Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.
US and World
It is harvest time across much of the United States. After an exceptional growing season American farmers are moving into some of the biggest crops on record. This has led to a decrease in grain futures prices over the summer. Of course, there is always some conjecture and disconnect between crop projections and actual yield. As combines roll in the United States, we will soon see whether some of the big yield predictions are actually as big as predicted.
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On September 12th the USDA released its latest (WASDE) report. USDA estimated corn production is down from their August prediction to 15.09 billion bushels cutting yield to 174.4 bushels per acre. The trade had expected this corn yield cut; in fact, expectations were somewhat lower than this. The USDA also dropped the demand by 25 million bushels lowering the 2016/2017 corn ending stocks to 2.384 billion bushels. The corn stocks to use ratio was reduced slightly to 16.5%.
While the corn yield was reduced in the USDA report, soybean production was raised 41 million bushels to 4.2 billion bushels with the average yield 50.6 bushels per acre. This is significant as it's the first time US soybean yield has broke through the 50 bushel per acre benchmark. The USDA lowered old crop ending stocks by 60 million bushels to 195 million bushels. The new crop ending stocks were increased by 35 million bushels to 365 million bushels. The soybeans stocks to use ratio was increased to 9%. New crop wheat supply and demand estimates were left unchanged from the August USDA report.
On September 16th, corn futures were higher and soybeans and wheat nearby futures prices were lower than in the last Market Trends report. December corn 2016 futures were at $3.37 a bushel. The November 2016 soybean futures were at $9.66 a bushel. The December 2016 Chicago wheat futures closed at $4.03 a bushel. The Minneapolis December 2016 wheat futures closed at $4.90 a bushel with the September 2017 contract closing at $5.30 a bushel.
The nearby oil futures as of September 16th closed at $43.03/barrel down from the nearby futures of last month of $44.49/barrel. The average price for ethanol on September 16th in the US was $1.74 a US gallon up from last month at $1.65 a US gallon.
The Canadian dollar noon rate on September 16th was .7568 US down from the .7725 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.
In Ontario, soybeans are starting to be harvested across the province. Many of these soybeans were ravaged by drought during the very dry growing season of 2016. In the next few weeks soybean harvest will be ramping up across the province and wheat will be planted. Producers will be looking for wide-open weather in October.
The dry summer across Ontario has reduced the Ontario corn yield. Statistics Canada is estimating Ontario corn yield 153.5 bushels per acre. This is down from approximately 170 last year. However, there have been private firms estimate actual yield at less than that, even some below 150 bushels per acre. This is continuing to have an effect on Ontario cash corn basis, which remains that import levels.
Corn is very likely remaining at import levels throughout this fall and winter depending on the amount of corn imported into Ontario. Farmer selling will also probably hold a determination in that. In the triangle area from London, Ontario to Sarnia to Chatham and back to London it's probably some of the best corn in the province. However, almost everywhere else the corn yield is compromised because of dry weather this past summer. As the corn harvest starts across the province there will be a greater indication of the variability in yield. This will very likely affect basis levels during this time. Also, in Eastern Ontario, there might even be some Québec corn move into Ontario as their crop is better this year. It is a fluid situation happening within a new import basis market environment.
Old crop corn basis levels are $1.05 to $1.20 over the December 2016 corn futures on September 16th across the province. The new crop corn basis varied from .90 to $1.20 over the December 2016 corn futures. The old crop basis levels for soybeans (for the crop now being harvested) range from $2.60 cents to $2.70 over the November 2016 futures. New crop soybeans (2017) range from $2.05-$2.20 over the November 2017 futures level. The GFO cash wheat prices for delivery to a terminal on September 16th was $4.60 for SWW, $4.54 for HRW, $4.67 for SRW and $5.19 for Red Spring Wheat. On September 16th the US replacement price for corn was $4.93/bushel. You can access all of these Ontario grain prices by viewing the marketing section.
The Bottom Line
With harvest underway in the United States and about to get underway in Ontario, we should soon get a better picture of crop size. However, it is very clear that both corn and soybeans are looking at record production in the United States. That has put futures prices where they have been since late July. In fact, a low in the corn market may have already been reached on August 31st when December corn reached $3.14 per bushel. Basis levels have responded lower in parts of the United States with harvest already underway. The combines will tell the story. Kernel depth and quality may weigh in adjusting this crop size further.
Of course, a reduction in the corn crop size in the September USDA report can be looked at as bullish to some market watchers. Going further on that vein, USDA may continue to decrease the crop size into January. The October USDA report will be our next indication of whether this is happening.
This soybean yield from USDA on September 12th was indicative of the great August weather, which helped soybeans. In fact, many trade analysts believe that this number may grow into the final USDA report into January. Of course the redeeming feature in this huge soybean yield is the huge demand for American soybeans. In fact, on a global basis soybean demand continues to expand. Soybean futures bounced off the September 1st low of $9.37 a bushel on September 15th in this futures level could serve as a floor for price over the next month.
