Commentary

Rural Voice May 2018

In parts of Ontario it has been a bit of a challenge to get corn in the ground.  Spring weather has been cool.  Some regions of the province have seen frequent and heavy rain storms that have kept planters out of the fields.  Other regions have dodged many of the rains and corn planting has gone reasonably well.   In these areas the corn is up and growing and having a good start.  Overall Ontario corn planting looks to be behind our average pace and current forecasts are predicting frequent enough rainfall to make planting delays potentially significant for some growers.

In late April there was growing concern that the US corn crop would be planted late, at that time increasing fears that final yields could suffer due to the late planting.  As of mid May these concerns have since subsided, and US corn planting is on track for an average planting pace.  US soybean planting has been very rapid and progressing quickly, well ahead of the average planting pace. 

Large spec funds have started to become friendly towards some major commodity markets recently.  This is despite the increasing strength of the US dollar against other world currencies, which usually has a negative effect on commodity prices.    Oil prices are strong and increasing as overbearing inventories have vanished and the lack of investment in the industry has caused usage to begin to outstrip production.  As we look to grain production, a similar set up seems to be occurring. 

Commodity funds continue to hold a long position in corn, beans and meal.  They will likely hold these positions until the progress of US crops is known with more certainty.  It’s no surprise that summer weather will set the direction of crop price movements, though it does appear we are heading into a period of reduced carry outs.  The market is well aware of this outlook for declining inventories however it does not seem that prices have to rally rapidly, recognizing that grain stocks are still rather large.

The USDA report released on May 10th showed a large reduction in world corn stocks upcoming.  Into 2019 world corn stocks are estimated to fall to 159.1 million tonnes, much lower than the average trade expectations which were about 183.6 million tonnes.  If corn stocks do fall this dramatically, with current world usage we would see the third tightest stocks to usage ratio since the early 1970’s.  At one time China held a huge proportion of the worlds corn stocks and these have been falling significantly in recent years as the country trims their over abundant stocks.  This of course leaves the market more sensitive to weather issues that may arise into the US growing season. 

Looking at US corn stocks alone, with today’s acreage estimate of 88 million acres, trend line yields will only maintain current stocks.  If US corn yields fall even slightly below trend, even by  about 5 bushels per acre below trend, to levels seen in the 2015-2106 marketing year of 168.4 bushels per acre, then the US stocks to use ratio falls to about 8.4% - the 4th lowest stocks to usage ratio since the 1960’s. 

Similarly with soybeans, the USDA report lowered both world and US soy stocks.  Most significantly US soy ending stocks at the end of this marketing year (2018-2019) are forecast to fall from 530 million bushels this season to 415 million bushels into next year.  This carryout has been determined using the current estimate of 89 million US soy acres and trend line yield estimates of 48.5 bushels per acre.  The past two growing seasons have produced yields greater than trend line and it is possible for this to occur again this year.  If US yields this season are 51 bushels per acre average then ending stocks would grow to a very large 633 million bushels, which is record high.  On the other hand, if US soy yields fall below trend line yields, by even approximately a bushel, to about 47.5 bushels per acre, then ending stocks would fall to the low 300 million bushel range.  This would leave the soybean stocks to usage ratio just over 7%, a level which is comfortably above the 8 year average.  From this data it appears that US bean stocks are not as sensitive to weather risks as US corn stocks.  That is unless demand changes.  The US is currently negotiating trade deals with China in an attempt to narrow their trading deficit.  This is proposed to be accomplished by China importing more US agricultural products, including soybeans.  The US has been experiencing more trade barriers into China than South American producers and for this reason the US is striving for what they term “fair trade”.  How these trade discussions go and what the results end up being are nothing but uncertain.  We do know that the US has been losing Chinese bean market share in recent years.  US soybean sales to China have been increasing in terms of tonnage however South American production has been growing their market share at a more rapid rate, capturing a larger percentage of the growing Chinese demand.  The current goal of the US administration is to capture a larger percentage of this seemingly ever growing marketplace.