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Market Trends Report – September & October 2021

US and the World

We are here.  It is early, but crops are being harvested across the great North American corn belt.  Weather is always the determinate of crop development and as harvest ramps up, we’ll surely get a picture of crop yields unvarnished from the hype as combines roll.  Generally speaking, the Eastern corn belt has had very good weather for crop development, while the northwestern part of the western corn belt not so much.  However, as it is heading into October, the crop looks to be a good one.  Prices have retreated into September on this reality.

On September 10th the USDA released their latest WASDE report.  USDA raised their domestic corn yield estimate to 176.3 bushels per acre, which is just below the 2017 record corn yield of 176.6 bushels per acre.  At the same time, USDA raised planted corn acres by 600,000 to 93.3 million acres.  This had the effect of increasing estimated harvested acreage to 85.1 million acres.  Total US corn production is now expected to come in at 14.99 billion bushels, which is up 246 million bushels from the August report.  USDA pegged new crop ending stocks at 1.408 billion bushels after raising exports and feed and residual usage.  The old crop ending stocks were raised 70 million bushels at 1.187 billion bushels.

On the soybean side of the ledger USDA surprised the market by reducing soybean planted acreage to 87.2 million acres from the 87.6 recorded in August.  However, USDA increased the yield estimate to 50.6 bushels per acre.  This puts US soybean production at 4.374 billion bushels this year.  On the demand side of the ledger, USDA reduced crush slightly, but boosted exports, which resulted in a 10-million-bushel higher total use.  New crop ending stocks were increased to 185 million bushels.  USDA kept Brazil and Argentina production at 137 MMT and 46 MMT respectively.  USDA kept wheat production unchanged with planted acres pegged at 46.7 million acres.  Globally, world wheat production was up overall, with boosts in production from Australia, the EU, but lower production in Canada and even production in Russia.

On September 11th, corn, soybeans and wheat futures were lower than the last Market Trends report.    December 2021 corn futures were at $5.17 a bushel.  The November 2021 soybean futures were at $12.86 a bushel.  The December 2021 Chicago wheat futures closed at $6.88 a bushel. The Minneapolis December 2021 wheat futures closed at $8.84 a bushel with the September 2022 contract closing at $7.69 a bushel.

The nearby oil futures as of Sept 11th closed at $69.72/barrel up from the nearby futures recorded in the last Market Trends report of $68.44/barrel. The average price for US ethanol on September 11th in the US was $2.44 a US gallon up from the $2.31 recorded in the last Market Trends report.

The Canadian dollar noon rate on September 11th was .7917 US, lower than the .7991 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.25%.

Ontario

Soybean harvest has commenced in some areas of Southwestern Ontario as hot weather in August accelerated development.  Soybean harvest will be earlier than usual this year but does not mimic years when drought has done that.  This year, crops are good in Ontario.  Although soybeans yields might be more variable, having been affected by heavy rains in some areas, the Ontario corn crop may set records.

Basis levels for old crop and new crop have come together over the last few days and weeks.  There is always flux at this point in the cash market, as old crop supplies reflect last year, but new crop supplies “suddenly” appear on the horizon.  Problems with damaged infrastructure in the US Gulf helped Ontario basis levels briefly, but we can expect pressure on basis over the next few weeks.  There is a good crop here as well as the Eastern corn belt of the United States.

The Canadian dollar has been helping, down from its highs in June of 83 cents US, now fluttering in and around the 79-cent level.  Keep in mind basis is the value which determines when grain is bought and sold.  It is mostly a reflection of local supply and demand, although the corn basis in Ontario often reflects its oligopolistic market structure. Getting cash market information on Ontario grain is important.  Keep abreast of US basis values in Michigan and New York.  All of this matters within our proverbial market challenge to balance futures prices with cash basis fluctuations.    

Old crop corn basis levels are $1.05 to $2.50 over the December 2021 corn futures on September 11th across the province.  The new crop corn basis varied from $1.05 to $1.25 over the December 2021 corn futures.  The old crop basis levels for soybeans range from $2.69 cents to $2.76 over the November 2021 futures.  New crop soybeans basis levels range from $2.48-$2.56.  Ontario SRW wheat prices are in the $7.58 range with new crop for next year currently fluttering near $8 across the province.   On September 11th the US replacement price for corn was $7.83 /bushel.  You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/

The Bottom Line

Future prices have declined and to some extent we’re peering into a new marketing environment from the last 8 months.  Prices are much higher than they were a year ago and surely many Ontario farmers have had marketing orders hit.  As we look ahead, we’ll see where harvest lows might take us, or realize that maybe as of September 11th they are close to already in.  The new environment will focus on crop size going to the elevator this fall, South American planting prospects and the strength of Chinese demand going forward.

The September USDA report was a reminder that even after a fairly steep price drop in the futures market, grain fundamentals still matter.  The corn planted acreage number was not changed as much as expected and the soybean acreage number was cut from an already too low number.  Prices were up on the day, partly a reflection of the USDA report and partly a reflection of algorithm triggers.

Grain fundamentals are one thing, but non-commercial demand is another, something that can add so much effervescence and volatility to any market.  Corn futures have fallen, and much of that aside from fundamentals has to do with noncommercials liquidating their long positions.  Much will depend on going forward what this group will do.  December corn dropped to $4.97 on the Friday of the USDA report, only to finish 20 cents higher at $5.17.  Non-commercials when they see a buying opportunity waste no time getting back in. 

