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Market Commentary

By Kevin Hachler

October 16, 2014

Every farmer hopes to have good weather and high yields.  The problem is that when most farmers are granted this wish, the farming community as a whole tends to suffer. Consider the impact of this year’s bin buster crops on the US farming community.  This year, the US is expected to harvest 14.475 billion bushels of corn, 3.93 billion bushels of soybeans, and 2.035 billion bushels of wheat.  Using current Chicago Board of Trade futures prices of $3.50, and $9.65, and $5.15 per bushel respectively, these crops combined would have a theoretical (but admittedly simplified) value of just under $99 billion.

Now consider the financial implications of the 2012 drought that severely restricted US crop production.  That year, the US harvested a corn crop of 11.93 billion bushels, a soybean crop of 3.03 billion bushels, and a wheat crop of 2.27 billion bushels.  With Chicago futures for corn, soybeans, and wheat trading two years ago at $7.40, $14.90, and $8.50 per bushel respectively, the theoretical value of these crops combined was just over $150 billion US dollars.  Less crops, but more money for farmers. 

Finally, consider that 10 years ago, US farmers were in the midst of harvesting 11.81 billion bushels of corn, 3.12 billion bushels of soybeans, and 2.16 billion bushels of wheat worth $2.06, $5.14, and $3.19 per bushel respectively.  Combined, these crops had value of only $47 billion.

While the examples shown above reflect the situation in the United States, there are parallels for Ontario’s farmers.  Our local grain industry has benefitted tremendously in recent years not only from higher prices, but also from strong yields two years ago when US production struggled.  This year, however, Ontario will feel the weight of large harvests around the globe.  Cash receipts will surely be lower, but crops are still worth a lot more than they were a decade ago.

Corn

Corn harvest throughout North America continues to grind onwards at a snail’s pace.  As of October 12th, 24% of the US corn crop had been harvested, well behind the 5 year average of 43%.  Corn prices have increased 30 cents since the beginning of October.  While there is talk that money is flowing out of the stock market and into "cheap" corn, certainly some of this rally can be attributed to the slow pace at which corn user's needs are being replenished.

With harvest lagging, the weight of the large crop is not yet being felt in its entirety.  Producers reluctant to sell corn should not be discounting the fact that the large corn crop will eventually make its way to market.  Initial yield reports, particularly in Indiana and Illinois, have been almost unbelievable.  There has been virtually no discussion of yields below 200 bushels per acre in these states.  The good news is that there is lots of harvest left in states such as Iowa and Minnesota where yields are not expected to be quite as large.  What remains to be seen is whether or not this hype of 200 bushel plus corn is really representative of what's actually coming off of the field.  Farmers may be more inclined to discuss their 220 bushel field than they would their field next to it that ran 170. Either way, anecdotal talk from the field suggests that the USDA's current estimate of 174.2 bushels per acre might still be too low.

While final yields are still up for debate, there's no denying that the world is flush with corn, too much to be used in one marketing season.  A two billion bushel carryout projection is not something that will ignite rallies in the corn market, particularly when many feel that usage is being overstated or yields have to increase further. 

For producers storing corn, their hope lies in the fact that current prices are below production costs in many areas.  This year's surplus is so large however, that the market can withstand 4 million less corn acres as long as yields are in the low 160 bushel range.  For prices to appreciate dramatically, the market will need to fear not only losing acres, but will also need to fear difficult growing conditions next summer.  Although corn prices might not need to fall much further from here, a greater risk to storing corn might be that the market does not appreciate enough from harvest to offset the costs of storage and interest.

Here in Ontario, corn harvest has barely started but quality concerns are common.  Much of the province's corn crop has struggled to mature amidst a short and cool growing season.  Early indications suggest distinct differences in quality that vary with planting dates and variety selection.

Corn basis levels are strong enough for corn to work into the province from nearby States.  Imports should help to balance the S&D over time, but they might not entirely fill the quality gap because much of Michigan seems to be facing similar quality problems that we are.  Ethanol plants can use lower test weight corn, but starch producers may need to work hard to fill their needs.  How this need for high quality corn affects the local marketplace won't be known until we work further through harvest.

Soybeans

As is the case with corn, soybean harvest has been a very slow process.  Whereas 53 percent of the US soybean crop is usually harvested by now, as of October 12th harvest progress was only at 40%.  Illinois, Indiana, and Ohio are all less than 30% harvested, leaving crushers in those States competing with exporters for coverage.  This slow start, coupled with the fact that speculative funds have been covering short positions has helped to fuel a 50 cent rally since the beginning of October.

Is the 50 cent rally the start of a major run or a selling opportunity that should be embraced?  Personally, I’m of the opinion that this rally needs to be sold.  Although pipelines are slow to replenish, the US soybean crop is undoubtedly large and will eventually get harvested.  Once it does, the market will need to contend with ongoing concerns about the Chinese economy and also with the willingness of Chinese buyers to honour high-priced contracts.

The soybean market will also be paying attention to the growing season in South America.  So far, planting in central Brazil is behind schedule with dryness being the main concern.  It is still early in the growing season however, and rains in the coming weeks would not come too late.  Obviously South America could have a crop failure which would be very supportive to soybean prices, but at this point, a big crop in the region is still the most likely outcome.

Here in Ontario, harvest is progressing very slowly having barely started only to get halted by rain.  Basis levels have been supported by exporters and crushers trying to secure what little soybeans have been harvested.  Early yield reports have been generally positive, and with acres as high as they are, a big crop will eventually come to market.  Although the delays might be supportive to basis levels in the short term, in the longer term they could be detrimental to basis levels.  Harvest delays translate into reduced opportunity for exporters to make and execute sales out of the province.

The weaker Canadian dollar has been a gift to Ontario’s soybean producers.  While I never attempt to predict the Loonie’s next move, I can say with certainty that with the Canadian dollar sitting below 89 cents, basis levels are about $1.20 per bushel higher than they would be at par.  Further depreciation in our currency would obviously be welcome for soybean producers.