US and the World
It can be an explosive time in the grain markets. Across the greater US corn belt corn, soybeans and wheat are showing great variability as we head into July. Historically, the July 4th weekend has always served as a market flashpoint as crops start to develop quickly and summer weather makes its impact. The June 30th USDA planted acreage estimates and quarterly stocks report also impact the market at this critical time. In 2017, we are here again and once again the USDA did provide some surprises for market action.
In their June 30th USDA report many market observers were musing that US soybean acres may overtake US corn acres planted. However, that was not the case as USDA predicted US corn planting at 90.89 million acres and US soybean planting coming in at 89.51 million acres. US corn acreage is down 3.11 million acres from last year. The US soybean acreage was approximately 440,000 acres below pre report estimates, but still 7% higher than last year. All wheat acreage came in at approximately 45.66 million acres, which was the lowest since the USDA began keeping records in 1919.
The June 30th USDA report also gives important quarterly stocks information on old crop. The USDA pegged the June 1st quarterly corn stocks at 5.225 billion bushels, which was higher than expected, 514 million bushels higher than a year ago. However, the second quarter disappearance was 3.4 billion bushels, which was up 290 million bushels from the same time last year. The soybean quarterly ending stocks totaled 963 million bushels, which was below trade expectations, but up 11% from last year. All wheat stocks were projected that 192 million bushels, which was 3% less than a year ago.
On July 3rd, corn, soybeans wheat futures were higher than the last Market Trends report. September corn 2017 futures were at $3.88 a bushel. The July 2017 soybean futures were at $9.70 a bushel. The July 2017 Chicago wheat futures closed at $5.45 a bushel. The Minneapolis September 2017 wheat futures closed at $8.16 a bushel with the September 2018 contract closing at $6.77 a bushel.
The nearby oil futures as of July 3rd closed at $47.07/barrel up from the nearby futures of last month of $45.83/barrel. The average price for ethanol on July 3rd in the US was $1.72 a US gallon down from last month at $1.73 a US gallon.
The Canadian dollar noon rate on July 4th was .7695 US up from .7433 US reported here last month. The Bank of Canada’s lending rate remained at 0.50 %. That may change July 12th with an anticipated rate increase.
Statistics Canada released their estimates of Ontario soybean and corn acreage June 29th. This year they project that Ontario farmers planted 3.1 million acres of soybeans, which is up 13.5% from last year. Statistics Canada also estimated that Ontario farmers planted 2.1 million acres of corn in 2017 an increase of 4.7% from last year. In Québec, the soybean area increased 22.5% from last year to 983,500 acres in 2017. Grain corn acreage also increased in Québec to 939,000 acres, which represents an increase of 5.6% over last year. Interestingly, Western Canadian soybean production continues to grow. Saskatchewan soybean acreage was pegged at 850,000 acres, a 254% increase over last year.
The Canadian dollar has been robust over the last few weeks currently fluttering around the $.77 cent level US. This has softened basis for soybeans and wheat in Ontario. The corn basis has also softened across the province except for Eastern Ontario where basis remains higher. The crop is variable across the province, as heavy rains have inundated many areas especially east of London, Ontario to the Québec border. However, other areas in the deep South West of Ontario have seen dry conditions. Projecting yield at this point might be premature especially considering what happened last year. Many producers would certainly welcome more heat and drier conditions.
The wheat crop continues its journey toward harvest with some fields partially harvested as of July 3rd in Essex County. Heads are turning under and this harvest will likely ramp up in the next few days and weeks in southwestern Ontario. Although the wheat basis has been under pressure, increased wheat futures prices have arrived in the nick of time for many Ontario producers.
Old crop corn basis levels are $.65 to $1.11 over the September 2017 corn futures on July 3rd across the province. The new crop corn basis varied from .75 to $1.13 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.10 cents to $2.40 over the July 2017 futures. New crop soybeans range from $1.85-$2.20 over the November 2017 futures level. The GFO cash wheat prices for delivery to a terminal on July 3rd were $6.88 for SWW, $6.82 for HRW, $6.82 for SRW and $9.11 for Red Spring Wheat. On July 3rd the US replacement price for corn was $5.25/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.
The Bottom Line
The June 30th USDA report did live up to its billing as a major market flashpoint. The major thing that it did was dispelling the market psychology of soybean acres outstripping projected corn acres. Still, soybean acres are at record levels, but not as much as expected and summer weather especially in August will largely determine soybean yields. Also too, soybean old crops stocks were less than expected, helping to surge soybean prices higher by 39 cents on June 30th.
