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Market Commentary

By Kevin Hachler

April 16, 2014

Weather is arguably the single biggest factor that affects grain prices.  In four of the last five years, producers have benefitted from the higher prices that were a direct result of yields negatively affected by weather.  As is always the case, North American weather this summer will make the difference between expanding and shrinking grain supplies.

The general consensus among weather forecasters these days is that we have a cool summer in store for North America’s major cropping regions.  A cooler than normal summer generally results in larger crops due to lower heat stress in the Midwest.  This would suggest that prices for corn and soybeans could be lower by fall.  The obvious problem with taking this information to heart and selling too aggressively now is that weather forecasters (much like grain market prognosticators) don’t have the best track record when it comes to making predictions.

Seed selection is an area where producers might want to be more mindful of this year’s weather predictions.  After a cold winter, the Great Lakes are slower to warm up and their cooler temperatures could increase the chances of an early frost this fall.  Already an early start to spring seems out of the question, so it would make sense to prepare for a shorter growing season.  Growers might want to think twice about whether cheating on units is worth the risk of extra drying costs, lower yields, or increased quality problems that might result if their crops struggle to mature.

Corn

Last year’s record large US corn crop is no longer the burden on the market that it was once thought to be.  The journey towards $4.00 at the turn of the year brought back a lot of demand lost as a result of the 2012 drought.  What was once thought to be a hefty 2 billion bushel carryout is now estimated by the USDA to be a snug 1.33 billion bushels.

Corn users are making money and are using more US corn that they did last year.  Ethanol margins continue to be strong, and corn use for ethanol is expected to rebound by 350 million bushels, returning to pre-drought levels.  US corn has worked into world markets and exports are expected to increase by 1 billion bushels to levels not seen since the 2010 marketing year.  Livestock producers are making money too, and with corn cheaper to feed than wheat, they are set to increase corn feeding by a staggering 22% or 1 billion bushels compared to the previous year.

Although there could still be some surprise tweaks to usage figures in the coming months, the corn trade has a pretty good handle on old crop supply and disappearance.  Market focus is now shifting to the upcoming growing season.  Whether North American corn supplies shrink or grow from here depend not so much on changes to demand as they do on the size of the crop that is going in the ground now.

The USDA’s March 31st Prospective Plantings report indicated that producers intend to plant 91.7 million acres of corn.  This would be a reduction of 3.7 million acres compared to last year.  If realized, an acreage reduction of this magnitude means that a 161 bushel crop is needed to maintain carryout and usage at current levels.  A 161 bushel corn crop would not be impossible, but it would be the second biggest on record after the 164.7 bushels per acre achieved in 2009.

Corn planting has gotten off to a slow start so far, but there are many good reasons to believe that corn acres will end up higher than 91.7 million acres.  The estimated total acreage of US principal crops is 1.1 million higher than what was sown a year ago; however a wet spring last year prevented producers from sowing 8.3 million acres.  Some of these acres can be expected to reenter production this year.  Since the USDA surveyed producers’ planting intentions, new crop CBOT corn futures have gained about 10% and optimism for profitability is increasing rather than decreasing.  Midwestern farmers love to grow corn and they can do it faster every year.  If the weather allows even for a short period of time, the corn planters will be hard to stop.

The bottom line is that corn prices are building in some weather premium to compensate for diminishing old crop inventories.  The slow start to planting is not a problem yet, but if conditions remain the same by the next time I write this column, the story will be different.  For now, producers should look at the recent price rally as a second chance to get rid of old crop inventory and to get a start at new crop marketing.

Old crop corn basis in Ontario is on the defensive.  Corn has been shaken loose because of both the rising flat price and because of time.  Many producers have not sold any corn since harvest but are now starting to do so with the weather having improved for shipping and with prices having rebounded from winter lows.  End users have good coverage into summer and some are backing away from the marketplace.  Exports at these levels are competitive, but it is not a given that all of the excess corn can be cleared out of the way.  Basis levels going forward will be stuck at levels that are cheap enough to export.

Ontario corn acres may decrease slightly from last year, but supplies could still be large.  Values for new crop are currently competitive with the nearby Michigan market but are not yet cheap enough to put on a large export program.

Soybeans

Old crop US soybean inventories are approaching zero, but the rest of the world is swimming in beans.   US farmers are responding to high prices with the intention to plant more beans.  By this fall, US supplies could also increase dramatically.  Needless to say, the soybean market is confused.  Prices are and will continue to be volatile as the market tries to solve the situation of having plenty of soybeans that are not necessarily in the right places.

March 1st soybean stocks as reported by the USDA gave no signal that the tightness in the US old crop soybean market has been resolved.  The US does not have enough soybean inventory left to satisfy exports and to maintain crushing levels.  Time is running out to trim exports out of the US, so old crop Chicago soybean prices are rising to ration crushing demand for meal and to encourage imports from South America. 

China on the other hand is now overwhelmed with beans and buyers there are facing heavy losses.  There is talk that Chinese importers are having difficulty getting credit to pay for soybeans that are arriving at their ports.  Apparently there are several cargoes of soybeans sitting in or near Chinese ports for which the shippers have not been paid.  China does not have much old crop US business left on the books, and North American shippers seem reluctant to allow the Chinese to back out of these remaining contracts.  As such, problems with the Chinese soybean marketplace are having limited success in keeping old crop US prices in check. 

In the longer term however, a continuation of financial concerns and an oversupplied marketplace in China should pressure US soybean prices.  Chinese cancellations of South American purchases that are happening now will help facilitate summer imports into the US.  By fall, the US will need to find a home for what could be very large crop.  With China being the destination for more than 60 percent of the world’s soybean exports, soybean producers need to hope that the Chinese are once again in a buying mood by fall.

According to the USDA, US farmers are set to plant a record 81.5 million acres this spring.  Plantings that are 5 million acres above last year can largely be absorbed as inventories will be starting from almost zero.  The market will need to maintain a weather premium into the summer months as a 5 bushel per acre variation in yield would mean the difference between a large surplus and continuing shortage.  New crop soybean futures of just over $12.00 per bushel likely allow for an average yield in the low 40’s, but would not be high enough to account for a scare that threatens a yield below 40 bushels per acre.

Old crop soybean basis levels in Ontario matter little to most producers because there are few owners of soybeans left.  Despite the lack of inventory available for sale, soybean basis levels have a negative tone because crush margins are poor.  Old crop basis levels are likely to remain volatile and could spike higher if and when meal buyers return to the marketplace.

New crop soybean basis levels are very strong from a historical perspective.  Solid margins are keeping crushers hungry for ownership and are keeping exporters honest.  Last year, soybean basis levels kept appreciating right through fall as harvest progress was slow and users struggled to obtain timely supply.   This year, basis levels are starting from a higher price point that doesn’t work as well into export markets.  Higher acres are likely to be planted, but new crop basis levels in the coming weeks are more likely to be impacted by crush margins and export opportunities than by supply.