Market Trends

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

Market Trends Report for January-February 2018

US and World

Winter weather blows across North American farm country as another year has gone and we greet 2018. The 2017 growing season was very uneven across North America, but memories of that are fading. Grain prices have suffered under the specter of big crop numbers that have been projected by both the USDA and private analysts throughout 2017. The January USDA report is always the final report on the crop year that past. On January 12th the USDA released a plethora of crop numbers, which will define the grain marketplace for the coming year.

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On January 12th, the USDA increased 2017 US corn production to 14.6 billion bushels, on a harvested acreage of 82.7 million acres. The average yield was increased to 176.6 bushels per acre, which was 2 bushels above the 2016/17 crop. 2017/18 corn ending stocks were raised to 2.48 billion bushels. Total corn usage was actually reduced to 14.470 billion bushels, down from 14.485 last month. US exports are down and US ethanol corn usage was down from December. Corn stored on December 1 was 12.516 billion bushels, which was above trade expectations.

The final 2017 soybean production came in at 4.39 billion bushels, which was below trade expectations. The national yield was pegged at 49.1 bushels/acre, which was a reduction from the 49.5 bushels per acre in December. On December 1 total soybeans stocks were 3.157 billion bushels, which was up 9% from year ago. The USDA increased soybean-ending stocks for 2017/18 to 470 million bushels. The harvested acreage for soybeans was up 8% from a year ago at 89.5 million acres. The winter wheat acreage was pegged at 32.6 million acres, which is the lowest in the US in over a century.

On Jan 12th, corn and soybeans were lower than the last Market Trends report. Wheat futures were slightly higher. March 2018 corn futures were at $3.46 a bushel. The March 2018 soybean futures were at $9.60 a bushel. The March 2018 Chicago wheat futures closed at $4.20 a bushel. The Minneapolis March 2018 wheat futures closed at $6.12 a bushel with the September 2018 contract closing at $6.21 a bushel.

The nearby oil futures as of January 12th closed at $64.30/barrel up from the nearby futures of last month of $57.30/barrel. The average price for ethanol on January 12th in the US was $1.50 a US gallon up from last month at $1.48 a US gallon.

The Canadian dollar noon rate on January 12th was .7997 US up from .7792 US reported here last month. The Bank of Canada's lending rate remained at 1.0%.

Ontario

In Ontario there has been heavy snowfall in late December and early January followed by rain and unusually mild weather and then back to cold again. It is probably not the best for the winter wheat, but of course it is way too early to tell. There are a few cornfields left in the province with farmers surely looking for the right weather to get those harvested.

Ontario basis levels have decreased since late December and early January. The Canadian dollar rising has had something to do with this in wheat and soybeans. However, the corn basis has decreased to some extent partly because of the big Ontario crop last year. Statistics Canada had predicted 169.5 bushels per acre of corn, but private yields are higher than that. Despite these lower basis levels, Ontario producers are still better off than their American cousins regarding basis.

New Ontario corn demand is in the offing with the proposal from the Ontario government to increase gasoline ethanol blends to 10% by 2020. This is welcome news to Ontario farmers and the environment. Moving to this blend would reduce carbon emissions by 2 mega-tonnes per year. Apparently, that is equivalent to taking 30,000 cars off the roads.

Old crop corn basis levels are $.55 to $.92 over the March 2018 corn futures on January 12th across the province. The new crop corn basis varied from .55 to .85 over the December 2018 corn futures. The old crop basis levels for soybeans range from $1.65 cents to $1.75 over the March 2018 futures. New crop soybeans range from $1.70-$1.80 over the November 2018 futures level. The Grain Farmers of Ontario cash wheat prices for delivery to a terminal on January 12th were $4.93 for SWW, $5.06 for HRW, $4.93 for SRW and $6.33 for Red Spring Wheat. On January 12th the US replacement price for corn was $4.63/bushel. You can access all of these Ontario grain in the marketing section at gfo.ca.

The Bottom Line

Market forces are continuing to substantiate the bearish market environment. The January 12th USDA report brought home the fact that the 2017 corn crop in the United States was one for the ages. In fact, if the planted acres had not fallen so much in the spring, ending stocks would've grown even more onerous. A small bullish glimmer came in a cut to US soybean yield. However, 49.1 bushels per acre of soybeans is still substantial.

In the corn market it is getting serious, if you didn't think so already. It is easy for Canadian farmers insulated with a lower Canadian dollar to forget that. For instance, over the last few years the highs in the corn market have been coming at lower prices usually in the late spring or summer. This is been followed by new lows established in late summer or early fall. 2017 was exactly like that and with 2018 in the offing; minus a weather event lower highs again could be reality.

