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Market Commentary

By Kevin Hachler

December 11, 2014

Corn

Harvest is normally a period in which corn prices decline as producers sell.  This year however, nearby Chicago corn futures have rallied more than 20% since the end of September.  What is remarkable is that this rally has coincided with the harvest of a record large US corn crop and with a drop in light sweet crude oil prices of 32%. 

The rally in corn prices is not all that surprising however.  Corn prices have been supported by robust ethanol production, by a strong livestock sector, and by talk of an upcoming acreage shift from corn to soybeans.  Furthermore, speculative investors that were bailing out of equity and other commodity positions piled their money into what they viewed to be cheap corn.

Now that the rally has stalled below $4 per bushel, it is difficult to imagine a situation in which corn prices need to rise much further.  After last year’s bountiful harvest, the world is flush with corn.  Absent a weather problem that could always develop in one of the world’s coarse grain growing regions, the fact that the US is still flirting with a very onerous 2 billion bushel carryout this year cannot be ignored.  Even demand which has been relentless at these price levels is starting to waver.

The economics of the ethanol market which has lent much support to corn are becoming less supportive.  While ethanol futures have risen in tandem with the corn market for the last two months, gasoline prices have plummeted, greatly squeezing blending margins in the process.  It is true that blenders are forced by the ethanol mandate to continue using ethanol but declining or negative margins will result in bare minimum production and blending.

Here in Ontario, we are nearly halfway through December and corn harvest is still not complete.  Many are describing this as a harvest from hell, though things are not as bad as they were in 1992.  In the absence of heat this summer, much of the province’s corn did not mature and low test weight is a concern across the province.  The majority of Ontario’s corn will not achieve a grade 2 standard, and that which does is still be lighter than it was last year.  Vomitoxin is a concern in some areas, but levels are mostly acceptable to end users.  Given that corn had to be dried from high levels of moisture, fines are a problem in many cases and corn will need to be cleaned to be acceptable for some end user’s needs.  This year’s poor quality crop can be a great opportunity for producers who know that they have good quality corn and market it accordingly.

Corn harvest has ramped up in recent days as ground conditions have become nearly perfect.  This, combined with the rise in cash prices has prompted a wave of producer selling.  End users have been able to increase coverage from inadequate levels but are still behind where they would normally be at this time of year.  Basis levels are high enough to import corn into the province by truck, rail and vessel (although the seaway will shut off vessel shipments in a few short days).  Ontario currently has the distinction of being one of the highest priced markets in all of North America.  Producers should keep this in mind when holding out for even higher prices because further increases to basis levels will be met with resistance.

Soybeans

Predictions of soybean prices well below the $10 per bushel level did come to fruition this fall, but values proved cheap enough to spur demand.  After registering a low of $9.12 ¼ on October 1st, Chicago soybean futures rallied during harvest to a high of $10.86 ¼ on November 12th.  Both crush and exports have been running at record paces for the past two months and have brought speculative demand back to the soybean market.

Crushers have been crushing at full steam as they respond to very supportive conditions – inventories of soybeans and meal were largely depleted going into this fall, harvest was delayed by weather, rail issues hampered soybean movement, and the livestock sector has been very profitable.  Although harvest is essentially over and rail issues are easing, the pace of soybean crushing should continue to be strong as pipelines have yet to be fully replenished.

The outlook for exports is less optimistic.  The USDA acknowledged strong exports this fall by increasing its forecast 40 million bushels in the December report, but further increases may not be warranted.  The pace of exports has slowed in recent weeks and undelivered sales are lower than they were a year ago.  Going forward, exports will largely depend on how the crop develops in South America and how well it flows to market.

After a poor start to the growing season, the weather in Brazil has begun to cooperate.  Planting is wrapping up at nearly the same time that it was a year ago and things are looking much better than they were a month ago.  With record plantings, even a mediocre yield would translate into a record crop that would only add to increasing global soybean inventories.

The weak soybean market in early October may have demonstrated what price levels are needed to make sellers disappear and to make buyers hungry.  That said, growing global soybean inventories will keep price further price rallies in check and may prompt a retest of the early fall lows. 

The ratio of corn to soybean prices for the 2015 is correcting with corn prices gaining on soybeans, but soybean acres are still likely to increase because of the higher cost to grow corn.  Given that such ratios have a history of overcorrecting, I would not be surprised to see soybean prices lose more ground to corn by next fall.  Producers should be prepared to make incremental sales of new crop soybeans if they are increasing acres in response to market conditions because those very conditions may change when the crop is ready to come off of the field.

Soybean harvest in Ontario has been a struggle but is now largely complete and fears of widespread quality concerns have been proven to be mostly unfounded.  Export programs are winding down and total volumes shipped out of the province are likely in line with what they were last year.  Although final yield is debatable, Ontario soybean acres this year were up nearly 20% compared to last year.  This should leave plenty of beans in the province to satisfy domestic usage though the timing of when these soybeans will come to market is anybody’s guess.  Basis levels measured in terms of US funds are currently strong, but any movement higher or lower in terms of Canadian funds will be mostly impacted by the exchange rate.

Wheat

Like the corn and soybean markets, Chicago wheat futures have sustained a sizeable $1.20 per bushel (or 25%) rally that dates from the end of September.  Soft red wheat futures have also benefitted not only from a return of speculative money, but also from production concerns in Australia and the Black Sea regions.  Reports that Russia intended to restrict imports also supported the market, though these reports have since been proven false.

Going forward, wheat prices should struggle to push higher given that the world still has lots of wheat.  US export sales are lagging behind last year’s pace and North American wheat is uncompetitive relative to other origins.  With Chicago wheat futures priced nearly $2.00 higher than corn, wheat will not easily work its way into feed rations.

Here in Ontario, old crop basis levels have benefited from a declining Canadian dollar and from a lack of producer selling.  New crop basis levels have benefited not only from a weak Loonie, but also from the lack of acres that have been seeded this fall.  While producers did manage to get more wheat planted than what had been anticipated at the end of September, Ontario’s winter wheat acres are likely to end up below 600,000 which would be the lowest in more than a decade.  Furthermore, much of the wheat that has been seeded was done so into less than optimal conditions and may not over winter well.