Special Edition – Market Trends Report – USDA Report June 30, 2022
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US and the World
We are off to the races. At least that’s the way it feels at this time of year. The July 4th weekend is always a seminal event for the grain market sometimes seeing very volatile market action. The crops are growing in the fields and there are active weather events across the American corn belt which will be affecting prices. Where it’s going to end up is anybody’s guess. On June 30th the USDA released their planted acreage report as well as the June 1st quarterly stocks grain report. These numbers will be used as a benchmark for the next several months until final numbers are calculated in January.
On June 30th the USDA surprised the market a bit by estimating US corn acres at 89.9 million. On the other hand, they pegged soybean acres lower than expected down to 88.3 million acres. However, even though these numbers were different from what had been predicted earlier it was within the pre report estimate. The USDA corn estimate is 4% lower than last year while the soybean estimate is 1% higher than last year. Illinois and Indiana were down 300,000 corn acres from a year ago, Iowa and Nebraska were down 200,000 corn acres each. Corn stocks in all positions were estimated to be 4.35 billion bushels which was up 6% from a year ago.
The reduction in the soybean acreage number was a surprise, but at the same time it is the largest in the last four years. Illinois soybean production was up 600,000 acres from a year ago and it was also up 200,000 acres from the March intention report of 11.2 million acres. Soybean stocks in all positions as of June 1st, 2022, totaled 971 million bushels which was up 26% from a year ago. All wheat acreage in the United States came in at 47.09 million acres which still marks the fifth lowest acreage since records began in 1919.
On July 1st, corn, soybean and wheat futures were lower than the last Market Trends report. September 2022 corn futures were at $6.19 a bushel. The December 2022 corn futures was $6.07. The August 2022 soybean futures were at $15.09 a bushel. The November 2022 soybean futures were at $13.95bu. The September 2022 Chicago wheat futures closed at $8.46 a bushel. The Minneapolis September 2022 wheat futures closed at $9.48 a bushel with the July 2023 contract closing at $9.68 a bushel.
The nearby oil futures as of July 1st closed at $108.43/barrel down from the nearby futures recorded in the last Market Trends report of $120.67/barrel. The average price for US ethanol on July 1st in the US was $2.70 a US gallon, down from the $2.85 last month.
The Canadian dollar noon rate on June 30th was .7760 US, lower than the .7827 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 1.5%.
Ontario winter wheat is starting to be harvested in Essex County and will surely pick up steam in the next couple of weeks across much of southwestern Ontario. Ontario new crop wheat prices have fallen approximately $5 a bushel since May and are reflection of the extremely volatile nature of the world wheat market.
Basis levels for all grains in Ontario have either remained the same or declined mainly because of the precipitous drop in grain futures prices over the last several weeks. The saving grace has been the value of the Canadian dollar, which continually is hovering in the 77 cent US range.
The Ontario crop is actively growing in the field as of July 1st and is variable across the province. Generally speaking, rain is needed especially in the parched regions of southwestern Ontario. There was also a huge replant of soybeans from Essex County up into Lambton and Middlesex County after heavy rains entombed soybeans in early June. Many of these fields will need generous rainfall and a long warm drawn out fall to reach maturity.
Old crop corn basis levels are $1.90 to $2.15 over the September 2022 corn futures on July 1st across the province. The new crop corn basis varied from $1.35 to $2.00 over the December 2022 corn futures. The old crop basis levels for soybeans range from $4.80 cents to $5.49 over the August 2022 futures. New crop soybeans basis levels range from $3.70-3.82 over the November 2022 futures. Ontario SRW wheat prices are in the $10.23 range and will remain in flux for the next few weeks. On July 1st the US replacement price for corn was $9.00 /bushel. You can access all these Ontario grain prices in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
We’ve had a cold bucket of ice water thrown on a bullish grain environment. Over the last two to three weeks, we have seen an exit from grain futures markets of some of the speculative money that poured into markets because of the Russia Ukraine war. At the same time, we have a good crop growing in the field. What we have become accustomed to is extreme volatility to the upside and what we have seen lately is the opposite to the downside. None of this should be a surprise do any of us.
So, what is it going to be? Is it going to be hot and dry in July in August or are we going to have benign weather for the next two months setting up a very big crop in the United States? Do you get the picture? The next few weeks of crop weather will definitely affect the road ahead on prices. In this world where commodity markets have been demanding everything, we are about to learn in North America if we can grow it first. July will help define that.
Keep in mind prices are still historically high even with the recent drop off. There are good crush margins for soybeans and all grains. Ethanol is a profit machine, and this will likely continue especially with lower corn prices. This is happening in a market atmosphere, where we are even seeing the price of oil and fertilizer moderating. Should we venture a guess that maybe markets are stabilizing? That is hard to say.
