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November 14, 2013
In late summer, many in the trade were fearing that US corn yields would struggle in the low 150 bushel per acre range. These fears turned out not to be justified as the USDA recently confirmed what producers were seeing in the field - a nationwide yield greater than 160 bushels per acre. Although the size of the US crop is turning out to be much larger than what was expected in late summer, demand is also strengthening. Users of corn are enjoying decent margins with both livestock feeders and ethanol producers making money for a change. Ethanol producers do face some adversity with the possibility of a lower mandate, however margins are strong enough that exports would be justified in the event that US domestic ethanol use is lowered.
The corn market has strengthened from contract lows on the heels of the USDA's November 8th report that pegged US corn ending stocks below 2 billion bushels. While the market is breathing a sigh of relief based on this news, it's not the kind of information that will push the market back to $7 per bushel, let alone $6, or maybe even $5. It takes the prospect of much lower carryout figures to achieve those price targets. What the report has done is given confidence that the slide in prices may have done its job. The crop will not get larger from here and demand is picking up steam. Should the market move much higher however, producers will be willing to step in to sell their large crops, thus preventing the really strong rallies that we experienced over the last couple of years. It is likely that the market will trade in a sideways range for a few months until we approach the time at which planting decisions for next year need to be made.
Given the prospect of a 2 billion bushel carryout, the corn market has relatively decent carries factored into it. In other words, Chicago futures are stronger for later delivery timeframes because the market is not needing to encourage upfront sales. December 2014 Chicago futures for example are currently trading at about $0.30 higher than are December 2013 futures. The market does not necessarily believe that 2014 corn is worth a premium of nearly $0.40 compared to this year's crop, it just doesn't need corn now. Regardless of how cheap corn prices are, US producers seem to love to grow corn. As such, it might make sense to guard against a further rebuilding of US stocks next year by taking advantage of carries in futures market now and forward selling some 2014 crop.
Here in Ontario, 2013 crop corn basis is holding steady. Normally, basis levels slide as the weight of harvest pressure builds. Harvest progress has been very slow this fall, especially compared to 2012. Ontario uses about 25 million bushels of corn per month. With the pace of harvest progress at least a month behind normal, plenty of space is available to put the crop away . This empty space does not necessarily translate into a smaller crop and Ontario should still average a crop size that is somewhere in the range of 340 million bushels. Given that the provinces usage is around 300 million bushels, production will exceed usage by roughly 40 million bushels. Corn values in Ontario so far have been too strong to export more than a handful of small vessels. How long will producers be able to hang on to all of this excess corn? Logic suggests that at some point in the coming year producer sales are likely to pick up and basis levels will need to fall to clear the excess inventory. In this business however, logic does not always prevail.
The US soybean crop this year appears to have dealt well with the season's adversity. Despite a late, wet start and then a dry finish to the growing season, US farmers have been satisfied with their soybean yields. The USDA is estimating a soybean yield of 43 bushels per acre. At 3.26 billion bushels, 2013 US soybean production will fall short of the record 3.36 billion bushel crop of four years ago, but is still a healthy rebound of 230 million bushels compared to last year.
With US harvest winding down on the supply side of the equation is shifting the Southern Hemisphere. Brazilian farmers are opting for more soybean acres at the expense of both full season and second crop corn and are likely to increase acres by up to 15 million compared to last year. After a slow start due to irregular weather, the pace of planting in South America is accelerating. If the weather in South America continues to co-operate, the region could produce a soybean crop that is a staggering 15 million metric tons above last year's record crop. To put this in perspective, 15 million metric tons would be the equivalent of an increase of nearly 13 million US soybean acres or 16% of the entire US crop.
The problem that South America has is not producing soybeans, it's getting them to market. Argentinean sellers have been hanging on to their grain inventories for political reasons while Brazilian producers have been restricted from getting product to market by logistical constraints. Despite South America's record large crop this past year, hungry Chinese buyers have needed to shift their appetite to the Northern Hemisphere.
US export sales so far this year have been nothing short of huge. The USDA expects US exports to total 1.45 billion bushels this year, and as of the end of October, 1.22 billion bushels of that business was already on the books. Last year, the US exported 1.32 billion bushels of soybeans and sales at the end of October amounted to only 950 million bushels. Export shipments on the other hand are slightly behind last year's pace. While this can be explained by a slower pace to harvest, there exists a possibility that the Chinese have been overly aggressive in their buying as a hedge against problems in South America. Logistical constraints on Soybean shipments this winter may be reduced because there will be less competition for port capacity from corn. If world buyers gain confidence that they can get South American soybeans cheaper, total US exports for the year could set back.
The soybean market is probably best described as being conflicted. On one hand, global soybean supplies are large and are getting larger. A better than expected US crop falls on the heels of a record large South American crop that is likely to be followed by another bin buster in 2014. On the other hand, South American soybeans are trapped behind a wall of political and logistical resistance. Global soybean inventories are no longer as tight as they were a year ago, but the positioning of soybean inventories in terms of both space and time are still out of balance with demand. The market will continue to correct these imbalances over time and may not need to do so with higher prices. Like last year, futures market inverses and basis levels may do much of the heavy lifting.
With harvest nearing completion, many are beginning to think of marketing next year's crop. New crop 2014 beans are trading at a very hefty discount to this year's crop. Given current price relationships between corn and soybeans, soybean acres are likely to increase. It is entirely possible that North American soybean inventories can finally rebuild from the tight levels that we've now seen for several years running. While there are still plenty of opportunities left to kill crops between now and next harvest, new crop 2014 sales are at least worth of consideration.
Soybean basis levels in Ontario are very strong for this time of year. Despite strong producer sales, harvest pressure has failed to materialize. Typically, finding homes for both soybeans and corn in a way that can keep up to today's modern equipment becomes a challenge during October and the early part of November which in turn pressures basis levels lower. This year however, soybean pipelines have struggled to fill let alone to get plugged. Soybean inventories heading into harvest were depleted, bins were mostly clear of wheat, harvest progress was slow due to rain, and yields are falling short of last year. As a result, exporters have found themselves needing to scramble to fill boats and crushers have also been aggressive buyers in an attempt to take advantage of very strong crush margins. All of these factors have combined with a lack of competition for space with a corn crop that remains largely in the field.
Ontario's soybean crop will likely average somewhere around 42 bushels per acre this year, down from more than 47 last year. Exports this year should fall below last year, but likely not be enough to offset the province's smaller crop. Since we ran out of soybeans last in early fall, overshooting exports this year means that inventories in Ontario will likely be tight again this year. That does not necessarily translate into higher basis levels because current values are bumping up against US replacement costs. Producers should be wary of carrying soybean ownership too long into inverted markets amidst the prospect of larger supplies a year from now.