Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
Post-March 31 Special 2017
US and World
March 31 is always a seminal date in the grain price calendar. Each year on this date the United States Department of Agriculture (U.S.D.A.) releases their prospective plantings report for all the major crops. It usually serves as the official starting gun on the new crop year as it refines its estimates for crops about to be planted across the United States. It also can represent a major flashpoint in the market along with June 30 and the January U.S.D.A. report as market volatility is usually accentuated as the market focuses on the U.S.D.A. numbers. Quarterly stocks are also released which always gives a good measurement on old crop demand.
On March 31 the U.S.D.A. announced that farmers were expected to plant 90 million acres of corn, down 4 million acres from last year. On the other hand, the U.S.D.A. announced that soybean acreage would be up 7% from a year ago coming in at 89.5 million acres. The U.S.D.A. also pegged U.S. wheat acreage at 46.1 million acres, which is the lowest recorded wheat acreage in the United States since they began keeping records in 1919. Clearly, there was a major move toward soybeans in the estimates taking away from other crops. The major exception was cotton acreage, which U.S.D.A. projected at 12.2 million acres, which is up 21% from a year ago.
Quarterly stocks for corn were pegged at 8.62 billion bushels, which was up 10% from a year ago. This is reflective of the big crop last year. Usage from December 2016 to February 2017 actually increased to 3.77 billion bushels, up from 3.41 billion bushels last year. Soybean stocks were pegged at 1.73 billion bushels, which were up 13% from last year. The December to February usage was 1.16 billion bushels, which represented a 2% decrease from your go. All the wheat stocks were projected at 1.66 billion bushels, which was up 21% from a year ago.
On March 31st, corn, soybeans, and wheat futures were lower than the last Market Trends report. May corn 2017 futures were at $3.64 a bushel. The May 2017 soybean futures were at $9.46 a bushel. The May 2017 Chicago wheat futures closed at $4.26 a bushel. The Minneapolis May 2017 wheat futures closed at $5.33 a bushel with the September 2017 contract closing at $5.49 a bushel.
The nearby oil futures as of March 31 closed at $50.60/barrel down from the nearby futures of last month of $53.86/barrel. The average price for ethanol on March 31 in the U.S. was $1.74 a US gallon up from last month at $1.74 a US gallon.
The Canadian dollar noon rate on March 31 was .7500 U.S. down from the .7649 U.S. reported here last month. The Bank of Canada's lending rate remained at 0.50.
In Ontario the mild winter has transitioned into a wet and mild spring. Winter wheat acres are now starting to green up across the province even though weather has been cool and wet. As we move into April seed drills will be starting to roll especially on lighter soils and the likelihood of widespread corn planting will start toward the end of the month.
The crop mix in Ontario is unlikely to change in 2017 versus a year ago. Last year we had approximately 2.015 million acres of corn and 2.695 million acres of soybeans in Ontario. With the Canadian dollar creating $5 and $13 new crop pricing opportunities this past winter there should be no shift one way or the other. However, spring weather will largely determine that as corn acres can be reduced by wet and cold springs.
The Ontario corn basis values have decreased into April 1. There continues to be ample corn supply in Ontario for the near future. With the U.S. replacement price at approximately $5.25, and import basis seems unlikely. The soybean basis has also gyrated on the Canadian dollar, but the futures drop throughout March has decreased that value as well. The Canadian dollar will continue to influence our cash price values directly for soybeans and wheat as we move ahead.
Old crop corn basis levels are $.65 to $1.15 over the May 2017 corn futures on March 31 across the province. The new crop corn basis varied from .75 to $1.15 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.49 cents to $2.60 over the May 2017 futures. New crop soybeans range from $2.40-$2.61 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on March 31 were $4.93 for SWW, $4.93 for HRW, $4.93 for SRW and $5.64 for Red Spring Wheat. On March 31 the U.S. replacement price for corn was $5.25/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The U.S.D.A. always resets the goalposts on market conditions and they did that again on March 31. The 89.5 million acres of soybeans was slightly higher than trade expectations and reflective of a positive soybean to corn ratio throughout the winter. If we use last year's yield, we can expect 4.6 billion bushels of soybeans, which is 400 million more bushels than projected demand. When you add the large crops coming from South America this is a heavy burden for the soybean market to bear. Prices fell after the report on such a bearish scenario.
The corn market on the other hand rebounded from the March 31 U.S.D.A. numbers. The 90 million acres of corn predicted by the U.S.D.A. was somewhat less than expected. If we yield the same as last year on those acres we will produce approximately 14.4 billion bushels of corn. This is approximately 200 million bushels above the early estimate for corn demand in 2017/18. his is one reason why corn rebounded on the news, but it's all still relative to the big stocks in corn in the United States as well as South America.