Wheat continues in its bearish sideways range with burdensome supplies globally. There have been problems in wheat growing areas in France and with frost in Western Australia. However, it will take even more production weather events to change the supply picture. Wheat plantings this fall are likely to be down in the United States based on low prices. This may also be the case in Ontario depending on fall weather.
Commodity Specific Comments
It is hard to imagine corn being anything but bearish with a crop of 174.4 bushels per acre USDA estimated in their September 12th report. However, because it is a reduction from 175.1 bushels/acre, there can be an argument made that it is bullish. However, it is a record corn yield with futures months in a carry situation.
The USDA production drop filtered down into the corn ending stocks number putting it at 2.384 billion bushels, still very onerous in this market environment. This was accentuated by a drop in feed usage, reducing corn usage to 14.475 billion bushels from 14.500 billion last month. Needless to say, that demand figure is huge.
The December 2016 March 2017 corn futures spread is currently at -.1025 cents, which is considered neutral. The December contracts remain priced in the lower 3% of the five-year price distribution range. Seasonally, corn futures tend to trend down through the first week of October.
Soybeans are benefiting from strong export activity in the US, especially at a time when we see a seasonal harvest low usually in October. The September low of $9.37 is now serving as a fairly significant benchmark. On September 16th, soybeans actually rallied $.15 bouncing off the mark. Soybean demand remains insatiable, partly why soybean prices have not totally bottomed out even with a 4.2 billion US crop estimate.
Breaking the 50-bushel mark from USDA (50.6) was also significant for soybeans. What we have is huge supply, but also very huge demand. The market is also inverted, which means that processors and exporters want those soybeans now. In past years with big soybean crops, the yield actually gets bigger as we go into January. That will be something for farmers to consider as we look ahead.
The November 2000 16 January 2017 soybean futures spread is -.0525 per bushel, which is considered bullish. The November contract is currently priced in the lower 20% of the last five-year price distribution range. Seasonally, the soybean futures market tends to trend down through the first week of October.
The situation with wheat remains bearish, as burdensome supplies are seemingly everywhere. Egypt, which has the largest per capita wheat consumption in the world has continually demanded 0% Ergot in their wheat shipments and this has been particularly difficult for their traditional Russian suppliers. Wheat quality is an issue in some parts of the world. For instance there was widespread frost in Australia Western wheat growing regions on the weekend of September 15th. However, small problems in wheat at this point only put a small dent in overall supply. It will take a combination of factors to come together to move wheat prices higher.
In Ontario, its that time of year again when producers will be planting wheat. For producers with drought-ravaged soybeans, it is likely to be planted early. Getting wheat planted before Thanksgiving is always preferred in Ontario. How many acres will be planted this year will be a question going forward. Is likely that Ontario's wheat acreage will be reduced from 2015 levels depending on planting conditions this fall. Those low prices do have their impact.
The Bottom Line (cont.)
In Ontario and in Canada as a whole, the Canadian dollar valued at 75 and $.76 US remains the whole story with regard to cash grain pricing. It is a bit of a mirage as the world's commodities are priced in American dollars, including our farm inputs like fertilizer and fuel. However, in Canadian funds, what we use every day the optics of $12.30 soybeans and $4.30 corn is so different than our American friends. The loonie is not the story, which it was last year, but it is still a key factor in keeping our cash grain prices buoyant.
This of course is affected directly by the value of the US dollar, which as of September 16th had risen to 96.105 index, a two week high. It is unlikely there will be any interest rate hike before the American election in November. However, any rate hike by the Americans will increase the value of the US dollar, which will be negative for grain futures, but also mean a lower Canadian dollar. This relationship with the US dollar and the Canadian dollar is very important to always consider. It gives the best clues on the path of the Canadian dollar and how it affects our Ontario cash grain prices.
The Canadian dollar is one thing that helps Ontario producers, but big demand for grain is the other thing that we can stick in our back pocket. These big supplies without the huge demand would take prices to much lower levels. 14.475 billion bushels of corn is just off the record demand set in August. Soybeans are the same way. At a certain point supply will be impacted, but that demand train will likely continue. When supply is impacted, somewhere in the world, prices will respond back upward.
As we move into Ontario harvest, daily market intelligence will remain key. As the Ontario crop comes off, the true variability of our crop size and quality will come to the fore. Basis variations may reflect local anomalies, but will surely be filled in as grain moves. In the distance is the October USDA report and South American plantings. Both represent significant flashpoints in futures market action. The challenge for Ontario farmers isto continue to measure these market factors. There will be many marketing opportunities ahead.