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Market Commentary

By Kevin Hachler

November 14, 2014

Corn

There is no doubt that this year’s US corn crop is large, but perhaps not quite as large as some had been thinking back in early October.  Reports of astonishingly huge yields have become fewer as US harvest has progressed into the Northern and Western regions of the Corn Belt.  The USDA has acknowledged this trend by actually trimming its yield forecast by a small amount in November. 

With much of the bad news out of the way, the corn market has rallied 66 cents in the last month and a half.  Speculative funds have been instrumental to this rally as they have been buying what they consider to be cheap corn.  As harvest winds down and the size of the crop becomes more certain, market focus will shift to demand and to crop prospects for next year.

The price rally has hurt export potential.  Export sales have recently slowed down, grinding to a virtual halt as foreign corn undercuts US offers.  Export sales now lag well behind last year’s pace despite the larger crop.  Ethanol producers are profitable, but are limited from using more corn because of how much they can actually blend into gasoline.  Feed users are profitable, but expansion in the livestock industry takes time and may not be felt enough in the current marketing year to drive ending stocks lower. 

The USDA’s current ending stocks figure of 2 billion bushels could easily grow by two to three hundred million bushels, leaving ample slack for a reduction to acres next year.  It should be interesting to see just how hard the corn market will need to work to attract acres in the New Year.  If we see another 170 type yield next year, we could afford to lose a few million acres.  If on the other hand, a yield in the low 160s is more realistic, corn acres can’t afford to give up too much ground.

Corn harvest is well advanced in eastern Ontario but harvest in the rest of the province ranges zero to being 25% complete.  The quality of this year’s corn crop is a concern; with test weight, vomitoxin and excessively wet moisture levels all providing challenges.  Low test weights have a negative effect on yields of starch and ethanol.  Buyers of #2 corn are finding themselves having to pay more for coverage than are buyers that are able to use corn of lesser quality.  If you are storing corn in your own bins, knowing the quality of your corn will help you to make the best marketing decisions.

Soybeans

There is no disputing that there are lots of soybeans around the globe.  As I write this, more than 90% the US’ record large soybean crop has already been harvested.  This nearly 4 billion bushel crop follows a record crop in South America last spring.  Despite the apparent abundance of global soybean inventory, the Chicago soybean market has rallied more than $1.50 per bushel since.

Going into harvest, lower soybean and soybean meal prices were universally expected.  Meal users were running on empty, anticipating that they could buy cheaper meal once harvest got underway.  Similarly, crushers had depleted their inventories of soybeans, exporters had early-ship vessels on the books, and speculative traders were on the short side of the market.  Essentially, the entire marketplace found itself leaning too heavily on one side, unprepared for the harvest delays and rail logistical snags that prevented the movement of soybeans and meal through the pipeline.  Coupled with these glitches, strong demand for sub $10 soybeans and short covering by speculators ran counter to the expectations of most everyone and pushed the market higher right through harvest.

Is this rally sustainable now that this harvest is over?  In the long run, I would suggest that the answer is no.  There is no doubt that the world has lots of soybeans.  The problem is that they just haven’t moved into the right places yet, and this process is taking much longer to play out than anyone would have guessed.  Eventually however, soybeans will move and the market may well find itself choking on supply.

Higher Chicago futures prices are slowly but surely helping to facilitate the movement of soybeans and soybean products.  There are reports that Argentinean soybean meal has been sold for spot delivery into the US.  While it will take upwards of 4 weeks for this shipment to arrive, transactions such as this are highly unusual for this time of year and in time will only add to the supply of soybean products in the domestic marketplace.

The recent rally in soybean prices may not yet have run its course and we may yet see higher prices.  For this rally to sustain itself at these prices or higher however, a crop problem in South America would ultimately be needed.  While there are concerns of dryness in Northern Brazil and too much rain in Argentina, it is still too early to reasonably expect anything less than record production from that region.

With soybean harvest nearing completion, basis levels in Ontario have held up well thus far, but the Ontario soybean pipeline is starting to fill and producers have been heavy sellers.  Whether or not basis levels can continue to hold firm will largely depend on the availability of freight for export.  Demand for soybeans remains strong, but vessels are scarce and the window for operation on the St. Lawrence is winding down.

Wheat

Chicago wheat prices have followed the soybean market higher, increasing by 80 cents per bushel over the past month.  While the Ukrainian unrest seems to have faded to the back of wheat trader’s minds, dry weather in Russia and a slow US soft red planting pace have contributed to the hike in wheat values.  While cuts to world wheat production forecasts for next year may be justified, spring conditions tend to be more important to the size of wheat crops than do fall conditions.  Global inventories are large, and a good spring could compensate for poor conditions this fall.

The US uses just under half of its wheat crop domestically.  It must rely on exports to clear the other half of its inventory.  The recent rally in prices only serves to make US exports less competitive in the world marketplace and the pace of export sales is lagging well behind USDA forecasts.  If corn and soybean prices retreat, the wheat market is likely to follow.

Here in Ontario, sellers of old crop wheat are scarce and basis levels are holding firm.  New crop basis levels are also firm, and are not likely to break for some time given that acres are very low and competition for what little wheat was planted is likely to remain fierce.  Just how many winter wheat acres were planted in Ontario is still up for debate.  Reported estimates upwards of 600,000 winter wheat acres seem to me to be a stretch.  Even if that 600,000 acre figure proves correct, the Ontario crop next summer would be very small by historical standards.