Corn
Despite a historically tight stocks-to-use ratio as forecast by the USDA, the corn market continues to
grind lower. The market has provided some relief rallies since fall, but each high tends to be lower than
the previous high. The corn market is now threatening to fall back to price levels not seen since last July
when the US drought first caused the market to take off. Corn’s weakness stems from impressions that
needed demand rationing is being accomplished. Should the market soften too much however, demand
could return to the point at which it overwhelms the limited old crop supplies.
The bulls in the trade talk of an impending jump in export demand, but this may prove a difficult task as
US corn prices remain the highest in the world. The USDA acknowledged sluggish export commitments
by decreasing exports by 50 million bushels in its February Supply and Demand Report. Export sales to
date are currently running 52% below last year's pace, while total exports are forecast to fall by only
42%. The weekly pace of exports will need to be bumped up by roughly 28% for the remainder of the
year just to meet the USDA’s current 900 million bushel projection.
Ethanol grind continues to struggle as margins remain negative in areas with high corn basis levels. As
such, several plants are sitting idle across the United States. Imports from Brazil have slowed to a trickle
ahead of an upcoming increase in Brazil's mandatory blend rate from 20 to 25%. This should help to
keep a floor under corn demand for ethanol going forward, and a combination of lower corn and higher
ethanol prices could bring plants back online.
While estimating exports and industrial usage is relatively straightforward and measureable, calculating
feed usage is a less precise undertaking. Feed usage as calculated by the USDA for the first quarter of
the marketing year was shown to be record high, despite an underlying environment in which corn
prices for the period were the highest in history and livestock herds were being liquidated. It is quite
possible that feed usage was overstated in some manner and is not likely to continue at its current
strong pace, especially given the threat of wheat working its way into feed rations. The market is hoping
for more clarification from the USDA’s next stocks report to be released at the end of March.
In the coming weeks, market focus will shift from the old crop to the new. Early acreage estimates
range from 95 million planted acres right up to 99 million acres. While it is still far too early to make any
predictions as to the eventual size of the crop, the potential to significantly rebuild stocks should not be
ignored. If we assume a crop of 89.5 million harvested acres, any yield greater than 133 bushels per
acre would increase supply compared to the current year. In other words, it would take another crop of
less than 133 bushels per acre to require more demand rationing than what was needed this year. If the
size of the crop were to approach or exceed 160 bushels per acre, supplies could become burdensomely
large. In fact, a 160 bushel crop harvested on 89.5 million acres would result in a record large supply of
14.95 billion bushels. During the 2009 marketing year, US domestic corn usage reached a record 13.07
billion bushels. To achieve that level of usage, Chicago corn futures traded in a range from about $3.50
to $4.25 per bushel for the bulk of the marketing year. Somehow the market will need to manage the
transition between snug old crop supplies and a potential rebound in supplies to surplus levels by fall.
Here in Ontario, producers have been reluctant sellers with recent lower Chicago futures prices. Basis
levels in Ontario are relatively low, and unlikely to improve in the nearby slots due to ample end user
coverage. Any rally in basis will be in the May-September shipping periods and will be contingent on the
on the amount of corn that can be exported out of the province by truck, rail, and vessel. Wheat
continues to work into feed rations, displacing corn, and this is not likely to change once the large
Ontario wheat crop is harvested.
Soybeans
The nearby Chicago futures market has made multiple attempts since November to break through the
$15.00 per bushel mark. The latest run to $15.00 was spurred on by too dry conditions in South
America. The USDA acknowledged Argentinian crop concerns in its February World Supply and Demand
report by trimming the country’s production by 1 million metric tons. What the USDA also did was
remind the longs in the market that despite some pockets of concern, the Brazilian soybean crop is
looking wonderful and is able to make up for any losses in Argentina. At the same time that the USDA
was delivering a blow to those who were bullish, the weather forecasts in Argentina began to show
improvement. Suddenly, the $1.50 per bushel rally in the market since the turn of the calendar year
seemed excessive, and a selloff ensued.
The total South American crop will almost certainly be record large this year, and is likely to be as much
as 25% greater this year compared to last. For the most part, Brazil has benefitted from beneficial
weather. A Brazilian crop of greater than 82 million metric tons is very possible and would allow Brazil
to displace the United States as the world’s largest soybean producer for the first time in history.
Market concerns for Brazilian soybeans are now shifting from crop development to logistics. The
Brazilian grain industry has never been tested with a crop this large and the world needs it in a hurry.
Recent changes to the number of hours that truck drivers are allowed to operate and inevitable
bottlenecks at the ports have many soybean traders nervous about potential delays in getting the crop
to market.
Total soybean exports out of the US for the current marketing year are projected by the USDA to be only
slightly below last year, yet export commitments thus far already amount to 93% of projected
shipments. Current ending stocks are projected to be very thin, leaving very little room for additional US
shipments this spring and summer. With new supplies soon to be available in the Southern Hemisphere,
Chicago futures do not necessarily need to climb higher to curb additional overseas sails. As long as
logistics in South America can keep up, Chicago prices need only to maintain a premium relative to
Brazil. If either Brazil or Argentina does run into logistical issues, the solution to tight North American
old crop supplies may not be so simple. The soybean market would need to work to cut domestic crush
and to encourage the Chinese to dip into their reserves so they can roll purchases forward to new crop.
The task of shifting business from old crop to new crop can be accomplished with wider spreads
between old crop and new crop futures values.
At its Outlook Conference on February 21st and 22nd, the USDA will provide its first legitimate indication
of the potential size of the upcoming year’s soybean crop. Given that South America is well on its way
to having a large crop, the importance of a near-perfect summer is less critical to the soybean market as
it has been in the past. New crop soybean futures at $12.74 still command a sizeable amount of
weather premium that has the potential to erode over time.
Statistics Canada reports noticeably lower on-farm soybean inventories in Ontario compared to last year
and commercial holdings are likely also lower. Exports out of the province were sufficient to clear away
much of our large crop last fall, and what remains is roughly equal to domestic crush. As it stands now,
spring exports are unlikely due to the availability of cheaper beans in South America.
Strong producer selling during late January and early February helped Ontario’s crushers to obtain
coverage and to relax their bids slightly. Producer selling has since evaporated as the market rally failed
and the flat price of soybeans dropped. Ultimately, the direction of basis levels from here will be
determined by who flinches first. Does the farmer give up and sell inventory to generate cash for spring
planting and space for his wheat crop? Or does the farmer hang on long enough for the crusher’s
ownership to dwindle? If producers are willing to hang on, they need to realize that they are doing so
without the benefit of any carry in the futures market.
Wheat
The wheat market is in the process of making new lows that date back to last summer. Anticipation of a
lot of US export business has failed to materialize thus far and frustrated longs in the market are
throwing in the towel. Hard red wheat is starting to catch a bid, but interest is generally too weak to
significantly change the fact that supplies are still plentiful. Wheat is finding some support as it works its
way towards levels that allow for feeding, however this does not tend to be a factor that will spur a new
rally.