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USDA Market Trends, March 31.

US and World

As April grows older it’s still about COVID-19.  Across the great North American corn belt, many farmers live in states or provinces which are in lockdown with orders to stay home. 

However, growing food on our farms is an essential service and with spring warmth now apparent, the challenge begins to get a crop in the ground.  We know how to farm, but the challenge will come in with our input support network as they try to keep people safe and deliver much needed supplies. 

Almost as an afterthought this year, USDA announced their Planting Intentions report along with the very important March 1st stocks update.

On March 31st, USDA pegged US corn acres to come in at 97 million, which was above the pre report estimate.  If this comes to fruition, it will be the largest corn acreage since 2012. 

Corn acreage is expected to be higher than 2019 in 38 of 48 reporting states.  Soybean acreage came in at 83.5 million acres which was lower than pre report estimates.  Increased soybean acres were in Arkansas, Illinois, Kansas, Michigan, Minnesota, North Dakota, South Dakota and Ohio. 

USDA pegged all wheat acreage at 44.7 million, which was below last year’s record low wheat acreage, the lowest since USDA started recording acres.

U.S. corn stocks on March 1st sat at 7.95 billion bushels, which was down 8% from 2019.  Corn usage from December 2019 to February 2020 was 3.45 billion bushels, up from last year’s 3.32 billion bushels during the same period.  U.S. soybean stocks were pegged at 2.25 billion bushels, which was down 17% from last year.  This was within the trade expectation. 

Soybean usage from December 2019-February 2020 was 1 billion bushels, which was down 1% from the same time last year.  U.S. Wheat stocks were down 11% from last year, pegged at 1.41 billion bushels, about the same as last year.

On April 3rd, corn futures were lower than the last Market Trends report.  Soybean and wheat futures were higher.  May 2020 corn futures were at $3.30 a bushel.  The May 2020 soybean futures were at $8.54 a bushel.  The May 2020 Chicago wheat futures closed at $5.49 a bushel. The Minneapolis May 2020 wheat futures closed at $5.27 a bushel with the September 2020 contract closing at $5.46 a bushel.

The nearby oil futures as of April 3rd closed at $28.34/barrel down hard from the nearby futures of recorded in the last Market Trends report of $31.73/barrel.  The average price for U.S. ethanol on April 3rd in the U.S. was $1.20 a U.S. gallon lower than the $1.46 recorded in the last Market Trends report.

The Canadian dollar noon rate on April 3rd was .7071 US, lower than the .7194 US reported here last month. The Bank of Canadas lending rate was reduced again in an emergency action to .25%.

Ontario

In Ontario, like everywhere else the farming landscape has changed radically.  What’s up is now down and vice versa.  We are all challenged not only to social distance during the COVID-19 time, but to do it in a way where our farms remain as efficient as possible. 

Of course, this has to be done, where everyone is safe and healthy.  It is a tall order, but one which is expected by all players in farm country.

COVID-19 is causing issues, once thought unthinkable.  It has disrupted the supply change not only in the grain industry, but even more so in the livestock and dairy sector. 

Some livestock processing plants have been limited (or closed) in Ontario and Quebec because of employee COVID-19 exposure, which causes obvious angst in this sector. It has also disrupted the dairy supply chain with demand changes, leading to milk being dumped on farms across Ontario.  

This is a huge negative for the Ontario and Quebec agricultural economy and could result in less feed demand.

At the same time, as gas and oil prices have cratered, so have ethanol prices.  That is an aside to the compromised U.S. ethanol complex, which is facing a weakening of regulatory requirements.  Needless to say, all of this affects the Ontario and Quebec ethanol sector.   Some plants emphasize sanitizer, some emphasize fuel ethanol.  There are winners and losers there.  Clearly, demand for Ontario corn is affected and likely reduced significantly, not good for both old and new crop corn prices. 

Old crop corn basis levels are $1.35 to $1.55 over the May 2020 corn futures on April 3rd across the province.  The new crop corn basis varied from $0.88 to $1.40 over the December 2020 corn futures.  The old crop basis levels for soybeans range from $2.92 cents to $3.03 over the May 2020 futures.  New crop soybeans range from $2.86-$2.93 over the November 2020 futures level.  The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on April 3rd were $7.97 for SWW, $8.18 for HRW, $7.97 for SRW and $6.92 for Red Spring Wheat. On April 3rd the US replacement price for corn was $5.34/bushel. 

You can access all of this on the Daily Commodity Report.

The Bottom Line

We are in times not seen before.  Milk being dumped in the US and Canada, gas and oil prices cratering, and stay at home orders rule the day.  Livestock prices have also crashed and that is never good. 

How much negative can we take?  In the past, farmers have said, people will always need to eat.  However, this is likely as close as we’ve come to that and the road ahead is still very difficult.

The cratering in the energy sector has piled on to the negative chain of events affecting markets.  An OPEC disagreement between Russia and Saudi Arabia set off the price crash, which was further exasperated by the stay at home orders, cratering gas demand. 

Ethanol demand has done the same thing, as blending requirements are just that.  If gas is not being burnt, neither is ethanol, which is a huge component of corn demand (39% in the US, about 33% in Ontario.

