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Market Commentary

By Scott Krakar

June 15 2016

 

As we approach summer, grain markets will be fixated on summer weather models.  With the problems that developed in South America the need for good US crops is becoming more apparent to market participants.  Currently US crops are developing nicely.  In its recent crop progress report the USDA indicated that 75% of the US corn crop is rated good to excellent, which is better than last year’s ratings at this time.  Likewise with beans, 74% are rated good to excellent, also up from one year ago. 

In most areas of Ontario, crops are looking quite well.  Many producers report excellent corn establishment and growth.  There are also areas that have had and continue to have less than ideal weather.  Notably eastern Ontario and towards the Niagara peninsula have experienced very dry conditions.  Conversely a few areas to the west have had heavy downpours forcing replants and delays in field work. 

Other than weather, the major unknown in the grain market today is planted acreage.  Since the USDA’s prior acreage estimate the markets have changed dramatically.  Due to the losses of a substantial amount of harvest ready beans in Argentina the soybean market has rallied for 9 weeks.  This is the longest soy rally since 1973.  Did farmers respond by switching greater acreages to soy, at the expense of corn?  Did growers respond to market signals as soybean production began to demonstrate greater profitability?  On June 13th a well respected market advisory firm, Informa Economics released their acreage updates.  Without any surprise these updated estimates show that producers did respond to soy market signals.  Informa lowered corn planted estimates from the USDA’s last number by approximately 1 million acres.  For soybeans, they raised acreage estimates about 1.5 million acres above the prior USDA survey.  On June 30th the USDA will release their most current planted acreage report. 

With the reduced corn acreage good weather becomes even more crucial to the US corn balance sheet.  How will the US ending stocks look under differing scenarios?  Let’s look at the numbers:

With the current corn ratings, assuming good summer weather it is possible that the US could produce a 173 bushel average yield.  If this situation were to arise then US ending stocks would increase significantly and the US stocks to usage ratio could increase to the highest since 2005/2006.

If US yields were to be equal to the 20 year trend of 163 bushels per acre ending stocks would fall year over year and the US stocks to usage ratio would fall to the lowest level since 2013/2014.  This would result in adequate stocks even though they declined from the previous crop year. 

Even a slight decline of 5 bushels per acre from the 20 year trend  yield could potentially lower the ending stocks to usage ratio to the lowest level since 1995/1996 given poor weather.  With this yield estimate ending stocks would fall to approximately 1 billion bushels.  It is indeed quite amazing that a seemingly large carryout of one billion bushels would lower the stocks to usage ratio to a level not seen in 2 decades.  This emphasises how much corn consumption has grown.  World usage is up 17% in 5 years, 31% in 10 year and 100% since 1972.

Given these estimates is it definite that corn prices will rally?  Of course it isn’t as weather will play a key factor as we considered.  But if we do see weather problems, does that mean that corn futures will trade significantly higher?  Naturally we understand that there are two components to supply and demand estimates.  We considered supply, now let’s consider demand.  If the US experiences a weather problem the role of the corn market will be to ration supply by price.  In doing so corn demand estimates would fall, as demand is affected greatly by price.  Typically there are two demand components that are quickly responsive to price rationing:  exports and feed.  If corn rallies world and feed buyers will search for lower priced alternatives.  To find this alternative they have to look no further than to wheat.  It is apparent that the market is anticipating this as wheat futures have fallen noticeably to corn.

The US hard wheat crop harvest is well underway in Texas, Kansas and Oklahoma and yields have been good.  Likewise with the Soft red harvest, early reports from Kentucky indicate good quality and yield.  There are expectations that some areas of the US will have quality issues due to vomitoxin.  This of course will be followed closely as harvest moves north in the coming weeks.  It is widely anticipated that the USDA will show US wheat stocks to be close to 1 billion bushels in its June 30th report.  Couple this with growing world stocks and the wheat market will able to offset some corn demand if necessary. 

Ontario is similar to the US, in that we too will have a large wheat harvest.  It appears that the majority of the wheat crop will have excellent yields, however there have been some areas negatively affected by disease and dryness.  Next month we will be into harvest and we will have opportunity to confirm both quality and yield.    Once quality is confirmed we will know the marketability of our wheat in a very competitive world situation.