Commentary

December 14 2017

As 2017 came to an end, the strength in US and Canadian stock markets remained, with both in record high territory.  Clearly market watchers, traders and investors displayed optimism in the economy progressing and continuing its growth into the New Year.  With the improving economic prospects the US Federal reserve continues to raise interest rates, with 3 rate increases in 2017, measuring only 6 increases since 2008.  Anticipations are for 3 to 4 more US rate increases in 2018 as the Fed tries to normalize interest rates.  Crypto currency’s, most predominately bitcoin, have been the focus of a lot of media attention and have attracted large amounts of investment capital.  Commodities continue to be out of favor with many investors, most notably with agricultural commodities.  Agricultural prices are so weak that the Bloomberg Agriculture Commodity Index is at its lowest level since late 2008.  Some market analysts remark that the ag markets are entirely deflated into modern historical lows and investment money should find value as rebalancing occurs from expensive asset classes. 

Our local harvest seems to have dragged out over what seems an extended period of time.  Even into mid-December there was still a noticeable number of corn fields yet to harvest.  This variability in harvest time is of course the result of spring planting which was difficult in many places with the wet start.  Overall however, the year turned out pretty well considering what seemed like a challenging growing season in many areas.  Statistics Canada recently reported their corn production estimate for Ontario to be 167 bushels per acre, up over 5% from last year.  Throughout harvest there have been many growers reporting large corn yields with some showing record yields.  With solid yields and slightly increased corn acreage Ontario has a good supply of local corn.  Even with these large yields growers are not readily selling corn.  Flat price corn is very cheap, with corn futures falling recently to new lows.  Basis levels continue to be strong especially coming out of a large harvest, as many growers hold tight to their stocks. 

Statistics Canada estimated Ontario soybean production to be record high at 3.8 million tonnes this fall.  Not only did soybean growers plant record high acreage of 3.1 million acres (equaling the record high acreage in 2014) but yields also performed very well on average.  Overall provincial soybean yields equaled 45.6 bushels per acre, falling slightly from last year’s yield.  With the exception of areas with extreme drought throughout August beans had another solid year.   

The price outlook for grains and oilseeds remains dismal into 2018.  The only positive that one can readily see is that the commodity funds (large speculators) are short extremely large positions in grain and at some time the market should find support and strength when they exit these positions.  The question that remains however is when and why would they exit these positions?  Grain inventories are still burdensome worldwide and with the carry structure of the market these funds remain profitable even if we see a sideways market over the long term. 

Ethanol production in the US remains very large and growing and in its recent December report the USDA increased its US ethanol corn use estimate to record high.  With this increasing ethanol demand estimate the US corn ending stocks dropped slightly to 2.437 billion bushels.  In other words it is well established that the US has large and growing corn inventories.  Therefore in order to see a price rally one would need to see other key regions experience poor production as we progress through their growing season.  Parts of South America, most notably Argentina has seen some dry weather, although it is still early in their crop year. 

Drought conditions in Argentina are potentially very impactful to the soybean market if production is threatened.   How dry is it in Argentina?  It has been reported that it is the 4th driest year since 1979.  Argentina is the worlds largest soymeal exporter, which accounts for about 46% of the worlds soybean meal exports.  Similar to corn, US inventories of soy are large and burdensome.  Without a weather issue in South America to threaten world production it looks as though soybean prices could have further to fall. 

Wheat market exports have been dominated by Russia as their crop was absolutely huge this past year.  This year it is estimated that their crop was 83 million metric tonnes as opposed to last year’s crop of 72.5 million metric tonnes.  As 2017 came to a close US wheat futures fell to competitive world values and into 2018 there is hope that US wheat becomes exportable into the world market again.  As of this writing, US soft wheat was becoming competitive with corn into South Eastern feeding areas of the US and this too should eventually support wheat prices, as more supply is consumed.

In Ontario there is some wheat feeding occurring, however it is not nearly to the same degree as last year at this time.  With the corn crop not nearly as affected with vomitoxin this year large wheat feeding will only occur with competitive pricing, not by necessity as buyers last year were forced to search for low vomitoxin grain.