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November 12 2015
Predominately this year’s harvest could be characterised as a smooth process. The weather has been terrific for field work. Warm temperatures, limited rain and generally favourable weather have been welcomed by all. As harvest is completed it appears Ontario’s field crops have yielded well. While there have been some locations that have been very disappointing, overall yields have been satisfactory. Good yields, good quality and the crop in the bin are the earmarks of a successful growing season. Now the crop is stored comes the difficult decision. When do you market your grain? If you have sold very little off the combine you are not alone. Producers in Ontario have not been selling much. Similarly producers in the US and around the globe are not selling much either. Around the world producers are tight holders of grain. The desire for the producer to hold grain is only natural of course. The flat price is not currently an attractive sale price. The past few years have been very profitable and in many situations the producer doesn’t have the necessity to sell grain for immediate cash needs. Many growers have built on-farm storage and are making use of their new space. Also the weather has been non-threatening to standing crops. Therefore there has been little sense of urgency to get corn harvested quickly. And finally there are some marketing advisers who advocate the belief that crop prices will rally and they are recommending that growers hold their grain. For these reasons (and others) producers have been slow sellers. Will crop prices rally and compensate those who store? Current projections are for growing world inventories. Grain production has been rapidly expanding while demand has not been growing sufficiently. Consequently row crop prices have since fallen to new lows. In summary we have the following situation: Producers are not selling grain and yet we still have poor world demand and low prices. Where will prices be when producers do begin to sell from storage? Since production is set and in the bin, demand going forward will provide the answer.
In its most recent report Nov 10th the USDA released updated corn production numbers. In this report US corn production was increased to 13.654 billion bushels. The majority of this increase was due to an increasing yield estimate. The average yield was increased to 169.3 bushels per acre from 168 bushels per acre in October. The old adage is that big crops get bigger. This adage is predicated by the fact that in 8 out of 10 years, when the USDA increases US corn yield from October to November it also increases yields in January. Whether this happens or not this crop year, there are still large stockpiles of corn throughout the US. Current US ending stocks are forecast to be 1.76 billion bushels. Given the large production the outlook for futures pricing is dependent upon export demand. How have US exports been in 2015? They are the second lowest in the past decade. In recent years China has been the world’s largest buyer of grain. Lately it has been reported that China has inventories potentially up to one year’s usage and rumors have surfaced that China may start an export program to reduce these stocks. Assuming that the US produces an average crop in 2016, with current demand projections the US ending stocks will continue to grow.
There is a large disparity in basis values across the US. In the western cornbelt where corn yields were large, basis is rather weak relative to the strong values in the east where much of the crop was damaged by the heavy rains. Ontario basis levels have been firming through harvest and are traditionally high for this time of year. What this demonstrates is that end users are currently looking for corn, as discussed producer selling has been slow. The best time to sell corn is when someone wants to buy it. Into the new year producer selling will likely accelerate, end users will get the coverage they are currently searching for and basis could fall rapidly.
In its November report the USDA increased both soybean yield and harvested acreage. Soybean yields were raised to an incredible 48.3 bushels per acre. The result of these increases was a higher estimate for US ending stocks. Couple this with rapidly expanding production in Brazil and record stocks in Argentina and the world soybean supply continues to grow. On November 22 Argentina will be holding its presidential election. The opposition candidate is reported to be in favour of reducing the countries soybean export tax by 5% and is also promising to remove currency controls which have been supporting the Argentine peso. If this candidate were to enact these new policy measures the prices realised by Argentina’s soybean producers would greatly improved. For the past few years Argentina’s ending stocks have been growing significantly as producers have been storing beans as a hedge against currency devaluation. It has been reported that there are in excess of 10 million tonnes of Argentine beans that will come to market if these measures are enacted. The effect that policies such as this and South American weather will be the drivers in soy prices as we enter the winter months.