The June 30 USDA report gave the market a bullish turn, but it was quickly overrun by the hot and dry weather in the northwestern US plains, where the wheat crop is burning up. Market action has been positive going into Monday, July 3rd with both corn and soybeans going up in concert with wheat. The extended forecast is dry for the Midwest and this is putting together a scenario for higher prices based simply on weather.
It is happening despite some bearish news for corn coming out of the USDA report, which had higher quarterly stocks than expected. This would project an ending stocks figure for old crop corn at 2.387 billion bushels and the ending stocks to use ratio would increase to 16.4%.
The June 30 USDA report may have caught traders off guard with a lower soybean acreage number, but hot dry weather has magnified it. For instance, on July 3 soybeans reach their highest close in three months. Noncommercial traders actually had their largest net short position in soybeans just previous to the USDA report. They were caught and much short covering was taking place. A weather market can do that, proof that nobody really knows where price will go.
Commodity Specific Commentary
We are headed into a critical time for corn in front of the critical pollination period for much of the US corn belt. Key is US yield, which USDA is still projecting 170.7 bushels per acre. The crop has had difficult conditions especially in the eastern corn belt this year and there are many doubters whether that yield is there. However, it is probably still too premature to say.
The run-up in the wheat market may have an effect on corn prices going forward. In the short term, wheat is likely to come out of feed rations helping put stability in corn prices. However, the USDA quarterly stocks were negative for corn, something that should not be forgot even if weather turns hot and dry.
The July 2017 September 2017 corn futures spread is -.105 cents, which is considered bearish. Seasonally, the corn market’s five-year weekly index shows the market trends down thru early October. The July contract is currently priced in the lower 36% of the market’s five-year price distribution range.
The market psychology may have changed regarding soybean acres, but 2017 acres are still at a record level. If we come in at 48-bushels/per acre, ending stocks will still be approximately 445 million bushels, a still burdensome level. The ending stocks to use ratio may be at just over 10%. Needless to say, as we turn the July 4th weekend, the script is not yet written.
The soybean demand picture remains very strong, both for new crop and old crop. In fact, the Q1-Q2 soybean stocks disappearance has been at record levels. Despite the big supplies of soybeans it is only managing to keep pace of world demand dynamics. August rains usually determines soybean yield. We are getting close to that everyday.
The July 2017 August 2017 soybean futures spread is currently at -.0475 cents as of June 30th. This is considered neutral. Seasonally, the soybean markets five-year seasonal index shows the old crop market tends to trend down thru the middle of August. The July contract is currently in the lower 20% of the last five-year price distribution range.
Minneapolis wheat futures simply have been on fire. The drought in Dakotas has accentuated an already short situation created by the lowest wheat acres since 1919. The near vertical rise in these wheat futures has been slow to translate to Chicago until very recently. Prices for wheat tend to top at harvest time in short crop years. Farmers welcome the wheat futures price rise. Wheat will be buying acres this fall.
In Ontario the wheat crop is set to be harvested with some activity already taking place in early July in Essex County. Yield expectations have been tempered this spring, but hopefully that will not be the case. Heavy rains and above normal rainfall in many parts of the province may still impact that yield picture.
The Bottom Line (Cont’d)
The run-up in futures prices has been significant for Canadian cash prices, but with the Canadian dollar gaining five cents US since May 4th, cash prices have not returned to levels seen only a few weeks ago. This is the Canadian pricing conundrum and always our challenge. How do we market our grain in a market environment when the Canadian dollar and futures prices are moving in opposite directions? With the Bank of Canada expected to raise interest rates on July 12th that should be positive for the loonie’s value.
Of course, the loonie’s variability will affect our Ontario basis levels especially for wheat and soybeans. At the present time old crop corn end-users have an ample supply of Ontario corn. Basis levels have dropped into July. Summer weather will impact the new crop basis levels going forward. If the 2.1 million acres predicted by Statistics Canada gets impacted by the same hot and dry present now in the northwestern US plains, look for basis changes.
Looking ahead, not only is Ontario yield important, but also projected USDA yield estimates, which will be announced in mid July and August. Will the dry weather in US wheat country take down US national corn and soybean yield? Or will unexpected rainfall simply make it all a mute point? Summer price movement can redefine volatility. The wheat market is a very good example of that.
It is a critical time in our marketing horizon. In fact, you could argue the time preceding and immediately after the June 30th USDA report and July 4th weekend is the most critical marketing period for corn and soybeans every year. The June 30th USDA changed the narrative. It provided many marketing opportunities not seen in weeks just previous. The incubation of a weather market in US wheat country is doing the same thing. For the Ontario grain farmer, standing marketing orders can help capture these opportunities. It will be an interesting summer. There will be many marketing opportunities ahead.
Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications.