Market Trends

Monthly market trends commentary is written by Philip Shaw, B.Sc. (Agr.), M.Sc.

Market Trends Report for June-July 2016

US and World

The weather is starting to heat up and so is the hype regarding our crop prices. Any time that hot and dry is mentioned now; there will be a proverbial chill in the "uncertainty economy" for grain across North America. As of June 6th, 99% of US corn had been planted and 89% of US soybeans. This is ahead of last year and the past five-year Uyear average. Looking ahead, market prices will continue to adjust to the soybean price bandwagon, which has risen about $3 in futures prices since January. Weather is key going into July like no other time of the year.

The next major USDA potential market mover report is June 30th, when the USDA announces a plethora of numbers including revised acreage figures for corn, soybeans and wheat. However, not to be ignored the June USDA report was released on June 10th giving further fuel to market prices. On June 10th, the USDA reduced new crop ending stocks for both corn and soybeans. The new crop corn ending stocks was pegged at 2.008 billion bushels, which was down 145 million bushels from last month's projection. The new crop corn stocks to use ratio was reduced to 14.23%. The new crop soybean ending stocks number was also reduced 45 million bushels to 260 million bushels. It also lowered the soybean stocks to use ratio for new crop to 6.6%.

The USDA on June 10th reduced the old crop corn ending stocks by 95 million bushels to 1.708 billion bushels. They also reduced the soybean old crop ending stocks to 370 million bushels from 400 million last month. Corn production is still slated at 14.43 billion bushels with an average yield of 168 bushels per acre. Soybeans are pegged to 3.8 billion bushels with the yield projected to be 46.7 bushels per acre. The wheat numbers from the USDA report had everything higher with total wheat production forecast to be 1.51 billion bushels. The winter wheat acreage is forecast to come in at 50.5 bu/acre, which would be the highest yield on record for the United States.

On June 11th, corn, soybeans and wheat nearby futures prices were higher than in the last Market Trends report. The July corn 2016 futures were at $4.23 a bushel. December 2016 corn futures were at $4.30 bushel. The July 2016 soybean futures were at $11.78 a bushel. The November 2016 soybean futures were at $11.62 five a bushel. The July 2016 Chicago wheat futures closed at $4.95 a bushel. The Minneapolis May 2016 wheat futures closed at $5.33 a bushel with the September 2016 contract closing at $5.42 a bushel.

The nearby oil futures as of June 11th closed at $49.07/barrel up from the nearby futures of last month of $46.21/barrel. The average price for ethanol on June 11th in the US was $1.90 a US gallon up from last month at $1.80 a US gallon.

The Canadian dollar noon rate on June 11th was .7852 US down from the .7728 US reported here last month. The Bank of Canada's lending rate remained at 0.50%.

Ontario

In Ontario the crop is mostly planted as of June 11th across the province. There have been some areas where replant has taken place both in corn and soybeans. Many areas of the province have suffered from a lack of moisture the spring, which is good for planting, but not so well for emergence. Eastern Ontario has received much-needed rain after a very dry start. Southwestern Ontario is looking for moisture as of mid-June.

Statistics Canada is saying 2.15 million acres of corn, 2.675 million acres of soybeans with 950,000 acres of wheat in Ontario this spring. Of course there might have been some shifting of acres of soybeans because of their price appreciation over the last six weeks. Needless to say, an Ontario corn crop over 2 million acres will likely continue to mean corn being exported out of the province. Of course, this would be true only if the great assumption of ever-increasing Ontario corn yields greater than 160 bu/acre remains consistent. If there is ever a hiccup year in Ontario corn yields down in the 130-140 range, corn will be imported into Ontario. That can never be negated. Its possibility always exists.

The wheat crop in Ontario looks tremendous, especially in southwestern Ontario with harvest set to begin in early July in Essex County. It is always a challenge to store and transport wheat in Ontario, as quality will always be important. That will be determined as we move ahead depending on weather. The Canadian dollar at .7852 US has helped with current cash prices of SRW in the mid $5.50 range. Wheat basis will continue to be sensitive to the Canadian dollar movement, but also can become very sloppy at harvest time, depending on quality and buyers opinions.

Old crop corn basis levels are .80 to $0.97 over the July 2016 corn futures on June 11th across the province. The new crop corn basis varied from .65 to $0.85 over the December 2016 corn futures. The old crop basis levels for soybeans range from $2.17 cents to $2.60 over the July 2016 futures. New crop soybeans range from $2.25-$2.48 over the November 2016 futures level. The GFO cash wheat prices for delivery to a terminal on June 11th was $7.77 for SWW, $5.60 for HRW, $5.54 for SRW and $6.06 for Red Spring Wheat. On June 11th the US replacement price for corn was $5.72/bushel. You can access all of these Ontario grain prices by viewing the marketing section.

The Bottom Line

Soybean prices have been on fire for the last three months. In fact, you can argue if it was not for soybeans there would be absolutely no life in these agricultural commodity markets. The fundamentals are onerous for all three grains, but soybeans have defied their critics, broke through resistance levels on their way almost to the $12 futures level from a low of $8.60 last March. This is impressive and it only goes to show how volatile commodity markets can be. Last February and March there was really nobody predicting this.