There are many other geopolitical issues, which are always wild cards.  The damage from Hurricane Ida was more of a red herring, as damage to US Gulf export facilities have been rare in past Hurricane paths.  One issue which is always there is he value of the US dollar, which as of September 11th, sits at 92.590 on the US dollar index, much higher than May and June when grain prices peaked.  It’s still key, any movement lower will help sustain grain futures prices.      

Commodity Specific Comments

Corn

Corn futures have fallen significantly from their highs in June, but will it continue?  Are the buyers more nervous than the sellers?  Will farmers get this crop harvested and with last year’s corn price behaviour in their memory, do they lock the bin door?  Corn fundamentals are still long term bullish, and this price drop could spur prices even at a time when the short-term trend is down.

Keep in mind, this corn crop is a big one, the second largest ever with yield being second largest a hair below 2017 levels.  The USDA left Chinese corn imports at 26 MMT, but at the same time increased Chinese corn production by 5 MMT and Chinese feed use by 3 MMT.  At the same time, export terminals have been slowed down by the Hurricane, but are set to be back on stream soon.  This is greatly needed especially in a year when the corn crop is huge.

The December corn futures contract is currently priced 9.25 cents below the March contract, which is bearish.  Seasonally, corn prices tend to top early in June and reach bottom in early October.  The December contract is currently in the 49th percentile of the past five-year price range.

Soybeans

The slowdown at the American Gulf has impacted soybeans shipments, but that is set to ramp up big time once everything is fixed.  As it is, even though the USDA increased soybean production slightly, soybean fundamentals are still tighter than we’ve become accustomed to. 

Key to soybean fundamentals going forward will be what happens in South America.  For instance, soybean planting is commencing in Brazil and will be ramping up in October.  The world has become accustomed to consistently bigger Brazil soybean crops, and this will be dialed in again.  As is, weather forecasts in South America will be key going forward to help determine South American crop size as well as soybean futures volatility.

November soybean futures are priced 12.75 cents below the March contract, which is considered bearish.  Seasonally soybeans tend to top in early July and bottom out in early October.  The November soybean futures contract is currently in the 57th percentile of the past five-year price range.

Wheat

The wheat market has sold off through August and September but may find its footing as we head into October.  It is true, that global wheat stocks are always onerous, but China and India hold so much of global stocks and keep them close to the vest.   In the preceding four days to this Market Trends report being published, wheat futures have fallen 60 cents.  However, US wheat stocks are the lowest in 8 years.  The wheat markets will continue to gyrate reflecting its complicated relationship with wheat classes and stocks.  Keep in mind, each class of wheat has its own supply and demand fundamentals.

In Ontario new crop wheat prices are fluttering near the $8 levels, very good prices historically. Like every year the challenge for farmers will be late summer and fall weather to get the crop planted.  With fall harvest being ahead of normal, this should bode well for a million acres of wheat this fall.

The Bottom Line (cont.)

Arresting the slide in grain futures prices over late August and early September has been the value of the Canadian dollar, which is hovering near 79 cents US.  On June 2nd the loonie reached 83 cents US and if that had been maintained Ontario cash prices would be much lower now.  However, per usual, it depends on the value of the US dollar, which was at a 4-month low last June 1st as the Canadian dollar peaked.  For Ontario soybeans and wheat, this is incredibly salient, not so much for Ontario corn, although it still matters.  It’s one reason Ontario farmers have bought into flat prices.  Hitting the foreign exchange right and the futures prices right is a always our marketing challenge.

As we head into harvest, we all want Chinese demand for grain to come back like we saw a year ago and there are surely those out there who say it’s going to happen.  However, the view from Asia might be different.  China is still buying a lot of soybeans, but crush margins have been soft, partly due to lower demand and higher prices.  Keep in mind, Chinese crushers produce their oil and meal for their massive livestock sector, which continues to have its issues.  As it is, the Chinese will need to maintain their demand to satisfy food requirements, but don’t be surprised if there is a wrinkle in this equation.  The different view from Asia will surely involve price and might not meet our expectations.

There are also other pressures which concern harvest in North America, one being weather.  At the present time, weather conditions look good for a rapid harvest, which should pressure cash basis in many parts of the corn belt, including Ontario and Quebec.   It is one thing to grow the crop, another to get in the bin, and we all know how challenging that can be.   In the Eastern part of the corn belt, corn, soybeans and wheat interchange across our borders.  With the preponderance of supply this year in the Eastern zone, a robust Canadian export program into Europe will be essential right up into September of 2022.

The Covid issues are still with us, both here in Canada and in far off lands where some of our crops go.  This will continue to challenge, as its effect on our supply chains is impacting our markets always.  Getting past it is paramount, but even 18 months into the pandemic, that seems elusive.  It will continue to affect markets in a micro way all the way from Indonesia to Thailand and Singapore to the United States and China.  The challenge for Ontario farmers is to manage their marketing risks accordingly.  Even in a good price environment, there isn’t a easy path ahead.  Standing price orders can help.  Daily market intelligence will remain key. There will be many marketing opportunities ahead. 

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