Estimates vary on how deep corn ethanol demand might be compromised.  15% less ethanol produced in Quebec and Ontario might be the number, as demand from sanitizer helps vs fuel ethanol.  In the U.S., with April 30th slated for the end of COVID-19 shutdown, that may mean 200-280 million lost bushels of corn ethanol demand.  If this continues into August that number might be higher up to 600-800 million bushels of corn demand. 

Simply put, corn prices have a big domestic demand problem with ethanol. Until our economies get back to “normal” and people are driving, this is not changing for the better.

Keep in mind, much of our market action, whether it be in oil, gasoline, ethanol, cattle or hogs is panic selling, where the markets to some extent are driven by emotions and sentiment.  It’s not real, but at the same time, it’s very real and can work both ways.  

Commodity Specific Comments

Corn

The American farmer loves to grow corn, and the USDA pegging 97 million acres substantiates that.  However, this survey was taken in the first week of March, when the world was very different.  In fact, 1-1.5 million acres of corn might have been switched into soybeans since the price drop over the end of March and into April. 

The 97-million-acre corn number is likely the highest we’ll seen all year.  Interestingly, the U.S. reduced stocks numbers were seen as bullish, but may reflect that last year’s corn yield was overstated in the January report and may in fact be much less.  Ethanol demand or lack of is only adding to the bearishness.  However, cheaper prices are good for US exports.

The May 2020 July 2020 corn futures spread as of April 3rd is -.06 cents which is considered bearish.  Seasonally, corn prices tend to trend up into June.  The May 2020 corn contract is currently in the 11th percentile of the past five-year price distribution range, showing just how cheap these prices are.

Soybeans

Soybeans are shifting sands.  Generally speaking, the March 31st report was bullish for beans, albeit those opinions were partly based on a pre-COVID-19 world.  Expect soybean acreage to increase from here on into the June 30th acreage report as corn prices have swooned.  Of course, much will depend on the weather going forward.

Soybean meal has kind of been a demand outlier during this heightened COVID-19 time.  As ethanol has swooned, soybean meal has picked up some of the slack in the livestock feed market.  Argentina, the largest exporter of soybean meal in the world, has seen a 10-13% drop in soybean meal demand partly because of COVID-19 logistic issues at ports.  This has helped US meal demand.  It has helped soybean futures prices, in a time, when ag prices simply want to go down. 

The May 2020 July 2020 soybean futures as of April 3rd is -.0525 cents which is considered sideways.  The nearby May soybean contract is currently priced in the 15th percentile compared to the past 5-year price distribution range.

Seasonally, soybeans prices tend to trade higher into early July.

Wheat

It’s always hard to be bullish about wheat, but prices have been a bit buoyant over the last two weeks as of April 3rd.  Nobody knows for sure, but the top maybe in.  There have been rumblings out of the Black Sea region that Russia may limit exports depending on how bad things get. 

However, that hasn’t happened yet, and the market seemingly doesn’t care.  Despite the lowest U.S. wheat acreage on record, the world still has lots of it. 

In Ontario, a Canadian dollar dipping down to .6816 on March 19th did provide some great cash price opportunities for Ontario wheat growers.  New crop elevator bids of $7.40 were for the taking. 

It serves as an example of that constant trade-off between ag futures and Canadian dollar values.  It was brief on March 19th and standing orders can capture that sweet spot. 

Looking ahead, the same applies. 

The Bottom Line (cont.)

On March 27th the Bank of Canada lowered its overnight target by another 50 basis points to .25%.  This was done as the Bank of Canada attempted to support the financial system and the economy during this COVID-19 time.  It is what it is and that is true for the Canadian dollar as well, which has swooned during this time.  While fluttering around the 75 cent US level for the greater part of 18 months, it now has been fluttering around 70 cents for the last few weeks, briefly dipping to almost 68 cents on March 19th

The U.S. dollar has been stronger as money flows to safe havens, and our Canadian dollar responded accordingly.  Interest rate cuts also make it weaker.  In this uneven financial environment, Ontario cash prices move violently, as soybean and wheat basis levels are largely a function of foreign exchange. 

Volatile cash bids can be tamed thru standing marketing price orders to capture these wild swings.  Eventually, someday, the Canadian dollar will be moving back to 80 cents and beyond.  Finding your place in this mix is very important.  Our foreign exchange risk management remains very real.

On April 6th, OPEC is set to meet again to discuss possible production cuts.  That’s key to the energy sector.  At the same time, it’s been dry in Brazil and Argentina, which will likely cut their production of both corn and soybeans. 

There are also all of those logistic issues related to COVID-19.  In fact, you can almost make an argument that our market’s fundamental factors are taking a back seat, until we get on the other side of a flattened COVID-19 curve.  That battle continues. 

It will remain a challenge for Ontario’s grain farmers.  We know what we have to do. 

However, we have to do it in a manner where everybody uses social distance guidelines to keep everyone along our supply lines safe. 

Contingency plans need to be made.  Along with that, standing marketing price orders for grains remain a valuable tool during this very uneven time.  Markets hate uncertainty, and unfortunately, that’s in great supply now. 

As we move ahead, we’ll hope for better days.  Daily marketing intelligence will remain key.

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