Needless to say, there were butterflies fluttering in the soybean economy that gave birth to this bullish move. Soybean meal has literally been burning up demand. This may come to a crashing end, but the world demand for protein is growing and soybean meal was reflective of this a few months ago. As soybean prices rose the speculative funds got into the market and it had a life of its own, at least till now. Profitable marketing opportunities exist in soybeans.

Of course the soybean price picture did not totally translate to corn and wheat. However, volatility in the US dollar does translate to all three grains. Recently the dollar has increased to 94.561 on the USDX from 93.780 on June 8th. However it was 95.960 on May 30th reflecting its volatile nature. It is still the home for capital to go in this world. With the Brexit vote set to take place on June 23rd, the US dollar may play an even more important role in crop prices as we move toward the big June 30th USDA report.

That is significant, not only for US grain futures prices, but also the value of the Canadian dollar, which is always the inverse of the value of the US dollar. If Britain decides to leave the European Union, money will flow into the US dollar increasing its value. At the same time, this may start a rippling effect throughout the European Union, which may boil currency markets. June 23rd represents a significant day for markets and our corresponding cash prices back here in Ontario.

Commodity Specific Comments

Corn

Corn is in abundant supply with 14.43 billion bushels in the offing. However, it is not an abundant supply everywhere such as southern Africa, where people are going hungry and in Brazil where the damaged Safrinha corn crop is leaving poultry producers trying to source corn. With the July contract trading at $4.23, this is a signal that the market is hinging on the big American crop this summer.

The problems in Brazil with their second corn crop are impacting American export prospects. This only adds to the nervousness in the market. As of mid-June the weather outlook is increasingly influencing the price of corn. Hot and dry weather predicted followed by a widespread rain forecast can make the futures price at this time of year very volatile.

The December 2016 March 2017 corn futures spread is -.05 cents/bushel, which is considered bullish. Seasonally the five-year trend for the corn market is down through mid-August. The July contract is currently trading in the lower 38% of the five-year price distribution range.

Soybeans

Soybeans have been the poster boy for market bulls this spring. Soybean meal has been a big catalyst to the increase in soybean prices despite fundamentals, which are onerous. Also two, investment capital into the soybean market is larger than any time since 2012. This new dynamic has driven the market aggressively.

The Brazil soybean situation is changed with USDA estimating the crop now at 97 MMT, which is down from the much-hyped 100 MMT soybean crop reported earlier. USDA also reported that by the end of their current season, which is in January, Brazil would only have 28 million bushels left. This, of course, is helping the US export their soybeans.

The November 2016 January 2017 soybean spread is currently at .04 cents, which is considered bullish. Seasonally the soybean futures market tends to trend down through early August. The July contract is currently priced in the lower 40% of the five-year price distribution range.

Wheat

The wheat market has tried hard to catch some of the bullishness spilling over from soybeans have a lesser extent corn. However, it is very difficult to move prices higher when wheat supplies just get bigger and bigger. Both old crop and new crop US carryout is higher and getting higher. Global wheat stocks are also growing with China currently holding 46% of the world supply, which is over 4 billion bushels.

These wheat prices have not changed significantly from last fall when Ontario producers were planting their 950,000 acres of wheat. The Canadian dollar has helped significantly with local cash prizes. As we move into July, wheat will start being harvested and local basis will have to be watched daily. Quality is always a concern in the wheat crop and we all have our fingers crossed.

The Bottom Line (cont.)

It is a volatile time mid to late June and early July. The next major market mover will be the June 30th USDA report, which will give us the USDA's opinion of planted acres as of June 1st. The conventional wisdom is there will be a shift to soybeans from the 93.6 million acres of corn predicted in their March 31st report. There will also be a plethora of other numbers released that day, which can shake the market. At that point, we will quickly move into the July 4th weekend where market volatility can be explosive.

Much will have to do with weather and the possibility of heat and drought in the United States. The weather "elephant in the room" over the last six months has been the changeover from El Niño to La Niña. This usually results in drier weather in US growing regions. However, it is predicted to come later this year with many analysts saying it may affect soybeans in August and not necessarily corn pollination in July. With the funds spurring prices in the soybean market presently, the specter of a weather event in August will only add fuel to that fire. However, there are some big ifs here. We look ahead.

In Ontario, the value of the Canadian dollar has been relatively stable at 77 and $.78 US over the last eight weeks. However, it will certainly remain the inverse to the US dollar and continue to affect our cash prices. Basis levels in Ontario for wheat and soybeans are mainly a direct conversion in foreign exchange. The old crop corn basis is likely to stay at the export level going into September. However, the new crop corn basis in Ontario will depend on our production this summer. If we produce over 160 bushels per acre corn as a provincial average, it's likely we remain on the export basis going forward. If there is a production calamity in Ontario where yield drops to the 130-140 level, it is likely we go to an import basis for corn in 2016-2017.

We are reaching a critical period in the next few weeks leading up to the June 30th USDA report for crop marketing. This time period always represents a time of volatile price movement in either direction. Changes in USDA projected acres; yield projection and old and new crop stocks will come June 30th. At the same time currency fluctuations should be apparent. The challenge for Ontario farmers is to market where you are comfortable and profitable. Standing orders can be key to reach price targets. Daily marketing intelligence will remain key.

USDA Reports

The United States Department of Agriculture publishes monthly reports that may be of use to our members.

Report Released
Crop production August 10, 2017
World agricultural supply and demand estimates August 10, 2017

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