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Market Commentary

By Kevin Hachler

July 17, 2014

After several years of growing demand and struggling crops, the global balance of supply and demand for grains and oilseeds is on the verge of undergoing a major transition.  Producers around the world have responded to higher prices by improving land, using better genetics, and taking advantage of technology.  While their efforts were thwarted by poor weather in 2012, good weather this year is allowing producers to showcase what they are capable of.  Supplies this year will most certainly build and as a result, producers need to adjust their price expectations lower going forward.  What could be a good price next year is not the same as what would have been a good price in 2012.

Corn

The Chicago corn market has been making contract lows as it digests ideas of a large crop.  Weather in key growing regions of the US has been nearly perfect and the crop is entering into the critical reproductive growth phase under ideal conditions.  The USDA currently estimates that corn yields will be around 165 bushels per acre, but some private analysts are predicting a crop that could surpass the 170 mark. 

Given current usage estimates, a 170 bushel per acre corn crop would push ending stocks for the 2014 crop towards the much feared 2 billion bushel figure.  A US ending stocks figure this large has not happened since Chicago corn futures made their way towards $2.00 per bushel a decade ago. 

Does this suggest that Chicago corn futures need to fall back towards $2.00?  Not likely because much has changed in ten years.  Consider that the value of money has fallen significantly and the costs of things in general have increased.  A gallon of gasoline for example took roughly $3.00 US per gallon to buy in 2004 and now costs more than $5.00 US per gallon. 

Another thing to consider is that usage of corn is much higher than it was 10 years ago.  US corn usage in 2004 was 10.7 billion bushels.  Today, total use has climbed to 13.5 billion bushels.  The significance of greater usage is that a 2 billion bushel carryout now represents 15% of total use compared to nearly 19% ten years ago.

Chicago corn prices have fallen by more than $1.40 per bushel since the beginning of May.  Perhaps this slide will prove sufficient for the time being.  With corn supplies building however, producers all over North America would view higher prices as an opportunity to add to existing sales.  If you are waiting for a rally to catch up on sales, you’ll need to pull the trigger before everybody else does.  Expecting Chicago corn to return to the $5.00 area does not seem a reasonable expectation at this point in time.

Old crop corn basis levels in Ontario can’t be described as anything less than chaotic.  Exporters made sales in anticipation that producers will give up on corn and become aggressive sellers this summer.  While inventories are likely still large, producers are hanging on and the corn has not been for sale.  Producers simply don’t like the prospect of selling corn at current prices.  As such, the trade has had to scramble to secure ownership, in some cases paying prices that exceed import values.

Producers that are still hanging on to ownership in their own bins should be prepared to act on short notice should strong flat priced opportunities present themselves again.  Eventually end users will feel comfortable that they can fulfill their needs until harvest.  At that point in time, any old crop corn that is left will be worth no more than the crop standing in the field.

Soybeans

Poor weather in 2012 in both the Northern and Southern Hemispheres severely limited global soybean production.  As a result, world soybean supplies struggled to keep up with Asia’s growing appetite and prices rose.  Now it seems that production is catching up to those high prices.  South American producers pulled off a record crop this past spring and it seems that this will be followed by a massive US soybean crop this fall.  The USDA estimated that a record 84.8 million acres of soybeans were planted this spring, more than 3.3 million acres higher than producers intended to plant back in March. 

Whereas global production is now set to increase by 16 million metric tons compared to last, Chinese demand for soybeans has been increasing at an annual rate of only 4.5 million metric tons.  The importance of China to the soybean marketplace cannot be understated as China accounts for 2/3 of all global soybean imports.  Currently port inventories there are flush with soybeans, credit is tightening, and concerns about the health of the Chinese economy always linger in the background.  It appears that global supply growth is now set to overwhelm what demand can absorb.

For months, the general consensus in regards to the soybean market is that US inventories will undergo a dramatic transition from extremely tight inventories this summer to a potentially large surplus this fall.  As such, most everyone expected that prices would eventually move lower.  What took people (myself included) by surprise is how quickly this transition to lower prices is happening.  It is said that the soybean crop is made in August, yet new crop Chicago futures have already dropped $2.00 per bushel since late May.  A price bounce from here is certainly possible; however any rally is likely to be limited and short-lived.  As is the case with corn, the objective of producers should be to pull the trigger on soybeans before everybody else does.

Producers hoping for higher prices beyond harvest are betting that the South American crop will encounter problems this winter.  Current prices are at or below variable production costs in some areas of Brazil; however this does not mean that acres will be reduced.  Farmers in general don’t leave much land unplanted because they don’t like the price.  Producers in South America are just as likely to plant on hope and prayer as are producers here.  Inputs may be trimmed, but acres might actually increase again because soybeans are the cheapest crop to produce.

In Ontario, there are very few old crop beans left.  New crop on the other hand is a different story with Statistics Canada predicting that acres are up by 22% compared to last year.  The idea that there are 3.05 million acres planted is difficult to dispute.  Yields on the other hand are far less certain.  Stands are spotty due to late planting and too much rain in some areas.  August will be critical in terms of determining how big the crop will be.  Despite what could be a large crop, basis levels this fall will likely depend most on the rate of producer selling.  A big crop does not necessarily mean that it is for sale.  Will producers let go of sub $11.00 soybeans or will they tuck them away into the ample bin space left by a smaller corn crop?

Wheat

With harvest underway, the USDA has increased wheat production forecasts by 50 million bushels from last month.  Production of all wheat however is still expected to be 9% lower than last year and 14% lower compared to the 2012 crop.  Despite the relatively small crop this year, domestic usage is still only slightly more than 60% of production.  The other 40% of the crop needs to be exported into a well-supplied global marketplace that is seeing few crop stresses in the major growing regions.

Chicago wheat futures are roughly 50 cents per bushel cheaper than they were a month ago and more than $2.00 per bushel below the May high, but they are not yet cheap enough to spur demand.  Wheat prices in competitive markets have fallen in tandem with the US, meaning that alternative suppliers still have cheaper product on offer.

Political instability in the Ukraine is still being monitored by wheat traders, but instead of being considered a bullish factor, the market is now growing concerned about the potential for a flush of wheat soon to come out of the region.  Wheat sales out of the Ukraine have been understandably slow, but the crop is growing and will soon be harvested.  Rather than sit on this crop, the fear is that Ukrainians may look to export and turn it to cash in advance of any deterioration to the political situation and that they may look to do so at nearly any price.

The current premium of nearly $1.60 per bushel for Chicago wheat versus corn means that increased feeding of wheat cannot be considered a realistic expectation at this time.  Further weakness might be yet to come for the wheat market; however we are now closer to a bottom than we were one month ago.  All markets eventually bounce, and funds that are quite heavily short wheat could provide a spark to the market should they be forced to cover their positions. 

Wheat harvest is just starting to get underway in the far southwest of this province.  As of this writing, yield reports in Ontario have been scarce, but early reports out of Michigan and Ohio are running better than expected with good quality.  Hopefully this trend continues as harvest moves closer to home.