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Grain markets tend to be strong in the winter as markets jockey to try to attract acres for the upcoming growing season. Often, this time of year presents growers with an opportunity to clean up some inventory and to take advantage of decent forward selling opportunities. This year is shaping up to be no different. The North American crop has yet to be planted and already there is talk of the lack of soil moisture in the Midwest and weather premiums being factored into prices. With production forecasts in South America having been cut drastically, supply and demand scenarios have tightened and the market realizes that North America will need to pull off large crops. Producers are wise to take advantage of this seasonal strength ahead of planting by lightening up on inventory and making some forward sales. As always, producers should be be cautious of overselling before the crop is in the bin or summer weather markets have been endured.
After recovering most of the losses incurred in the immediate aftermath of the bearish January USDA stocks report, the corn market has been stuck in a fairly narrow trading range. Neither the bulls nor the bears can gain much traction as each side has a story to tell. The bulls tell a tale of slow producer sales and domestic stocks currently 4% below last year while the bears hold on to the notion of slowing demand for ethanol and large world coarse grain stocks that are curbing export demand.
For the better part of a year, the USDA’s reputation for calculating stocks has been questionable at best with several surprises along the way. More than a month after its release, market analysts are still questioning the validity of the USDA’s latest and larger than expected (but lower than last year) stocks figure. At issue is the idea that quarterly feed usage was reported as being the lowest in over a decade despite more animals being fed than a year ago. The degree to which grain usage is being displaced by dried distillers grains (an ethanol by-product) may explain part of corn’s apparent decline as a feed grain and is being hotly debated in the trade.
Producer selling in the US has been much slower than expected and is adding further support to the idea that they simply don’t have the crop to sell. Those on the other side of the debate argue that producers flush with cash and newly built storage facilities have little incentive to sell corn after having been teased with more than $7.00 per bushel late last summer.
In the wake of the expiring 45 cent per gallon tax credits to blenders, the pace of ethanol grind has yet to slow. Last year, Brazilian sugar was more economically used in sugar production than it was for ethanol. As such, US producers were able to displace sugarcane ethanol and export their ethanol to Brazil. High sugar prices have since encouraged increased sugar production in other areas of the world to the point at which US ethanol exports to Brazil are no longer economical. With inventories building and margins falling, it seems but a matter of time before corn use for ethanol slows appreciably.
Corn export demand out of North America sits well below last year’s pace. Excessive wheat supplies have displaced corn exports into many markets including China and US corn remains expensive relative even to offerings of drought-stricken Argentina.
Spring is just around the corner and the market is attempting to gauge planting intentions. At the turn of the year, all signs pointed to an increase of up to 3 million corn acres, mostly at the expense of soybeans. The soybean market has gained sharply relative to corn in recent weeks, to the point at which the price ratio for new crop corn versus soybeans is roughly equal to where it was one year ago. Higher input costs versus last year could cause producers to rethink their planting strategies and shift production towards soybeans. Domestic corn supplies are tight enough that the market cannot tolerate another year of poor growing conditions and will need to stay supported until a big crop can be assured.
Ontario corn basis continues to be soft with end users well covered for the near term. According to crop insurance figures, the Ontario corn yield last year was at least 161 bushels per acre. This is well above previous estimates. As a result, we need to ship more corn out of Ontario especially from the south west. On a positive note, Michigan basis is slowly gaining strength which should put a decent floor under basis.
Encouraged by high prices and by solid yields over the past several years, Ontario producers are poised to increase acres by as much as 20% versus last year. Despite slow producer selling, basis will likely struggle as long as the threat of such a large crop hangs over the market place.
Despite lacklustre export demand from China, the soybean market has recovered more than $1.50 per bushel from its fall lows as growing conditions in South America have deteriorated. Observers in the region have been sharply reducing production estimates. What appeared to be a large crop at the beginning of the growing season is now looking to be more than 10 million metric tons smaller than last year. Although estimates of South American production are now the lowest in three years, they still represent the third largest crop in history. Even the most pessimistic production forecasts are nearly 30% above the devastating 2008 / 2009 crop. Recent rains in the driest areas have come during the critical pod setting and filling periods and should help to stabilize the crop.
The Western Hemisphere accounts for nearly 85% of the world’s soybean production. Given the occurrence this year of disappointing soybean crops in both halves of the Western Hemisphere, the ratio of world soybean stocks-to-use for the current crop is likely to be down about 6% versus from a year ago. From a historical perspective, a world soybean stocks-to-use ratio in the low 20% range is not overly tight, but it is comparable to the 2007/2008 crop. During that particular marketing year (fall 2007 to summer 2008), Chicago soybeans rallied sharply to an all-time high of more than $16.00 per bushel. Before getting too excited about this year’s price prospects however; it is important to consider that in the summer of 2008, market action was focused not so much on the beans in the bins as it was on the beans in the ground. In other words, it took not one, but two years of disappointing soybean production to push the market to those highs. With the situation in South America having stabilized and the fact that the region started the year with excess supplies, it would be safe to assume that further gains in Chicago would need to be fuelled by another disappointing North American crop this year.
Soybean basis levels are holding up well despite a Canadian dollar that does not want to stay below par. Strong values in the US have encouraged some movement into nearby states and have forced the domestic crushers to push their bids from recent lows. Exports were down last year and Ontario is sitting on a decent crop. Strong basis levels going forward will likely depend on the eagerness of producers to sell.
New crop soybean basis levels have appreciated strongly to levels well below where they were during most of last year. Producer selling has been very slow and Ontario’s end users are starting to compete aggressively with exporters for coverage. Acres should be stable versus last year but a smaller crop in South America may increase opportunities for harvest exports out of the province.
A deep freeze combined with little snow cover throughout Europe sparked the wheat market as it unsuccessfully attempted to break out of its 1 to 1 trading relationship with corn. The winterkill impact of the freeze won’t be known until spring, but the short covering panic in the market has subsided.
After selling out of its supplies, Russian wheat is no longer the cheapest option for foreign buyers and the US has once again become competitive in export markets. Because the world wheat supplies are still abundant however, this does not necessarily mean that higher prices are on way because wheat continues to price itself as a feed grain.