It should also be noted that the quarterly stocks were large, partly because of the big crops from last year, but also demand is not quite as strong as the hype around it. For instance, U.S. soybean demand is down from a year ago. The quarterly corn stocks were higher than expected, but still reflected a new corn demand record high of 8.32 billion bushels. These numbers will need to be watched closely over the next eight weeks for possible demand variance. In the corn market there is increased competition from Brazil this year. In the soybean market, there are just a lot of soybeans everywhere.
It is all so rudimentary. It's like it's over before it's even started. That's how the March 31 U.S.D.A. report is sometimes looked at. However, there is a world of production risk ahead in the northern hemisphere. There will likely be some type of the summer rally because there always is. Weather in the northern hemisphere will be a large determinant of whether this comes true. History tells us there is always a correction, but it may not be this year. Needless to say, it will come.
Commodity Specific Comments
90 Million acres is down from last year, but it still represents a lot of corn when there are old crop stocks plentiful on the ground. Demand is very strong at 14.6 billion bushels. That means with an approximate trend line yield of 170 bushel/acre in 2017, corn-ending stocks would be down to 1.8 billion bushels. If you went down to 165, we'd be near 1.5 billion bushels. Clearly, any production hiccup this summer would help corn prices.
There generally is a change in the acreage prediction on March 31 and June 30. Sometimes this can result in a 1 million acre increase in corn. These numbers are fluid because weather is 80% of market prices. Farmers have the capacity to plant incredibly quickly, so acres on June 30th and summer weather hold the key.
The May 2017 July 2017 corn futures spread is -7.5 cents as of March 31, which is considered neutral. The May corn contract is still priced in the lower 14% of the five-year price distribution range. Seasonally, the corn market tends to trend down through August. Last year the high was hit in mid-June.
Soybean acres were the big winners in the U.S.D.A. March 31 report. 89.5 million acres are a lot of soybeans and it would've been even larger if there were not a 12% rise in the number of cotton acres predicted. Some of the soybean acres came from reducing corn acres, but the big move was from wheat states Kansas, Oklahoma, North Dakota and Minnesota and winter wheat states.
Of course the soybean price is down significantly with cash values now in Ontario below $12 a bushel. The Brazilian soybean crop continues to grow in size. Soybeans are often called the great liars, as their production potential always looks fickle until combines roll. It is hard to imagine a weather event in April that will reduce the potential crop. However, this is agriculture and anything can happen.
The May 2017 July 2017 soybean futures spread is $-.11 per bushel as of March 31. The May contract is currently priced in the lower 26% of the five-year price distribution range. Seasonally the markets five-year index shows the old crop market tends to trend up through late June.
In United States farmers are growing the least wheat acres since 1919. This is reflective to some extent of the market share American farmers have lost in the wheat market worldwide. With increased production in places like the Black Sea region, it is difficult to imagine our American friends getting this back. Wheat stocks remain very onerous even with these reduced acreage projections. It will take a catastrophic black swan event to change this market.
In Ontario, one of the first tasks out of the gate in spring is side-dressing nitrogen to the wheat crop. This surely will be happening as things dry up into April. Acres usually change to some extent, but I would not expect much decrease from the approximate 900,000 Ontario wheat acres this year.
The Bottom Line (Cont.)
The value of the U.S. dollar has risen in the last few days of March, but fell off its highs from earlier in the month. The increase in interest rates in the United States is likely to continue and although it is hard to predict the value of the U.S. dollar, it will remain very important for our agricultural commodity prices. Any rise in the value of the U.S. dollar will be negative to grain futures prices.
This U.S. dollar at approximately 100 on the Index is having a corresponding effect on other currencies in the world. For instance, the Russian Ruble and Chinese Yuan are still fairly weak. The Brazilian Real has rebounded off its lows but still very low. These foreign exchange gyrations impact farmer selling in Brazil, foreign demand for Russian wheat and Chinese buying power. These factors, to say nothing about how it affects the Canadian dollar, impact our agricultural commodity demand.
It is almost like a broken record or like the 6:00 am wake-up call in the movie Groundhog Day with regard to the Canadian dollar. Fluttering around $.75 continues to create the cash price mirage of heightened prices here in Ontario. That accelerates when grain futures prices are rising, but in the current environment of falling futures prices it accelerates downward. It's all part of pricing grain on farms in Ontario. It continues.
The marketplace is not immune from any black swan event in the coming weeks. The March 31 U.S.D.A. report has set the table for the immediate grain pricing future. However, geopolitical events could also weigh in on this market. Political uncertainty between the U.S. and China and others always has to be measured. Clearly though, large grain supplies and projections have forged a bearish market environment. In Ontario this has been partly mitigated by a low Canadian dollar, which continues to challenge our on farm-marketing environment. There will be a U.S.D.A. retrenchment on June 30 with surveyed actual acres planted. The market surely will be volatile heading toward there. Daily market intelligence remains key. •