US and World
It is that time of year of rapid growth of crops across the greater American corn belt. Fourth of July corn pictures are being posted all over social media, showing excellent progress. For the week ending June 28th, USDA rated US corn 73% good to excellent and soybeans 71% good to excellent. This is far better than last year as the crop is poised to rack up big yields. However, weather is always the factor that decides it and extremely hot and dry weather has descended over the corn belt. At this critical juncture in crop development, the extent of the dry period will surely weigh on markets.
On June 30th the USDA released their long-anticipated acreage report, which always serves as a litmus test for prices moving forward into summer. On June 30th the USDA shocked the market with a big 5 million acre cut in corn acres from its earlier March report. USDA came in at 92 million acres of corn down from 97 million on March 30th, but still an increase from last year. The USDA pegged old crop ending stocks as of June 1st to be 5.22 billion bushels, which is up 1% from a year ago and above pre report estimates. Between March and May 2020, there was usage of 2.73 billion bushels, which was lower than the 3.41 bbu during the same period last year.
USDA pegged US soybean acres to come in at 83.8 million acres, which was slightly above the March numbers and 10% higher than last year. The USDA put old crop ending stocks at 1.39 billion bushels which was down 22% from last year. This was telling based on the China US trade war raging last year. However, these ending stocks were still above pre report estimates. USDA pegged wheat acres at 44.3 million acres, which was down from 2% from 2019, which again reflects the lowest acreage since 1919.
On July 4th, corn and soybean futures were higher than the last Market Trends report. Wheat futures were lower. September 2020 corn futures were at $3.43 a bushel. The September 2020 soybean futures were at $8.91 a bushel. The July 2020 Chicago wheat futures closed at $4.92 a bushel. The Minneapolis September 2020 wheat futures closed at $5.10 a bushel with the September 2021 contract closing at $5.64 a bushel.
The nearby oil futures as of July 4th closed at $40.32/barrel up from the nearby futures of recorded in the last Market Trends report of $36.26/barrel. The average price for US ethanol on July 4th in the US was $1.57 a US gallon up from the $1.47 recorded in the last Market Trends report.
The Canadian dollar noon rate on July 3rd was .7372 US, higher than the .7355 US reported here in the last Market Trends report. The Bank of Canada‘s lending rate remained at 0.25%.
In Ontario hot and dry weather has inundated the province as of the July 4th weekend. Corn is starting to suffer from the heat, and as usual, there are differing degrees of potential hurt across the province. Eastern Ontario and Quebec have been on the dry side most of the spring. Southwestern Ontario has been not as bad, but with temperatures in the mid 30s with no rain predicted, things dry out fast. Farmers will be looking for timely rains to break this cycle going into mid-July.
Wheat harvest will be commencing across the province this month. Already, as of July 4th, combines have started up in Essex County, with good yields and quality reported. Large parts of southwestern Ontario which didn’t have wheat in 2019 have turned golden, as the crop matures quickly in this July heat.
Basis levels for corn and soybeans have increased since the last Market Trends report. This reflects the increase in futures prices with the Canadian dollar steady in the 73 cent US range. Wheat prices will be in flux as harvest will ramp up into July. Farmers will need to keep abreast of cash offers for wheat not contracted as Ontario wheat market conditions could change if quality does become an issue.
Old crop corn basis levels are $1.35 to $1.55 over the September 2020 corn futures on July 4th across the province. The new crop corn basis varied from $0.90 to $1.40 over the December 2020 corn futures. The old crop basis levels for soybeans range from $2.85 cents to $2.90 over the August 2020 futures. New crop soybeans range from $2.55-$2.77 over the November 2020 futures level. The GFO cash wheat prices for delivery to a terminal on July 3rd the were $6.34 for SWW, $6.68 for HRW, $6.34 for SRW and $6.32 for Red Spring Wheat. On July 4th the US replacement price for corn was $5.42/bushel. You can access all of these Ontario grain in the marketing section at http://gfo.ca/marketing/daily-commodity-report/
The Bottom Line
The USDA report reset the goalposts on this year and certainly changed, albeit just for moment, the psychology of the grain market. It’s been accentuated by hot weather and a three-day weekend, which can always add a little mystery to grain prices, especially coming off a fairly surprising USDA report. Needless to say, these still are bearish times, especially when we consider grain stocks and the considerable crop that is growing in the field.
It’s just not as bearish as it once was. Add the heat and dryness into the mix, and it might just feel more bullish. Keep in mind, the USDA still is showing a gap in acres between 2018 and 2020. Last year, there was approximately 20 million acres of prevent plant. In 2020 they predicted 311.88 million acres of “principal crops”, while the figure in 2018 was 319.3 million acres, a 3.4% gap. Other more minor crops like sorghum, oats, barley, durum, rice and peanuts showed a rise in acreage.
