat.  As of October 16th, this is continuing, and it will likely result in one of the bigger wheat crops planted over the last several years.

The Bottom Line (cont.)

     A drop of more than $0.03 US in the Canadian dollar since the last market trends report represents a huge boost to Ontario cash grain prices.  The Canadian dollar fluttering in the 72 cent level US is mostly a reflection of the big appreciation in the US dollar. With the US Federal Reserve set to continue to raise interest rates it is likely to even get stronger.  Of course this is taking place in a global world where things are uneven based on our wartime markets. The American dollar is seen, rightly so as a safe haven and the Canadian dollar is finding its new level.  The challenge for Ontario producers is to capture that balance between a low Canadian dollar level and a good futures grain price.  $0.72 US does represent opportunity to price grain in Ontario.

     There is one recurring theme underneath the global grain trade which is increasingly being institutionalized. That is that South American production is being seen as a way to stabilize grain prices. For instance, this past year there have been all kinds of production problems in Europe regarding the weather aside from the Ukraine problems.  Third world leaders are openly discussing their own food security based on the problems in Ukraine. We don’t have a huge crop in North America, but it is satisfying our needs. The one outlier is South America where production continues to exponentially grow and in 2023 this is happening in spades. Without it, prices go much, much higher.

     La Nina is supposed to be ending, but some weather forecasters are saying that might not be the case and if it’s not the case it will have a detrimental effect on South American weather.  Last year Brazil had a drought and production was down but as we all know this year USDA is calling for 152 MMT of soybeans, a mind-boggling number. Their corn production is rising as well. Simply put, the world is counting big time on South America and if weather does not cooperate it adds another level of price risk to our equation next year.

     The challenge for Ontario farmers is to measure all of these market factors. At the end of the day the Ontario crop should be quite good, but not necessarily as good as last year. There were also some areas that have been particularly dry with tougher yields. However, prices for grain sold off the combine are historically good.  The risks associated with these higher prices are also higher. A key facet to guiding ourselves in the way ahead will be daily market intelligence. There will be many marketing opportunities ahead.

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