At the present time the November soybean futures to December corn futures ratio is running near 2.6:1. This favours increase soybean production in the United States versus corn. In fact, this present ratio is slightly lower than last year, but the United States still planted more corn than soybeans in 2017. That is one reason why in the United States it's very difficult to imagine planting less corn versus soybeans in 2018. However, at a certain point, one would think those ratios would become more real. Maybe this is the year, despite corn's great productivity that the planters will stop early.

Keep in mind that cash basis levels in some areas of the United States are largely negative for corn. It is the same, albeit better in Ontario, but still negative in American terms. With our propensity to produce corn in Ontario and our foreign exchange mirage effect on cash prices, sometimes it's easy to forget that. If the trend holds true cash corn prices in the US would be seriously into the sub $3 range. The drive to 300-bushel yields does help, but it is a vicious cycle.

Commodity Specific Comments

Corn

With so much corn on the ground there may be some impetus for changes in the US regarding ethanol. For instance, what about mandated E12 or E15? In some states like Illinois corn ending stocks actually increased and this is led to basis levels, which are moribund. The hurt is real and there will be some soul-searching on planting corn versus soybeans the spring.

That debate will certainly rage over the next eight weeks and it will probably be compounded by crop conditions in South America. At a certain point, it is reasonable to assume that corn might benefit from higher crude prices and a higher commodity index in general.

The March 2018 May 2018 corn futures spread is currently -8.5 cents US as of January 12th. This is considered bearish. Seasonally the corn market tends to trend up through early June. The March contract is currently priced in the lower 9% of the five-year price distribution range

Soybeans

Soybeans have always been characterized by having insatiable demand worldwide. China has certainly been a large part of that. However, in the January 12th USDA report the USDA cut soybean exports lower by 65 million bushels. Hopefully, this is a momentary thing, and soybean exports will pick up in the United States until South American supplies come online.

Of course, there are some who say soybean acres will outstrip corn acres in 2018 in the United States. Whether that happens or not, it's clear that soybeans are finding favor. In Canada last year there was 2.3 million acres in Manitoba and 850,000 acres in Saskatchewan. That's indication that if the price is right, global soybean expansion will certainly be in the offing.

The March 2018 May 2018 soybean futures spread as of January 12th is -11.5 cents US. This is considered bearish. The March 2018 soybean contract is currently priced in the lower 22% of the five-year price distribution range. Seasonally the soybean markets five-year seasonal index tends to trend up through mid-June.

Wheat

Wheat continues to not get a lot of respect, as winter wheat acreage in the United States this year is the lowest in more than a century. In fact, in the January 12 report many analysts had expected it to decrease further. Russia has certainly taken part of this business. There are also huge differences with regard to market fundamentals in the different classes of wheat, with protein being at a premium. Uneven weather currently in Kansas is causing some concern in these markets.

In Ontario, the winter wheat, which was under a thick blanket of snow, has seen a partial January thaw, much of it exposed in southwestern Ontario. As we all know, it is difficult to determine at this stage how the wheat will survive into next year. The Canadian dollar will continue to have a substantial impact on the price of Ontario wheat.

The Bottom Line (cont.)

The Canadian dollar continues to influence our Ontario cash grain prices especially for soybeans and wheat. It rose to over 80 cents US on the January 5th news that Canada's unemployment rate had fallen to 5.7%, which is a 40-year low. However, it has been volatile. Rumors of an impending American exit from the NAFTA talks had it drop three quarters of the sent in one day soon after. In Ontario farm country, watching the loonie movement is so key to our marketing.

These nuances in the Canadian dollar's movement will continue. However, generally speaking the Canadian dollar moves in an inverse fashion to the value of the US dollar. At a certain point, one would think that the American dollar would start rising again on their good economy. That should be a signal for Canadian dollar weakness.

In their January 12th USDA pegged Brazilian soybean production at 110 MMT and Argentina at 57 MMT. Clearly, this is a big supply in the pipeline, but it is not made yet. South American weather is critical to sustaining this crop and if it changes, soybean futures prices will move up. Their weather and corresponding movements and soybean futures prices needs to be closely monitored over the next four weeks.

Despite bearish market conditions, history tells us there will be grain price rallies this winter and going into early spring. Farmers selling will be part of that equation. For many bin doors are slammed shut, but they will eventually have to open. The challenge for Ontario producers is to measure all the different marketing factors that come into play including our Canadian dollar. Capitalize on those marketing opportunities when they arise, learn from them and never look back.

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

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