COVID19 is also exploding again in the US southern states, which could further hurt our corn demand. As is, in the week previous to July 4th, ethanol production was down 17% from a year ago and livestock producers continue to have difficulty getting their animals processed. None of these issues are going to go away quickly even with a V shaped recovery. As we move ahead, it will take a major weather scare to keep any buoyancy under corn prices.
Keep in mind for the moment, we’re into a weather market, which are always inherently fickle. Not everywhere is dry and a myriad of factors are already dialed into our futures prices, most of which are those good crop ratings. The 7-10 weather forecasts as we head into corn pollination will hold sway in this market.
Commodity Specific Comments
The USDA did farmers a big favour on June 30th taking 5 million acres off the table. It’s unusual that this happens because the USDA rarely does that. However, keep in mind, the next USDA report comes along July 10th and it is likely to be bearish on the demand side of the ledger.
Droughts or even more so, perceived droughts, which we have as of July 4th are fickle by any estimate. They end on the first rain and that’s what we are into now in many parts of the corn belt. As is, the corn crop looks good and even though its hot and dry, there is still lots of corn around. New crop ending stocks will likely be in the 2.4 bbu range even with less acres being predicted in the US.
The September 2020 December 2020 corn futures spread is currently -10 cents, which is considered bullish. Seasonally, the July 4th weekend and pollination time period are critical for corn prices, then they tend to go lower into October. The current nearby contract is in the 5th percentile of the past five-year distribution range indicating historically cheap prices.
Soybean acres were up in the June 30th report and so was disappearance vs last year. The 83.8 million acres might have been about what analysts were expecting, but it’s 10% more than last year. Soybeans usage between March and May 2020 was 869 million bushels, which further adds to the soybean mountain.
Soybeans have gained recently, especially after the June 30th report pushing the $9 mark. If the hot and dry weather forecasts continue, they could easily go in concert with corn. However, good rains in August usually make soybeans. Sometimes heat can actually be good for them, limiting disease. China has been buying and those Phase 1 commitments are still in our back pocket as we move ahead.
The August 2020 September 2020 soybean futures contract as of July 4th is .0125 cents, which is considered bullish. Seasonally, soybean prices tend to go up through early July and fall into October. Covid 19 may have changed that to some extent. The nearby soybean contract is currently in the 18th percentile of the past five-year distribution range.
Wheat futures prices remain under pressure for familiar reasons. We have too much of it almost everywhere. USDA actually predicted a reduction in the winter wheat crop. USDA pegged wheat stocks to be higher than expected levels, ditto for global stocks. However, it’s not like this is much different for the wheat market over time. There will be wheat futures opportunities and daily market intelligence will remain key.
That goes for Ontario too, as wheat harvest will be commencing across Southwestern Ontario in the next few days. In fact, as stated earlier, its already started in Essex County. Quality concerns will always be a factor for local prices. As we move ahead, local cash wheat markets will need to be scrutinized further in order to capture good opportunities.
The Bottom Line (cont.)
In Ontario, wheat harvest is top of mind. Also top of mind for those Ontario cash wheat prices will be the value of the Canadian dollar currently fluttering in the .7372 US level. No question, compared to the prices our American friends are getting, this has helped. Having a Canadian dollar at par as it was in 2012 would put large negative basis values on grain futures, which is hard for some to imagine in Ontario. As is, the Canadian dollar value is mostly related to the inverse in the US dollar, which remains strong vs other world currencies.
The COVID19 global crisis has helped sustain the US dollar above the rest, as hard currency is what it is. This is likely to continue to happen even as the US continues to set new records for Covid19 infections. The new Bank of Canada governor Tiff Macklem, will continue to work on balancing interest rates and the growth or lack of in our Canadian economy. This year the IMF is expecting the Canadian economy to contract by 8.4%. That’s a huge number not seen since the 1930s and one, which will continue to be negative for the Canadian dollar.
The next USDA report will come out on July 10th and I expect it to be bearish, extolling the disappearing demand for both corn and soybeans over the last few months. It should also set 2020-21 carryover closer to 2.4 billion bushels of corn, lots to go around. However, it is very likely that weather reports will take over into the news few days and weeks. Remember, this is not 1988 or 2012, but 2020, where things look much better. Needless to say, it’s a fluid situation on price.
As we move ahead into July, have those standing marketing orders set. Weather markets can go either way, depending on whether mother nature decides to play nice. All our geopolitics games are still in play, China continues to buy US agricultural commodities under its phase 1 agreements. That is always a chronically touchy subject, especially in an American election year. The challenge for Ontario grain farmers is to keep your eye on daily market conditions. Risk management never grows old. The road ahead will surely have many time sensitive marketing opportunities.