This is all happening in a geopolitical environment that is still very volatile and concerning. We have Russian missiles raining down on shopping malls in Ukraine and residential areas. At the same time, Chinese demand for grain is still substantial, but they’re dealing with COVID shutdowns making the supply chain wonkier. Ukrainian grain being diverted or confiscated and put through Russian ports is an example of things we did not expect. This is relieving some local markets in Turkey, the Middle East and North Africa. At the same time Western countries like Canada have pledged new mobile grain systems to be moved into Ukraine to take care of some of the harvest this summer and fall.
Commodity Specific Comments
The July 4th weekend weather will certainly determine much direction in the first week in July for corn futures. In the United States, this is also synonymous with corn knee high by the 4th of July, but that is not the case in the northern central plains which is had quite a slog with corn planting. Corn in parts of the United States is simply behind schedule.
Some of the big stories that we have been talking about over the last few months are already priced into the corn market, such as inflation and the Russia Ukraine war. Also, to, the weather risk premium often tops out in the middle of July. So, as we move forward the weather story will it be important especially as we move toward pollination.
The December 2022 corn futures contract is currently priced 6.25 cents below the March contract which is considered a bearish indication for commercial demand for new crop corn. On the other hand, old crop corn futures spreads are very bullish. Seasonally, corn prices tend to peak in mid-June and bottom out in early October. The December 2022 corn futures price is currently in the 58th percentile in relation to the past five-year price distribution range.
The USDA report on June 30th said there was a lot less soybeans than expected but that did not stop the market from crashing on that day. The weather story is such a big one now, but soybeans could have been affected by weakness in the edible oil market.
Keep in mind many farmers were continuing to plant past June 15th in the United States. Where at one time we thought there might be up to 5 million “prevent plant” acres in the United States, that has been all planted. Big prices mean that people are taking the risk of planting late versus enrolling in a government program. The soybean number will be revised by USDA, and we should know by August.
Soybeans remain bullish. The November contract is currently priced even with the March 2023 contract which is considered bullish. The July August 2023 contract is also at an inverse, which is considered extremely bullish. Seasonally, soybean prices tend to peak in early July and bottom in early October. The November 2022 soybean contract is currently in the 61st percentile of the past five-year price distribution range.
The wheat market has almost been in a straight line down over the last six weeks. There never is a seasonal expectation in wheat futures prices as it’s grown just about everywhere. There has also been lots of Russian wheat get to markets and this was reflected in downward price pressure in the European wheat market. Ports in Crimea were loading wheat which is not usual and certainly must reflect Ukrainian wheat being diverted through unusual channels.
As stated earlier the wheat harvest has begun in the deep Southwest of Ontario. Cash wheat prices have fallen to the $10 level from their high of the $15 level only about six weeks ago. However, these prices are still the highest we’ve seen at this time of year ever as wheat harvest ramps up across the province thwew will be many producers taking advantage of this. As always, quality concerns may weigh on the Ontario wheat market depending on weather.
The Bottom Line (cont.)
There is no question the swoon in grain futures prices has been significant from the frothy times of earlier this spring. However, the Canadian dollar fluttering in the 77 cent U S range has provided a bottom stimulus for Ontario grain prices and it will continue. As mentioned, several times in the past the value of the Canadian dollar is mostly related to the inverse of what the US dollar does. On July 1st the US dollar index reached 105.62 which was close to the multi-year high of 105.79 set a couple of years ago. With the US dollar very strong based on so many different factors it has been hard for the loonie to gain even in an environment where the Bank of Canada has been raising interest rates. This has been positive for Ontario grain prices.
Significant to the price of grain in Ontario will always be our crop weather in the next couple months and the quality and yield of the Ontario and Quebec crops. If we have a normal year with benign weather, we likely have normal basis fluctuations and lots of crop to be exported this fall and into 2023. With 2.3 million acres of corn and three million acres of soybeans in Ontario there is a lot at stake. There have been weather hiccups already, but timely rain will be important across the region this summer to make a big crop this fall.
To some extent the June 30th USDA report redefined the road ahead with more corn acres and less soybean acres than expected. However, there will be a revision of these numbers likely in August to better reflect the late planting of soybeans in the North Central plains. Even though future spreads now into 2023 are bullish especially for soybeans they need to be watched closely over the next few weeks to give clues on what the market is saying. Even in these heady times with good prices are we headed toward a more bearish environment? Or is this simply a momentary lapse in the grain market before grain prices recoil and ignite into another rally? Grain futures spread should give us clues to that into the future.
The road ahead for Ontario farmers will be continually challenging. We have had opportunity to price grain at historical levels and even though the prices are less now, it continues. Certainly, the level of inflation with our farm inputs has made it very challenging on so many levels. Despite that, as we move ahead daily market intelligence will remain key to hone our risk management plans further. Wheat harvest is a upon us. There surely will be quality and yield concerns as we go ahead. Another USDA report will come two weeks from now and another in August. This should help refocus exactly where we’re going with regard to crop size this coming year. There will be many marketing opportunities ahead.