Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
US and World
The new calendar year always represents somewhat of a reboot for farmers. For the most part, the crop has long been harvested and the focus begins to change for another production year. 2016 will go down as one of the best crop years in United States history. It will also go down as year when the big supplies were needed to satisfy a growing demand for agricultural commodities. Needless to say, anytime there are record crops prices tend to be lower, which is exactly what happened in 2016. On January 12th the USDA weighed in with their final estimates on the 2016 crop year.
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The January USDA report is often marked with tremendous price volatility. Final estimates can be explosive especially when the market is leading the wrong way. On January 12th, the USDA actually lowered both US corn and soybean production for 2016. US corn production came in 15.1 billion bushels, which was down 54 million bushels from its December estimate. The final yield was 174.6 bushels per acre compared to 175.3 in December. US ending stocks for 2016/17 were lowered to 2.355 billion bushels, which was down 48 million from last month's estimates. The quarterly stocks for December 1st for corn came in at 12.384 billion bushels. The September to November usage of corn was 4.5 billion bushels, which was up from 4.1 billion bushels at the same time last year.
Soybean production was actually lowered to 4.3 billion bushels down 54 million bushels from last month with a national average of 52.1 bushels per acre. Soybean domestic ending stocks were lowered 60 million bushels down to 420 million bushels. Soybean quarterly ending stocks as of December 1st were pegged at 2.9 billion bushels. This represented a disappearance from September to November of approximately 1.61 billion bushels, which was a 15% increase on the same period in 2015. All US winter wheat planting four 2017/18 came in at 32.4 million acres, which represented the lowest US winter week total since 1909. The 2016/17 wheat ending stocks to use ratio is estimated at 53.3%, which is the largest in 30 years.
On January 12th, corn, soybeans, and wheat futures were higher than the last market trends report. March corn 2017 futures were at $3.58 a bushel. The March 2017 soybean futures were at $10.46 a bushel. The March 2017 Chicago wheat futures closed at $4.26 a bushel. The Minneapolis March 2017 wheat futures closed at $5.82 a bushel with the September 2017 contract closing at $5.61 a bushel.
The nearby oil futures as of January 12th closed at $52.37/barrel down from the nearby futures of last month of $51.90/barrel. The average price for ethanol on January 12th in the US was $1.69 a US gallon up from last month at $1.99 a US gallon.
The Canadian dollar noon rate on January 12th was .7613 US up slightly from the .7497 US reported here last month. The Bank of Canada's lending rate remained at 0.50.
In Ontario winter weather has set in, but is being marked by some mild periods. Winter wheat acres across much of the Southwest and the rest of the province are being exposed to low temperatures. However, it is not like we have not seen that before. One never knows how the wheat will fare until it sees the first warm rays of the sun closer to spring.
The Ontario corn basis has been maintained since last month with the true yield of the Ontario crop becoming very apparent. An average yield between 158 and 164 bushels per acre now seems in the ballpark and this is amazing especially considered some of the dry areas throughout the province in the last growing season. The import basis that we had last summer is long gone and it is unlikely to return until summer. Supplies of Ontario corn look adequate throughout the next few months.
Basis levels will continue to be affected by the volatility in the Canadian dollar especially for soybeans and wheat. Predictions on where it might go are folly especially at a time of the ascension of the Trump administration. However, standing orders are a useful tool to capture unusual basis gains when the loonie is volatile. It certainly has been that way over the last four weeks and it is likely to remain so in the near future.
Old crop corn basis levels are $.55 to $1.20 over the March 2017 corn futures on January 12th across the province. The new crop (2017) corn basis varied from .75 to $1.15 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.40 cents to $2.58 over the January 2017 futures. New crop soybeans (2017) range from $2.30-$2.45 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on January 12th was $4.87 for SWW, $4.80 for HRW, $4.93 for SRW and $6.40 for Red Spring Wheat. On January 12th the US replacement price for corn was $5.23/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The January 12th USDA report reinforced the huge record crops we saw in American fields in 2016. This came as no surprise as its been dialed in for quite some time over the last several months. In fact, an argument could be made this report offered some hope because despite these record crops, we continue to see record demand for grain and prices are not completely underwater.
Soybeans have been the commodity star among the three big grains. With the March soybean futures currently at $10.46 as of January 12th, it offers profitable opportunities for farmers. In fact, in many ways it has helped the corn futures price from drifting lower. At a certain point as we move toward spring there will be a reckoning. Do American farmers plant soybeans or corn? Prices will need to adjust, corn higher or soybeans lower.
