Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
US and World
One of the biggest harvests in US history is coming to completion. As of November 7th, 91% of US corn has been harvested and 94% of soybeans. The 2016 growing season has been one of the best in years in the United States and the big crops are proof of that. Grain futures prices have been somewhat resilient in this atmosphere, holding their own with grain piles everywhere. On November 9th, the USDA weighed in with their latest WASDE report.
Listen to the Market Trends Podcast
On November 9th, the USDA raised yield expectations for both corn and soybeans. USDA is now expecting corn production to come in at 15.2 billion bushels. This was on a higher estimate of 175.3 bu/acre. This is the highest corn production on record. The total US ending stocks for corn were pegged at 2.4 billion bushels. The USDA also increased world corn production by 4.84 billion bushels citing increases in Ukraine and Russia.
The USDA also raised soybean production to 4.36 billion bushels on a estimated yield of 52.5 bushels per acre. This is another record crop. US domestic soybean ending stocks were increased to 480 million bushels, which was 85 million more bushels than the October report. USDA also bumped up global stocks were 2016/17 to 4.17 MMT. There was little change in the wheat situation from October. US production was capped at 2.31 billion bushels.
On November 11th, corn and wheat futures were lower and soybeans nearby futures prices were higher than in the last Market Trends report. December corn 2016 futures were at $3.40 a bushel. The January 2016 soybean futures were at $9.86 a bushel. The December 2016 Chicago wheat futures closed at $4.03 a bushel. The Minneapolis December 2016 wheat futures closed at $5.13 a bushel with the September 2017 contract closing at $5.41 a bushel.
The nearby oil futures as of November 11th closed at $43.21/barrel down from the nearby futures of last month of $50.35/barrel. The average price for ethanol on November 11th in the US was $1.80 a US gallon up from last month at $1.79 a US gallon.
The Canadian dollar noon rate on November 11th was .7421 US up slightly from the .7594 US reported here last month. The Bank of Canada's lending rate remained at 0.50.
In Ontario harvest has being progressing well with a large majority of the soybeans harvested as of November 11th and much of Ontario corn. There has been some delay in the harvest of IP soybeans in deep southwestern Ontario as dry down has been elusive. However, soybean yields have been very strong across the province. There is some credence being given to the dryness early in the growing season lessening disease pressure with rains coming in August. It is likely that Ontario will have an above average soybean yield for 2016.
The corn crop has exceeded expectations so far in Ontario. Dry weather did have a significant impact in Niagara and other parts of central Ontario with lower yields. However, corn yields have been better than expected in many areas where dry weather had manifested itself. In fact, it is very likely that the Ontario corn yield will be in the range of 155-160 bushels per acre giving us much more corn that originally had been expected. This has put the Ontario corn basis on the defensive. What was thought to be a year of constant import basis has changed. Corn is being exported out of Hamilton and Prescott. There is still a small amount of corn being imported. However, this is far from the short crop that was expected before combines started to roll. The corn basis has dropped and may come under renewed pressure is more corn as harvested.
There has been some localized vomitoxin concerns, but this is not widespread especially east of Highway 400. In fact, almost every year there are concerns in 2016 can be classified as that. Yields, in fact, have been surprising to many farmers who had their expectations lowered because of the dry summer.
Old crop corn basis levels are $.85 to $1.30 over the December 2016 corn futures on November 11th across the province. The new crop (2017) corn basis varied from .80 to $1.02 over the December 2016 corn futures. The old crop basis levels for soybeans (for the crop now being harvested) range from $2.55 cents to $2.75 over the January 2017 futures. New crop soybeans (2017) range from $2.60-$2.75 over the November 2017 futures level. The GFO cash wheat prices for delivery to a terminal on November 11th was $4.71 for SWW, $4.64 for HRW, $4.71 for SRW and $5.69 for Red Spring Wheat. On Nov 11th the US replacement price for corn was $5.07/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
It has been an incredibly wild time in the markets as of mid-November. Of course, the big flashpoint in market action was the US presidential election on November 8th. Polls have suggested that Hillary Clinton would be elected President and markets were responding accordingly in the lead up to the vote. However, when that didn't happen volatility was extreme on election night with stock futures and agricultural futures bouncing up and down. This was accentuated the next day by a very bearish USDA November market report.
In the crosshairs was the value of the US dollar. Trump victory was looked at as bearish for the US dollar. However, the opposite happened after the Trump victory with the US dollar going up sharply. At the same time the Brazilian and Canadian dollar dropped. When the USDA announced even bigger crops, agricultural futures prices retreated once more. Looking ahead past November 11th, expect much more volatility as news about the intentions of a Trump administration becomes more clear.
