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Special Edition – Market Trends – USDA Report March 31, 2022

US and the World

    Spring can represent many things to many people, but to farmers usually it represents a new optimism of the season ahead. There is also an anticipation to get back on the land and that is certainly there in spades in 2022. It’s been a spectacularly volatile grain market over the last month as war has continued to rage in the Ukraine.  This is certainly challenged producers all across North America as they prepare for their planting season. The starting block on new crop pricing always gets a boost on March 31st of every year as USDA releases their prospective plantings report.  Typically, it can be an explosive day for the markets with the plethora of numbers released by the USDA. How many acres are we going to plant this year and how much grain is in the bin?

     On March 31st USDA answered that question by estimating that U S farmers would plant 91 million acres of soybeans, which is a new record while corn acreage was forecast to fall 4% from last year to 89.5 million acres. This was a surprise to the market, relatively bullish for new crop corn, while relatively bearish for new crop soybeans and neutral for new crop wheat.  The USDA pegged all wheat acres at 47.4 million acres which is up 1% from last year, but still the fifth lowest of all wheat planted acres since records began in 1919. 

     Quarterly corn stocks as of March 1st, 2022, totaled 7.85 billion bushels which was up 2% from last year, but slightly less than what was expected from pre report analysis. The soybean quarterly stocks as of March 1st totaled 1.93 billion bushels which was up 24% from a year ago. All the wheat stored in the United States as of March 1st totaled 1.02 billion bushels, which was down 22% from a year ago. All of these positions were within range of many pre report estimates. 

     The USDA report surprise was mainly in the lower corn acreage number. It was the lowest corn planting in five years at 89.5 million acres and the market reacted accordingly. New crop corn futures took off while new crop soybean futures dropped on the day.  Wheat continues to trade off the volatile situation created in the Ukraine. As it is, the corn and soybean ratio has changed greatly since March the 1st and we could see higher corn acreage numbers come the final planting report on June 30th.

       On April 1st, corn, soybeans and wheat futures were lower than the last Market Trends report.   July 2022 corn futures were at $7.28 a bushel.  The December 2022 corn futures was $6.55.  The July 2022 soybean futures were at $15.66 a bushel.  The November 2022 soybean futures were at $14.06.  The July 2022 Chicago wheat futures closed at $9.84 a bushel. The Minneapolis March 2022 wheat futures closed at $10.64 a bushel with the September 2022 contract closing at $10.40 a bushel.

     The nearby oil futures as of April 1st closed at $99.27/barrel down from the nearby futures recorded in the last Market Trends report of $109.33/barrel. The average price for US ethanol on April 1st in the US was $2.45 a US gallon, up from the $2.53 last month.

     The Canadian dollar noon rate on April 1st was .7992 US, higer than the .7862 US reported here in the last Market Trends report. The Bank of Canadas lending rate remained at 0.50%.

Ontario

     At the end of March, beginning of April there was a little bit more field activity across Ontario.  Producers were applying clover seed on frosty mornings or overnights. There was also some frost seeding going on across some pockets of the province of hard red spring wheat. However, the warm weather is still elusive in this early spring and field activity is yet to ramp up. However, that will change very shortly. 

     World events have certainly changed the market dynamic globally, but also within Ontario. Futures prices have generally led the price direction over the last couple of months compared to what basis levels have done. For instance, there is general pressure on truck and freight traffic throughout the system resulting in increased costs, which will need to be passed on.  For instance, the cost of diesel fuel over $2 a liter going into trucks moving grain certainly has a big impact on the cost of grain movement. This will be reflected throughout Ontario and Quebec throughout spring.

     Of course, the Canadian dollar will continue to have an effect on basis values to producers and it is risen lately almost back to the 80-cent level as of April the 1st.  Generally speaking, this has meant the soybean basis has dropped with the futures price drop and corn has stayed the same or slightly increased based on the futures price increase. In this volatile grain market standing marketing orders put in advance can be very helpful to capture the cash price one desires.

      Old crop corn basis levels are $1.45 to $1.81 over the July 2022 corn futures on April 1st across the province.  The new crop corn basis varied from $1.15 to $1.40 over the December 2022 corn futures.  The old crop basis levels for soybeans range from $3.75 cents to $4.10 over the July 2022 futures.  New crop soybeans basis levels range from $2.90-$3.05 over the November 2022 futures.  Ontario SRW wheat prices are in the $11 range with new crop for this year currently fluttering near $11.07 across the province.   On March 11th the US replacement price for corn was $9.28 /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 are looking at a spring planting season which is more important than ever to sustaining global agricultural commodity supplies. Grain stocks are lower than normal, but they are also more threatened than usual because of the war in Ukraine.  The unpredictability of that war has made markets prickly. It has made it exceedingly difficult to base decisions on market fundamentals especially when it comes to the wheat market.

     This certainly could lead to food shortages in some parts of the world like North Africa where the Black Sea wheat is incredibly important to satisfying food demand. At the same time, it means that the 91 million acres of soybeans and the 89.5 million acres of corn estimated by the USDA to be planted this year is incredibly important. The world needs all of that and more to satisfy the demand especially in the light of war in the Ukraine. Predicting their output at this point is a mugs game.

     This is all taking place in an inflationary environment which makes things more difficult and challenging. For instance, we have seen the price of oil drop recently based on a release from US oil reserve.  Another factor in the general inflationary environment farmers find us in. This is reflected in our markets in higher prices, but at the same time will likely continue to evolve with the geopolitical situation.  Sanctions on Russia are difficult for Russians, but they also have implications for the rest of us.