The US dollar has lost value lately, but is still high as of January 12th at 101.18 on the US dollar index. The Trump rally has waned, but this will need to be watched closely post January 20th as the new administration takes power. If the United States continues with good economic growth, it is entirely likely that the US dollar turns around and goes higher, which will act like a brake on commodity demand.
Weather in Argentina and Brazil continues to be a major factor for corn and soybean prices. Flooding in Argentina and sporadic dry areas in Brazil may yet impact crop development in those countries. This is particularly acute in January and February. If benign weather continues the rest of the way, expect record crops from South America. This will continue to keep a burdensome supply alive.
Commodity Specific Comments
The USDA report was good for corn, because it wasn't overly bearish, production levels lowered instead of getting hit over the head with another higher yield number. Corn demand remains very strong. The corn soybeans ratio between 2.6-2.7 favours soybeans. This will likely change at some point as we head toward spring. Farmers need to be ready with standing orders for corn.
Ethanol demand is at record levels, up 25 million bushels in the latest USDA report. American exports to Canada and Brazil are a large part of this ethanol demand and will likely remain so in 2017. It is not 2008, when ethanol demand needed to grow. However, ethanol demand remains a great "constant" within the corn demand equation.
The March 2017 May 2017 corn futures spread is neutral at -7 cents. The March contract is currently priced in the lower 15% of the last five-year price distribution range. Seasonally old crop futures tend to trend up through mid March.
Soybeans in the US are priced at profitable levels now for many US producers. It's often that December/January market action can be a high and it's one reason why some US analysts are thinking a lot more soybeans acres in 2017. US crop insurance will weight on these decisions.
Winter wheat acreage is the lowest since 1909, which is a very long time. How will these acres be shifted in the 2017? Soybeans are likely to pick many of them up. For the most part, it's likely these new soybean acres may come from the fringe states and not the I-states where corn is king. In the meantime, we've still got that record Brazilian crop growing in the field. Their harvest will start soon. Eyes on Brazil weather will remain key for our old crop market prices.
The March 2017 May 2017 soybean futures spread is neutral at -9.25 cents. The March soybean contract is currently priced in the lower third of the last five-year price distribution range. Seasonally, the old crop soybean market tends to trends sideways throughout January but the new crop November contract tends to trend down into February.
Chicago wheat has been higher of late. However, stocks to use ratios are up to 60%, which is not good for prices ahead. Spring wheat with high protein has been the market leader and a bit of a star lately closing in on $6 futures.
These higher wheat futures prices have helped Ontario cash prices reach almost $5 dollars a bushel at terminals. However, these price levels still don't bode well for Ontario wheat farmers. Pricing wheat under the snow can be risky. However, as we go through winter, daily market intelligence will be key to seizing on price opportunities.
The Bottom Line (cont.)
As we move ahead, the new Trump administration will certainly set the agenda for market action in the near term. Aside from South American weather, any dust up with China over trade could upset American soybeans exports to China. The negative tangible effect of that possibility would weigh on soybean futures. It's all a theory now, but something that has been on the horizon since the election.
The US dollar will be impacted from this, just how is another concern. The higher US dollar has acted as a brake to commodity demand. The post election Trump rally and subsequent "Trump dump" has been an example of how fickle politics can play on the value of the US dollar. US wheat demand is greatly affected by this high US dollar value. Much will depend on US economic growth going further into 2017 and how the Trump administration plays out.
As the US dollar goes usually the Canadian dollar is in an inverse direction. That is the continued challenge for Ontario farmers. Cash prices for wheat and soybeans especially can jump on a volatile loonie. It happens quickly. On December 28th the loonie bottomed out at .7360 US, just two weeks later hit .7680 US. The weeks ahead will likely be no different. Standing cash price grain orders can be very useful in this environment.
It is July/August in South America. Weather still plays a prominent role in the health of Brazilian and Argentinian crops, which will be coming on stream soon. Despite that, demand is still growing and is also at record levels. At a certain point there will be a supply hiccup somewhere in the world and prices will have to rise to ration this record demand. For Ontario farmers currently ensconced in the throes of winter, we should never forget that. 2017 is ahead of us and there is still a world of price risk to manage. A firm grasp on these many market factors remains a daily task.