Demand has been so strong for both corn and soybeans. This post Trump election rally in the US dollar will have a negative effect on that. For instance, at the present time with the US dollar rallying, the Brazilian Real is going down, which will make Brazilian soybeans much cheaper to the Chinese. This may have the effect of reducing demand sharply especially if the US dollar goes above par on the index. It may also be affected by the US Federal Reserve raising interest rates in December or January. This will be positive for the US dollar and negative for agriculture futures prices.
The story in grains this year has been overshadowed by the Trump victory in November. However, that story is still real and it is the one of grain surpluses. If the November 9th USDA report said anything, it was how huge the crops are in the United States this year. 15.2 billion bushels of corn and 4.361 billion bushels of soybeans are record, almost science-fiction like in its breadth. This will surely weigh on futures prices into the New Year.
Commodity Specific Comments
Mexico is a major buyer of US corn and with the election of Donald Trump, there is much nervousness in the corn economy. For instance, in the week ending November 11th, the Mexican peso fell 7% against the US dollar. This will make it harder for Mexico to import US corn. More clarity regarding President-elect Donald Trump's NAFTA policy may make the situation more tenable.
At the same time this is happening corn is being planted in Brazil with favorable weather so far. With so much corn on the ground in the United States, more pressure from Brazil will not be welcome. Monitoring those crop conditions in the next few months may give us some clues to price direction. As it is, US corn exports are up 82% from a year ago. Demand is robust.
The December 2016 March 2017 corn futures spread is -8.75 cents as of November 11th and this is considered neutral. Seasonally corn futures tend to trend down into late November. The December contract is currently priced in the lower 5% of the last five-year price distribution range.
Palm oil demand has been resilient over the last several weeks reaching a new four-year high as of November 11th. This has been good for soybean prices. However, on November 11th soybeans broke down to a three-week low diverging from their palm oil cousins.
This three-week low in soybean futures prices may be reflective of both commercial and noncommercial traders selling with the carry in the market strengthening. This means that there is an abundance of soybeans despite the brisk US export pace. It might create a divergence between soybean futures and basis at many US locations.
The January 2000 17 March 2017 soybean futures spread is -8.5 cents which is considered neutral. The January soybean futures contract is currently priced in the lower 29% of the five-year price distribution range. Seasonally, soybeans tend to go up into December.
Wheat supplies are onerous almost everywhere in the world and the value of the US dollar rising continues to hurt US exports. There are weather concerns in the United States for the wheat that is planted, but we all know it is a long time before anything like that impacts the crop.
It's really difficult to know how much wheat was planted in Ontario this past fall, but there was adequate weather to get it planted. It is unlikely that Ontario will produce over 1 million acres of wheat like we did last year.
The Bottom Line (cont.)
In this market environment Canadian farmers are benefiting from an even lower Canadian dollar at .7421 on November 11th. This continues and it is having a huge effect on cash price optics in Ontario. However, it does not simply translate into higher basis levels especially for corn. In fact, we have seen the Canadian dollar retreat along with the Ontario corn basis in the last few weeks. This is a reflection of the better than expected corn crop in Ontario. Still, the lower Canadian dollar, which generally is the inverse of the US dollar lends itself to higher Canadian cash prices.
Balancing this Canadian Dollar volatility will remain a challenge for Ontario farmers. Where to price the crop based on Canadian dollar value versus futures value is always a challenge. The low dollar is also lending itself to exports, with Hamilton Port and Prescott loading vessels. There should be much focus put on not only the words of President-elect Trump in the next few weeks, but also that of Federal Reserve Chairman Janet Yellin and Bank of Canada governor Stephen Poloz. Interest rates will be the variable that moves, which will have a big effect on our foreign-exchange rates.
While this is happening of course our South American friends are planting their crops. With South American currencies declining against the US dollar this should be positive for planting big crops. Of course, the November 9th USDA report pegged Brazilian soybean production at 102 MMT and Argentina at 57 MMT. Planting weather so far has been benign, so the real possibility of even bigger crops in Brazil loom. This possibility should be offset by the very real possibility of a La Nina weather event cutting into production later in the year.
It is an important time for Ontario farmers to balance all of this market intelligence. The election of President Elect Trump was widely unexpected. However, that fact alone caused many market flashpoints over the last few weeks and it will likely change agricultural trade moving ahead. This combined with big crops in the United States and our foreign exchange volatility will certainly be affecting Ontario cash grain prices into December.