     As it is, part of that inflationary spiral might be the reason that corn acres are down this year because of increases in nitrogen costs, fertilizer in general and fuel.  It is difficult to know for certain, but with showtime almost here for planters to hit the field the rubber is about to hit the road.  Every cob of corn will be needed this year and more.  Where once agricultural demand was always the problem, in 2022 the focus is increasingly on garnering enough supply of almost every agricultural commodity.

Commodity Specific Comments

Corn

     Like many of our commodities corn is in a dynamic situation. For instance, in the second quarter of this crop year the corn usage was actually the greatest that has ever been recorded reflecting such big demand. At the present time we would need to attain 178 bushels per acre U.S. National corn yield to keep corn ending stocks above 1 billion bushels. That’s a tall order with all the weather risk ahead.

     March corn has rallied over a dollar on the futures market since the last day of February, which shows us the dynamism within this market.  Keep in mind that the March 1st intentions reflected in the USDA report may change simply because of the price changes over that time. However, it would be highly unusual in this situation for corn acres to overtake soybean acres going into the next big USDA report in June. Needless to say, planting conditions will have much to say about that. There is certainly a lot of risk ahead in the corn market aside from the reduced production expected out of Ukraine.

     The May 2022 corn futures contract is currently priced $0.13 above the July contract, which is a bullish indication of demand. Seasonally, corn prices tend to peak in early June and reach bottom in October. The nearby May contract decreased down to the 90th percentile of the past five-year price distribution range over the last two weeks dropping from the highest values we’ve seen in nine years.

Soybeans

     Soybeans might not be the bullish story they once were but make no mistake they are still bullish. The South American crop continues to get lower, which is particularly unusual over the last several years. Needless to say, the higher soybean prices had an obvious effect on the USDA estimating soybean acres coming in at the highest ever 91 million acres.

      There is also US domestic demand in the biodiesel sector in the United States which is increasing. Think of it as the ethanol story of 2007 for soybeans in 2022. Even though it might not change the story for soybean demand like it did for corn demand it is still significant.  As we move ahead the world will want all of those 91 million US soybean acres especially considering what’s going on in the Ukraine.

     The May 2022 soybean futures contract is currently priced 16 cents above the July contract which is a bullish indication of demand.    Seasonally, soybean prices tend to peak in early July and reached bottom in early October. The nearby May soybean futures contract is currently in the 82nd percentile of the past five-year price distribution range.

Wheat

     The wheat story continues to surround the problems that we’re seeing with the war in Ukraine.  How much of this price action is fundamentals versus non-commercial players violently adjusting to trading algorithms dialed in?  For instance, do the fundamentals of grain really need a $12.50 cash price in Ontario to get what is needed? The point being is that with war markets violent volatility can be very normal amid the smoke and fog of war. However, it is very difficult to know at this point how it’s going to work out. 

     In Ontario, the next few weeks will likely be the time when we’ll have a true appreciation for how many acres made it through the wet fall and the relatively mild winter.  With cash prices currently in the $11 area and with marketing orders hitting almost close to $13 this past few months it’s certainly a good time to have wheat in Ontario. However, as all Ontario wheat producers know there is still much risk ahead. As it is now, the wheat needs some warm spring weather to continue on its journey.

The Bottom Line (cont.)

    The Canadian dollar has been on the rise since March 15th and has had a big effect on the Ontario basis values for soybeans and wheat especially.  For instance, on March 15th the Canadian dollar was fluttering in the 77 cent US level only to close over $0.80 on March the 31st. With futures values incredibly high during this time the variation in Ontario cash prices can be pretty incredible. Having standing orders set at particular cash values can help producers deal with this cash price volatility. As it is, the Bank of Canada will likely continue to increase interest rates, and this will likely be bullish for the Canadian dollar. This will be bearish for Ontario cash values reflecting that continual management challenge for Ontario farmers to judge grain futures prices versus Canadian dollar value. It’s usually related to the inverse in U.S. dollar value, but it is also reflective of interest rate increases in Canada. We move on, as per usual with our eyes wide open.

      Seasonally, we know that soybean prices tend to bottom out in October and tend to top in July. That might be the case again this year, however it’s pretty clear that soybeans took a bearish hit in the March 31st USDA report.  Or you could argue that the bullish trend has been broken and at least in the short term maybe soybean futures prices are on the downtrend. For instance, the future spread between May and July is still at an inverse of $0.16, but it’s the weakest since February the 25th, which means bullishness is getting less and less.  It just goes to show in an overall bullish market there can be counter points made. Yes, fundamentals will likely win out in the end, but when is that and how much will price be affected?  It’s a long and winding road.

     At the same time the second corn crop (Safrinha) in Brazil is doing well, much better than last year with good moisture. The corn crop in Argentina is not doing as well with the Buenos Aires grain exchange saying that 14% of Argentina’s corn crop has already been harvested.  The hope would be for China to come in and buy some more US corn, but at these elevated levels it’s hard to see. As of April 1st, the price of corn in China at the Dalian exchange was the equivalent of $11.37 a bushel.  Daily market intelligence will remain key to following this South American corn situation.

     The challenge for Ontario grain farmers is to continually monitor these market factors and the risks associated with seasonal tendencies as spring gets warmer. We will soon be talking about weather every day. Sometimes the weather is kind and sometimes the weather is not. That is the case around the world in the different growing regions and with war in the Ukraine, it just makes it so much more important. As we move ahead into later April keeping abreast of planting progress and harvest in South America. Risk management with regard to our marketing plans will continue, it’s just that in 2022 there is so much to think about. There will be many marketing opportunities ahead.       

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