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Market Commentary

By Kevin Hachler

August 21, 2014

Corn

It was only 2 short years ago that the corn market was concerning itself with how to manage a drought-restricted 2012 corn crop that came on the heels of a disappointing 2011 crop.  Corn prices skyrocketed as the market attempted to figure out how to ration the small crop.  As it turned out, the $8.00 per bushel CBOT level that was breached 2 summers ago proved to be more than enough to bridge the gap until supplies stabilized.

In response to higher prices, US producers planted a record number of corn acres in 2013 that led to a record harvest of nearly 14 billion bushels.  This spring, producers responded to lower corn prices by cutting back on acres, but growing conditions have been nearly perfect and are likely to compensate for the decrease in area.  The crop is somewhat behind in maturity and will be more sensitive to an early freeze than normal, but the odds of a crop in excess of 14 billion bushels are high.

Instead of worrying about how to ration usage, the market this year is attempting to figure out how to expand demand.  Increasing demand beyond current projections will prove difficult however.  Further expansion to the ethanol industry is restricted by decreasing gasoline consumption and by infrastructure that is unable to handle higher ethanol blends.  Export prospects are weak as the world is flush with grain at the moment.  Livestock numbers are still slow to rebuild, and corn will need to compete with a glut of distillers grains in feed rations.  Whereas 2013 production exceeded total use by 325 million bushels, the USDA predicts that production this year will exceed use by nearly 600 million bushels and carryout stocks may build towards the much feared 2 billion bushel mark.

Despite the dismal outlook for the corn market, Chicago corn futures seem to have found support above $3.60 per bushel.  In the short to medium term, the market is likely to trade mostly sideways, awaiting confirmation of crop size this fall.  Longer term, the possibility exists that corn prices could dip to $3.00 per bushel or lower.  The positive news if any can be found is that we are now $1.50 per bushel closer to the bottom than we were back in the spring.  Decreasing prices will eventually give way to increasing prices, but unfortunately in an era of growing supplies, the prices that most producers are hoping for are not necessarily realistic.

Supply and demand projections for Ontario corn would suggest that supply is more than sufficient to meet demand until new crop becomes available.  Basis levels however tell a different story.  Although there might be lots of corn around, it hasn’t been for sale.  End users are pulling as much as they can from the US by truck and rail, but logistics limit how much can be imported.  Old crop basis levels have risen to unprecedented levels.  Basis levels are now such that the flat price is high enough to encourage local producers to sell what is needed.

End user needs are extending coverage into October now.  Producers holding old crop corn should be cognizant of the significant spread between old and new crop values.  As harvest approaches, these values will converge.  Barring a disaster with Ontario’s corn crop, old crop basis levels are most likely to fade into new.  If you still hold corn in the bin, it can’t be stressed enough that it should be sold now.  The only reason not to sell old crop corn is if you are concerned that you will be unable to fulfill existing new crop sales because of maturity issues.  The lack of heat in Ontario this summer has delayed crop progress and could prove a major threat to production in the event of an early frost. 

Barring a disaster, Statistics Canada estimates corn production of 295 million bushels, which would be the smallest crop in 5 years and would be less than what Ontario uses in a year.  Basis levels for new crop corn are already high from a historical standpoint, and are strong when compared to neighbouring US states.  Although imports might be justified at times during the marketing year when producer sales are soft, the shortfall might be limited by inventory carried over from this year into next.

Soybeans

Since May, new crop November soybean futures have fallen by more than $2.25 per bushel.  The price slide may have slowed, but lower prices are still possible, if not likely.  While the corn market suffered last year, soybeans were able to hold ground because of tight US inventories.  Soybean exports out of the US for the 2013 crop are record large, thereby drawing old crop inventories down to minimal levels.  While US supplies dwindle, world inventories are swelling. 

The USDA is currently anticipating a 3.82 billion bushel US soybean crop, smashing 2009’s record of 3.36 billion bushels. Although the crop is not yet mature, growing conditions have remained ideal throughout August.  This crop comes on the heels of a record crop in South America harvested this spring. 

South American producers are almost certain to further expand soybean acres this fall.  The prospect of growing corn in an environment of $3.75 corn futures and freight costs that exceed $2.50 per bushel from farm to port won’t sit well with many South American corn producers.  Even though the price of soybeans is lower than it’s been for several years, South American producers will have little choice but to grow more of them.  If the USDA is to be believed, global soybean production is increasing at a rate of more than 700 million bushels annually while consumption lags with an increase of only 475 million bushels.

With the US on the verge of harvesting a monster of a crop and the South Americans planning to plant more soybeans, inventories in the US are about to undergo a dramatic shift from deficit to surplus.  The price advantage that soybeans have enjoyed relative to corn is likely to erode.

This summer, the ratio of soybean to corn prices achieved highs in excess of 3.4:1.  Such a wide number represents a value that falls into the upper extremes of the ratio’s historical trading range.  A mean value of this ratio over time falls closer to 2.5 to one.  Markets have a way of over-correcting as they revert back to their means.  Keeping this in mind, it would not be out of the question for this ratio to fall to 2.0:1 or less by next spring, especially if South America has a large soybean crop.  Consider the implications of such a change in the fortunes of this ratio; a rally back to the $4.50 level for corn futures would translate to $9.00 soybeans!  If corn stays stuck at $3.50, well, let’s not think about that…

Ontario’s soybean acres are up 20 percent compared to last year, but yields at this point are difficult to assess.  The crops look good from the road, but closer inspection is revealing some disease pressure.  The crop is somewhat behind in development, and as always, is susceptible to an early frost.  All factors considered, Ontario should have a large amount of soybeans to market in the coming year.  Exporters appear eager to handle plenty of beans this fall, but additional sales will be dependent on the availability of freight which is said to be tight.  Absent the ever-present impact of the Canadian dollar, the direction of soybean basis levels through the fall will depend largely on how quickly the crop comes to market.

Wheat

Wheat inventories in the US are stabilizing and continue to be overshadowed by large world supplies.  Growing conditions in the world’s major wheat producing areas are largely trouble free, representing a major shift in fortune compared to a few short years ago. 

Although the political situation in the Ukraine has been making headlines in the wheat trade, concerns related to export disruptions have thus far proven to be groundless.  US wheat prices are too high relative to the rest of the world and will keep exports in check.  With Chicago wheat futures prices trading at a sizeable 1.87 premium to corn, feeding too will be kept at a minimum. 

The bottom line for wheat futures is that this year’s smaller US wheat crop can easily be accommodated. The rest of the world can pick up the slack where North American producers cannot.  Higher prices are not justified at this time and it is hard to be overly optimistic in the coming months.

Ontario wheat harvest is still not complete, but quality for the most part is holding up well.  Yields have been a positive surprise to some, but with reduced acres crop size is limited.  That said, Ontario’s production is still greater than usage, and the excess will need to be exported.

 Across classes, wheat basis levels are quite strong from a historical perspective.  Producers have been slow to sell and some buyers have been caught needing to cover existing commitments.  This will keep additional exports at bay.  Once covered, buyers will be less eager to own wheat and basis levels will likely fall, unless of course the Canadian dollar slides at the same time.