U.S. and the World
It’s been a very difficult spring across the greater American corn belt. As June grew, older farmers were scrambling across much of the Eastern Corn-belt to get crops into the ground. As of June 19th, 92% of US corn had been planted and 77% of US soybeans. However, there were areas of grey in those numbers. As many farmers chose to switch away from corn and in the US case, put those acres into prevent plant. This was a very unusual year where there is a huge production problem in American fields. As we move ahead, the market will surely be busy coming to grips with a possible supply shortfall in North American fields.
On Friday, June 28th the USDA released their planted acreage report. This report was widely anticipated this year based on the problems in American production fields. On June 28th, the USDA raised the corn-planting estimate to 91.7 million acres from the previous June estimate of 89.8 million acres. This was a shock to the market, as gains in corn acreage were not expected, especially in light of the widespread planting problems in American fields. The USDA also announced American farmers would plant 80 million acres of soybeans; 4.6 million acres lower than their March estimate. Corn was limit down on the news, while soybeans gained on the day.
About an hour after the report was released, USDA announced that they would be re-surveying acreage planted to corn, cotton, sorghum, and soybeans in 14 states in the first part of July. The results of this survey will come out in the August 12th USDA report. It was an unusual announcement from USDA taking into consideration the problems with surveying farmers on acreage on June 1st when much of the crop had yet to be planted. The timing of the announcement was odd because it came after the report was released to the market. A question could be asked, why it hadn’t been released an hour before the main report was released? Which might have mitigated some of the corn’s losses on the day.
Soybean stocks on June 1st were at record levels of 1.79 billion bushels, which was up 47% from the third quarter of a year ago. Corn stocks were set at 5.2 billion bushels, which was 2% lower than last year at this time. Wheat ending stocks for 2018/19 came in at 1.07 billion bushels, slightly less than the 1.09 billion bushels a year ago.
On June 28th, soybean futures were higher than the last Market Trends report; corn and wheat futures were lower. September 2019 corn futures were at $4.24 a bushel. The August 2019 soybean futures were at $9.04 a bushel. The September 2019 Chicago wheat futures closed at $5.27 a bushel. The Minneapolis September 2019 wheat futures closed at $5.47 a bushel with the September 2020 contract closing at $5.46 a bushel.
The nearby oil futures as of June 28th closed at $58.47/barrel up from the nearby futures of last month of $52.51/barrel. The average price for ethanol on June 28th in the US was $1.74, the same as the $1.74 a US gallon in the last Market Trends report.
The Canadian dollar noon rate on June 28th was .7641 US, higher than the .7471 US reported here last month. The Bank of Canada‘s lending rate remained at 1.75%.
In Ontario, the last week of June dawned hot and dry, giving many farmers there first opportunity to plant. Rains that had been predicted were missed for the first time. The farmers on the heavy clay in Essex and Lambton counties as well as Niagara finally had the chance to get on the fields. With the crop insurance deadline moved back to July 5th, this also afforded extra opportunity to follow through with cropping plans.
It was a scramble to get planted into Canada Day and beyond. This was only made possible from one of the worst springs in many careers. It begs the question of how many acres of Ontario corn and soybeans got planted. As well as, how yield will be impacted as these very late cropping acres move through what is left of the growing season. 1.7 million acres of corn might be optimistic. Three million acres of soybeans might be fair game. However, yield is likely to be severely compromised, causing much supply disruption in the fall.
Basis values have fallen for soybeans and increased for corn since the last Market Trends report. This is largely indicative of the rise in the Canadian dollar value. Corn, on the other hand, has more of a life of its own, as a supply disruption is clearly in the cards for this fall and winter. Ontario cash basis has risen, and it is likely to become even more volatile depending on summer heat and rains.
Old crop corn basis levels are $1.35 to $1.45 over the September 2019 corn futures on June 28th across the province. The new crop corn basis varied from $1.16 to $1.28 over the December 2019 corn futures. The old crop basis levels for soybeans range from $1.97 to $2.15 over the July 2019 futures. New crop soybeans range from $1.94-$2.05 over the November 2019 futures level. The GFO cash wheat prices for delivery to a terminal on June 28th were $7.15 for SWW, $7.41 for HRW, $7.02 for SRW and $6.72 for Red Spring Wheat. On June 28th the US replacement price for corn was $6.40/bushel. You can access these numbers in the Daily Commodity Report.
The Bottom Line
The June 28th USDA report was a bit of a pause button for market bulls. Anecdotal evidence of corn acres lost in the worst spring in memory for many farmers. As well as those in the Eastern corn belt is no substitute for hard USDA numbers that say otherwise. The 91.7 million acres corn planted number is a reminder that the USDA sets the goalposts for grain prices. Despite the many problems and the yield reduction from USDA two weeks ago, for the moment, we’re trading 91.7 million corn acres and 80 million soybean acres.
