Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
US and World
The 2016 growing season is only a faint memory now as farmers across North America and Europe to plant another crop in 2017. However, the 2016 crop continues to weigh on the grain markets because of its sheer size and scope. Combined that with record crops coming off now in South American fields and you have a huge supply of grain. This has weighed on market prices all winter and it continues to as we head into spring. Grain supplies are huge and as the 2017 spring season begins, market watchers will be musing about if the benign crop weather of the last five years continues.
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On March 9th, the USDA weighed in with their latest supply and demand report (WASDE). It substantiated the huge grain supplies available around the world. The USDA report raised estimates of Brazil soybean crop to a record 108 MMT, which was 4 MMT greater than their estimate in February. At the same time the USDA raised Brazil corn production to 91.5 MMT, also a 4 MMT increase from their last estimate. This is an aside from the rapid planting progress of Brazil's Sahrinha corn crop.
These higher crop estimates of increased global stocks. For instance, global corn ending stocks for 2016/2017 were raised to 3.08 MMT. Soybean ending stocks were also raised by 2.42 MMT for the 2016/17 crop year. The USDA kept 2016/2017 corn ending stocks at 2.32 billion bushels. However, it raised US domestic soybean stocks to 435 million bushels. Global wheat production was also raised 2.83 MMT mainly due to increase crops in Argentina and Australia.
On March 11th, 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 $10.06 a bushel. The May 2017 Chicago wheat futures closed at $4.40 a bushel. The Minneapolis May 2017 wheat futures closed at $5.38 a bushel with the September 2017 contract closing at $5.52 a bushel.
The nearby oil futures as of March 11th closed at $48.49/barrel down from the nearby futures of last month of $53.86/barrel. The average price for ethanol on March 11th in the US was $1.68 a US gallon down from last month at $1.74 a US gallon.
The Canadian dollar noon rate on February 10th was .7427 US down from the .7649 US reported here last month. The Bank of Canada's lending rate remained at 0.50.
In Ontario farmers are getting ready for spring planting, although winter still holds across much of the province as of March 11th. An early spring seems very likely in the American Midwest based on weather and lack of snow cover. However, one never knows about Ontario. Spring weather will help determine the crop mix between corn and soybeans this coming year. Last year's (Agricorp) yields of approximately 168 bu/acre for corn and 46 bushels per acre for soybeans will be difficult to repeat.
In Ontario we had seen the decrease in the Canadian dollar over the last four weeks down to the 74 cent US level. This usually has a direct effect on corn and soybean cash prices. Over this time, we have actually seen basis increases, even while futures prices have retreated. However, like his usual for Ontario corn a decrease in the Canadian dollar does not always translate to a increase in Ontario corn basis. That has been happening over the last four weeks as cash prices remain under US replacement values. It is a classic example of how Ontario corn basis differs from its soybean and wheat cousins when it comes to a declining Canadian dollar.
Despite that, the Canadian dollar remains a pricing wildcard for our cash prices. It has been under pressure because the US dollar has been rising up late. American interest rates are likely headed higher, which will be a stimulus for the American dollar going forward. That scenario does not bode well for the Canadian loonie.
Old crop corn basis levels are $.50 to $1.17 over the May 2017 corn futures on March 11th across the province. The new crop corn basis varied from .75 to $1.08 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.72 cents to $2.80 over the May 2017 futures. New crop soybeans range from $2.59-$2.90 over the November 2017 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on March 11th were $5.18 for SWW, $5.18 for HRW, $5.18 for SRW and $5.76 for Red Spring Wheat. On March 11th the US replacement price for corn was $5.30/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
The story is about supply, big supplies. Going into the March 11th USDA report we heard about flooding in Argentina and Brazil. However, those concerns have been dashed away because South American supplies are not only ample, but in the case of Brazil at record levels. 108 MMT doesn't lie. Our world is awash in grain and it is weighed on prices. Thankfully, demand has been maintained and is in fact growing.
So what happens next? There will be much focus on the March 31 USDA prospective plantings report. Will the United States plant 88 to 90 million acres of soybeans in 2017 potentially adding too big soybean supplies? In the US the crop insurance price for soybeans is $10.19 vs $8.85 a year ago. Clearly, the incentive to grow soybeans is there and the US crop mix going forward will definitely impact our prices in 2017. Will corn acres drop-off? Will soybean acres reach a new planting frontier or will American farmers go back to their default position and plan more corn? These are just some of the questions that will be answered starting on March 31st.
