Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
US and World
February can be a time of wait and see for grain markets. The old crop has long been tucked away and plans are being made to plant a new crop in North America. In fact, in places like Texas corn planting has already started. The southern hemisphere can dominate the headlines at this time of year. At the present time harvest is fully underway as the world waits to see just how big those southern hemisphere yields are. The grain market ebbs and flows on every little bit of news at this time of year from Brazil and Argentina.
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Market intelligence from South America had been saying flooding in Argentina would reduce their crop and good weather in Brazil would make their record crop even higher. On February 9th the USDA weighed in with their latest WASDE report. The USDA pegged Argentinian soybean production at 55.5 MMT, down from 57.0 MMT estimated in January. However, USDA kept Brazilian soybean production at 104 MMT, the same as their January estimate. USDA also kept Argentinian and Brazil corn production the same from their January estimate at 36.5 and 86.5 MMT respectively.
USDA also lowered US corn ending stocks, but kept US soybean stocks the same from the January estimate. The corn ending stocks were lowered 35 million bushels to 2.32 billion bushels. The corn stocks to use ratio for 2016/17 was projected at 16.1%, which is much higher than the 12.7% at the same time last year. There was no change in the soybean ending stocks of 420 million bushels. US wheat stocks were lower to 1.139 billion bushels, some largest since the 1980s.
On February 10th, corn, soybeans, and wheat futures were higher than the last Market Trends report. March corn 2017 futures were at $3.74 a bushel. The March 2017 soybean futures were at $10.59 a bushel. The March 2017 Chicago wheat futures closed at $4.49 a bushel. The Minneapolis March 2017 wheat futures closed at $5.72 a bushel with the September 2017 contract closing at $5.67 a bushel.
The nearby oil futures as of February 10th closed at $53.86/barrel up from the nearby futures of last month of $52.37/barrel. The average price for ethanol on February 10th in the US was $1.74 a US gallon up from last month at $1.69 a US gallon.
The Canadian dollar noon rate on February 10th was .7649 US up slightly from the .7613 US reported here last month. The Bank of Canada's lending rate remained at 0.50.
In Ontario, it is been a fairly mild and benign winter coming out of January and into February. In fact, much of southwestern Ontario has been snowless over the last month. Winter wheat looks fine in the deep South West of Ontario, but of course you really never know until late March into April. Weather the rest of the way into spring will largely determine how this crop emerges into spring.
The Ontario corn basis has increased slightly from last month, with the exception of a slight contraction in basis in Eastern Ontario. There is ample corn to be sourced across the province and basis is likely to stay at these levels for the immediate future, as the US replacement price for corn as of February 10th is $5.45. Ontario cash prices have a long way to go to approach this level.
The Canadian dollar can always take a whipping by the media in January as some economists post their yearly predictions. This was no different with a few economists predicting a $.65 loonie. However, this is mostly noise to Ontario farmers as the Canadian dollar has gyrated over the last month in a two cent range currently just over $.76 US. It continues to be a stimulus for Ontario cash soybean and wheat prices. As always, farmers need to grasp its importance to cash basis for wheat and soybeans not only for old crop, but new crop too.
Old crop corn basis levels are $.65 to $1.15 over the March 2017 corn futures on February 10th across the province. The new crop corn basis varied from .75 to $1.10 over the December 2017 corn futures. The old crop basis levels for soybeans range from $2.50 cents to $2.62 over the March 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 February 10th were $5.35 for SWW, $5.35 for HRW, $5.35 for SRW and $6.18 for Red Spring Wheat. On February 10th the US replacement price for corn was $5.45/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
Prices are higher. Of course, this is a very good thing to Ontario grain farmers who have watched as our American friends produced record crops last year and the same can be said for what is going on in the production fields of Brazil right now. In many ways, it shows how dynamic demand for these commodities is. Despite record production futures prices have rallied as of late.
Having said that, all of the bearish factors in the grain market are still there. The US corn ending stocks remain the same at 2.32 billion bushels, which is huge and will remain that way until some type of weather-related phenomena takes supply down. Both the US soybean and wheat ending stocks are very high, which should mitigate price rises in the future. For producers that are looking to continue to price new crop, these factors should be carefully taken into consideration.
Still, futures prices have been more buoyant as of late, led by soybeans, where the funds continue to be interested in being long. Farmer selling has been a factor in the United States, although many of the beans have already been sold there. In the USDA report, the Brazilian soybean estimate is 104 MMT, but some private estimates have the Brazil soybean crop at 108 MMT. Simply put, it's another record crop, one of which the market will need to absorb.