Still, grain prices have rallied from where we were just eight weeks ago. However, memories of May 1st amid the rainy fog of spring seem to be such a distant memory. For many farmers, much of the 2019 production was hedged long ago, and for others, you can’t sell something that you don’t have. The difficult spring that is now over has challenged our marketing acumen. Many farmers cannot market a new crop, because it didn’t get planted. It’s the price rally that happened because of somebody’s misfortune. However, this time, it wasn’t in some far off land. It was in the Eastern Corn Belt, which includes much of Ontario.
That scenario has led to some unusual movements in basis. For instance, in many places in the United States as futures increased during this recent price rally, basis bids went up as well. It was a course in “supply disruption 101”, rarely seen at this time of year. As we move ahead, it’s not over. We have a production problem in US fields. Significant volatility in both futures and basis is likely in our immediate future.
Going into the June 28th report, corn was screaming bullish. For the moment, the USDA has thrown water on that scenario. However, spread action between December and July corn is still bullish, just not as bullish as it once was after the post USDA price drop. Commercials, at least for the moment, grew less bullish corn. However, in this market environment, the sentiment and the carry in the futures months is so fluid. A “hot and dry” scenario or heat “dome of doom” will surely upset that apple cart.
Commodity Specific Comments
Skepticism reined on June 28th concerning the US corn acreage number of 91.7 million acres. Farmers had indicated to USDA via survey June 1st that 83% of their intended corn acreage was in the ground. It looks like as of June 28th, USDA assumed the other 17% got planted which is highly unlikely. The re-survey in early July should change that number again.
The August 12th report will reflect on all these acreage questions. It may be explosive, and it may not be. The narrative is/was there was a huge problem in American production fields this past spring, to say nothing about the production risk that may be ahead. US national corn yield is in the balance.
The September December 2019 corn futures spread is currently -0675 cents as of June 28th, which is considered sideways. The nearby spot contract after the blow back on June 28th fell back to the 73rd percentile of the past five-year price distribution range. Seasonally, corn prices tend to trend lower the rest of the way into harvest. However, 2019 is a different year.
Soybeans continue to be a whipping boy, but even their bearish fundamentals are changing. The 4.6 million acres reduction in soybean acres in the USDA report might reflect the low water market for soybean acres this year. The re-survey might find more acres as farmers switched from corn. However, a larger prevent plant acres numbers might also be the result.
It’s getting old, but the Chinese and Americans have committed themselves to renewed trade talks coming out of the G20 in Osaka Japan. Combine those lower acreage numbers with a compromised yield number and a trade deal, and we might get to a Eureka moment in beans. However, there are a lot of “what ifs” in that scenario.
As of June 28th, the August 2019 September 2019 soybean spread is -.065, which is considered sideways. The nearby spot contract is currently priced in the 18th percentile of the past five-year price distribution range, up from the lowest prices in 12 years. Seasonally, soybean prices tend to trend higher into July.
Wheat always needs help, and higher corn prices may be providing that. It can be argued that wheat will be replacing corn in feed rations at these price levels. With the uncertain North American corn crop, this scenario may increasingly play out. Total US wheat acreage was at 45.6 million, the lowest in 100 years. However, there was a slight increase in SRW acres (31.8 million ac), which surpassed modest expectations.
What’s left of Ontario wheat is moving quickly to harvest, especially with the hot sun of late June. Wheat acres are scarce in parts of Essex and Lambton counties, traditionally some of the bigger wheat growing areas. Wheat straw will be at a premium.
The Bottom Line (cont.)
Of course, those market variations this year are challenged by the supply disruption within Ontario. It’s hard to hedge a crop, which isn’t there. For many Ontario farmers, the specter of lower yields or unseeded acreage is real. Excellent weather and timely rains and a wide-open fall are what is needed.
The Canadian dollar benefited from better economic data, which helped it gain 2 cents vs. the US greenback over the last two weeks in June. This had the effect of mitigating basis gains in corn, while soybean basis eroded. It continues to be a challenge for Ontario farmers to balance futures prices with a Canadian dollar, which affects basis values in soybeans and wheat.
There are a lot of moving parts in this market. Geopolitics is still boiling with the G20 in the rear-view mirror and a Presidential photo op at the DMZ in North Korea. The USDA also may have some surprises going forward as the June 28th report had a lot of official caveats attached to it. In that USDA report, total principal crop acreage was 309 million acres, which is approximately 10 million acres less than last year. This implied that there are 10 million acres of prevent plant. It should become more apparent as we go into July and August.
2019 will go down as one for the ages. It was the most challenging spring for many farmers across the Eastern Corn Belt and Ontario. It is likely the Ontario corn crop will fall short of supply expectations vs. past years. It is expected to be the same for soybeans unless the weather turns nice thru summer and fall. The challenge for Ontario farmers is to re-adjust once again those marketing plans. Standing marketing orders are always an excellent tool to capture an opportunity. Catching a few breaks helps too. With the rough 2019 planting season in the rear view mirror, new marketing opportunities will surely emerge in our future.