There are other headwinds specifically the value of the US dollar, which may rise on a expected US rate increase. This is always difficult for corn and wheat demand. In addition to this, trade issues between the American administration and Mexico and China could still be divisive or American agricultural commodity demand. The situation is tenuous even without looking at the grain fundamentals. Sometimes politics can matter.
The USDA did not change US export demand projections for both corn and soybeans. This was somewhat of a surprise because both corn and soybean shipments were running ahead of last year's pace. This will likely be dealt with in future USDA reports, as they might be waiting for confirmation of the first half-year demand figures. Needless to say, those demand numbers are important as world stocks of grain continue to grow.
Commodity Specific Comments
Corn fundamentals are pretty overwhelming especially at a time when Brazil as a record crop and the Safrinha crop is quickly being planted. December corn at $3.86 is not really exciting anybody. It is cheap especially when you look at cash values in the United States and this ultimately will be a boon for increased demand.
Much has been debated in the United States about a increase in the RFS (Renewable Fuels Standard). At the present time there are only rumors of increased ethanol requirements. This is happening at a time when ethanol is quite profitable and exports are strong out of the United States. RINS or renewable identification numbers, which are traded are also part of the conversation.
The May 2000 17 July 2017 corn futures spread his neutral at -.0775 cents as of March 11th. The May corn futures contract is currently priced in the lower 23% of the last five-year price distribution range. Seasonally, over the last three years the market has rallied into late April but on an extended range the market tend down thru August.
Soybeans have been testing support levels and have actually broke through house of March 11th. This is significant always because the funds have been heavy buyers of soybeans and their technical traders. If these technical support levels are breached it would not be unusual for the funds to start selling aggressively. This will need to be watched going into the March 31st USDA report.
Significant to the market is the burdensome supply. An example of this was the huge yield reported by USDA in their report of 108 MMT of Brazilian soybeans. The Brazilian Real remains higher than last year, holding up farmer selling in Brazil. However, this is changing and it may result in more pressure on the market moving forward.
The May 2000 17 July 2017 soybean futures spread is -.0975 cents as of March 11th. The May soybean futures contract is currently priced in the lower 34% of the last five-year price distribution range. Seasonally the market's five-year seasonal index tends to trend up through late June.
Global wheat production was increased in the USDA report as so many countries have had increases in wheat production at a time when US wheat fields have been inundated with very dry weather. The low prices may eventually cure this market, but it is difficult. A higher US dollar will not be friendly to US wheat prices.
The Ontario wheat crop looks to be emerging unscathed into March and clover applications have already taken place in many parts of Southwest Ontario. Cash prices have fallen recently, but are still higher than harvest lows of last summer. The Canadian dollar will remain very key to Ontario cash wheat prices.
The Bottom Line (Cont.)
For Ontario farmers there is much to consider as we look toward spring. Every year is different in our production fields but also from a marketing perspective. The Canadian dollar has created opportunity even though it can be argued it is a bit about price mirage based on the US futures prices. Canadian price optics can fool you. However, that is the marketing environment that we find ourselves in and it is not any different then it has ever been before. The challenge will always be to balance futures price gains with basis levels constantly affected by foreign exchange.
Seasonally, an argument can be made that the selling season for new crop historically has been beneficial from March to July 4th. This should be kept in mind in the next few weeks especially as we face the big US report on March 31st when the USDA releases potential 2017 planting acres. Headlines will matter that day, but they will also matter if the dryness in the American Southwest spreads to the northeast. Headlines can drive futures prices especially with so much fund money interested in commodities.
Of course, the adage that risk management never grows old is true. There is potential four prices to retreat and retreat substantially especially in the soybean complex as they are much higher than a year ago. There are seemingly soybeans everywhere in an argument could be made they are ready to break. Hedge your bets by hedging your crop in a way that you deem appropriate. Spring can always be a very volatile time especially on USDA report days like March 31st.
In this volatile time for pricing Ontario grain, standing orders can be helpful. People that are comfortable with options may also capture risk premium. We are all even no matter where we farm because nobody knows what grain markets will do. We can only consider the market factors and practice our best risk management. Market your grain where you are comfortable and profitable. On March 31st the USDA will have their next big report. A plethora of crop numbers will be released. We need to be ready.