Interestingly enough, the vagaries of foreign exchange are weighing in. The Brazilian Real has gained significantly against the US dollar over the last several months and cash prices to Brazilian farmers are now less than they were a year ago. This has made for more reluctant sellers in Brazil with American grain being much more competitive. The US dollar value will continue to be a big factor in this trade
Commodity Specific Comments
On February 10th the March corn contract close was the highest in over seven months as the market has absorbed much of the news from the colossal crop harvested last fall. However, a 2.32 billion bushel corn ending stock doesn't lie and should weigh on corn prices going into the future. Argentina is expecting 23% higher corn output in 2017 and this will surely add to those bearish concerns.
The December contract failed to break $4 on February 10th, finishing at $3.99/bu. However, many producers are looking at new crop projections very closely hoping for the $4.25 range. Much will depend on corn planting in the US this year with projections to drop about 2 million acres. Safrinha corn is now being planted in Mato Grosso Brazil as their soybeans are 45% harvested.
The March 2017 May 2017 corn futures spread was -7 1/2 cents on February 10, which is considered neutral. The March 2017 corn futures contract is currently being traded in the lower 31% of the past five year price distribution range. Seasonally, old crop corn futures tend to trend up through mid-March, while new crop corn futures tend to turn sideways through mid-March.
The February USDA report reduced Argentinian soybean production to 55.5 MMT, but the Buenos Aires Grain Exchange estimated the crop at 54.8 MMT. Clearly, wet weather continues to impact the Argentine soybean crop helping to sustain soybean futures.
In mid-February we also saw a bit of a ray of sunshine from the Trump administration concerning China. After a dalliance with Taiwan earlier, it was reported that President Trump on speaking with Chinese President Xi Jinping had agreed to the one China policy. This certainly was music to American soybean farmer's ears, as China is so important to US soybean exports. Many were concerned the President's earlier political rhetoric toward China might hurt American soybean exports.
The March 2017 May 2017 soybean futures contract spread is at $-.11/bushel, which is considered bearish. The March soybean futures contract is currently priced in the lower 45% of the five-year price distribution range. Seasonally, old crop soybean futures tend to trend up through late June. New crop soybean futures tend to trend up through early June.
The wheat market has also shown signs of life rising significantly on the futures level over the last four weeks. Demand for good quality wheat has been high in the United States and concerns about weather in US wheat growing regions has added to the rare enthusiasm in the wheat market. However, wheat is still banging up against DDG's and corn in the feed market and some of this enthusiasm may be lost over the next few weeks.
In Ontario, producers are hoping that the wheat emerges out of winter with some vitality. Ontario cash prices for wheat have risen significantly because of the futures price rise. The value the Canadian dollar will remain a very important cash price market factor in this market.
The Bottom Line (Cont.)
The February USDA report showed no export changes for US corn or soybeans. It also showed no change in Brazil's corn or soybean crop estimates. Within the same report the USDA said there would be a 4 MMT increase in China's corn demand and a 4.5 MMT decrease in wheat production from India and Kazakhstan.
A big narrative is emerging regarding 2017 acreage. With the reduction in US wheat acres of last year and the profitable new crop US soybean prices now attainable, many are expecting a huge shift in US soybean acres the spring. How many soybean acres will be planted in the US in 2017? Will it be 90 million acres, which would be unprecedented after an 83.7 million acre crop planted last year? Does the corn price need to increase or the soybean price decrease before spring to balance those acres? At the USDA February 23,24th Outlook conference, the first unofficial estimates of acreage will emerge.
Of course, we all know that the American farmer loves to plant corn. Last year, there were 94.5 million acres of corn planted and most analysts are looking at a reduction of at least 2 million acres this coming year. Clearly though, even with 92 million US corn acres in 2017 at trend line yields, there could be even higher ending stocks next year. This will depend on Brazil recapturing lost exports from last year when their Safrinha corn didn't do well. This year's crop is starting to be planted now.
Clearly, there are some pricing opportunities in February 2017 and this will likely continue into the late spring as the various market factors become clearer. In Ontario the low value of the Canadian dollar will continue to stimulate our cash prices. Any spike in old crop futures will be accentuated by the lower loonie. Ontario farmers will continue to have the unique challenge of balancing a Canadian dollar stimulated basis with futures values to their liking. Daily market intelligence will remain strategic. The seasonal nature of these markets needs to be constantly monitored.