Commentary

August 24 2017

Market confidence has been waning as many question the likelihood of the once optimistic reforms promised by the US government.  Currently the market demonstrates skepticism in the promised reforms, which were supposed to have delivered a business friendly environment.  The reforms prospects are dwindling as the US faces external threats and internal dysfunctionality.  The conversation has changed from tax cuts and infrastructure development to continued unpredictable and shocking statements.   Recently President Trump announced that he will “probably terminate NAFTA at some time”, stating that the US has gotten a “bad deal” in the past.  The President’s economic advisory council has been disbanded as CEO’s from many US business stepped down and there is a threat that the US congress may be shut down due to the presidents distain for what he presents as an uncooperative congress.  How many of these issues become reality, and if they do, what their impact will be is not fully known, however market participants view these events as a risk and risks do not encourage investment and continued market strength. 

As we head into September grain markets are extremely weak.   Early in August many were concerned with drought in many states, notably in the Dakota states and in the greatly important corn state of Iowa.  The August 10th USDA report put these worries aside.  In its July estimate the USDA estimated corn yields to be 170.7 bushels per acre on average and most analysts thought that in the August report estimated yields would fall to 166.2 bushels per acre.  Instead the USDA only dropped yield slightly and corn yield was estimated to be 169.5 bushels per acre.  This slight decrease caught the market off guard and speculative funds who owned lots of corn have been liquidating their positions.  Currently we are waiting for alternative crop tours to report estimated corn yields and anecdotally we keep hearing that variability is huge within the crop.   Typically variability is not an indicator of high yielding crops and if there are crop problems we will likely not see them reflected in the market till harvest. 

The USDA raised soybean production in their recent estimate.  In July the USDA estimated 48 bushel per acre average and in August they estimated 49.4 bushels per acre.  This estimate is compared to an average analyst guess of 47.5 bushels per acre.  Everyone who grows beans knows that August is almost the only month that matters in determining bean yields.  The “I” states (Indiana, Illinois and Iowa) represent almost 1/3 of the entire US soybean acreage.  These states have recorded below normal precipitation this summer and therefore it is possible that yields could come in below current estimates.  It is interesting to note that if yields fell to the mid 44 bushels per acre (4th highest yield or record) then ending stocks would drop to the second lowest stocks on record.  With strong demand prices would have to rally aggressively to ration demand.  Each bushel per acre of production equals 90 million bushels of production.  Therefore even seemingly small changes in final bean yields can have an extremely large net result in ending stocks and price.

Wheat prices are almost too disappointing to discuss.  The severe drought in the US spring wheat growing area rallied the wheat market to recent highs, as panic caused many to buy.  The spring wheat balance sheet appeared as though it would tighten extremely and millers would have difficultly procuring high protein wheat.  The tightness in the spring wheat crop caused all wheat prices to rally and prices strengthened to very good levels for producers.  As fast as the wheat market rallied it fell back again – falling to new contract lows.  US wheat prices rallied above world market values and sales from the US became uncompetitive.  Because current US inventories cannot be lowered at above world values the market has fallen aggressively to stimulate demand. 

The Ontario grain trade is extremely quiet with our current low price environment.  Producers are not willing sellers and will hold onto grain until they need storage space or cash to service payments.  As a consequence basis levels have strengthened in the spot market as end users try to pull bushels from reluctant sellers.  This situation is not likely to change in the near term.  Local corn basis levels have rallied to prices that allow the importation of corn and imports are occurring.  Wheat basis levels have strengthened in US dollars substantially, although this strength isn’t readily apparent to local cash sellers because the Canadian dollar has risen and futures have fallen simultaneously. 

Wheat yields appear to have been strongest in the west part of the province and generally become weaker as one moves east this growing season.  This is similar to precipitation accumulation.  Parts of south western Ontario are experiencing dry, almost drought conditions, while eastern Ontario can’t get a break from every type of precipitation you could possibly imagine.  It doesn’t seem that the east can catch a break and the crop has significantly suffered.  While many acres didn’t get planted it seems that many that did get planted may never get harvested.  Crop development in many parts of the province is behind normal and many are starting to consider the possibility that these crops will not reach maturity as the calendar keeps moving toward fall.  This situation will keep basis levels firm into harvest, at least until this fear subsides.