There was huge divergence in grain prices over the past week, with corn being the weakest link. This is because corn demand became questionable due to it’s tie to the collapsing energy prices. Almost 40 percent of US corn goes to make ethanol.

 

Ethanol prices are trading under $.90/gallon, the lowest ever. Suddenly it is not an economical additive to gasoline, with lowest gas prices in 21 years. Production plants are shutting down to stop the bleeding. Corn basis has also dropped sharply.

 

Meanwhile, soybeans and wheat had strong gains for the week. Seasonally, grains rally in March or April almost 7 years out of 10. Also helping these markets was rumors of better exports, especially to China. South America is drying out, so crop estimates there are declining.

 

Soybean meal was the leader, rising $38.00/ton in the past week. That’s a 12.7 percent gain. Argentina, the world’s largest exporter, is in lockdown due to coronavirus, so is exporting less. Less DDG’s will be produced as ethanol plants shut down.

 

The soybean/corn ratio has obviously made a major adjustment with the relative moves this week. Because we are getting to the spring planting season in North America, it will likely mean more soybean and less corn acres.

 

In Ontario, the ratio favors soybean acres even more, as soybeans react to the weaker Canadian dollar much more than corn does. The current ratio delivered to Hensall elevators for new crop is nearly 2.6 to 1, whereas the Chicago futures ratio is only 2.4 to 1.

 

Most Hensall Identity Preserved (IP) soybeans carry a $3.25/bushel premium. Adding that to the harvest price puts the ratio to 3.3 to 1, and flat prices over $15.00 per bushel. That compares very favorably to our current harvest corn bid of $4.56/bushel.

 

Grain markets are more volatile, but nothing like the action in stock, bond, energy and metal markets. COVID-19 has drastically changed markets and the world. With volatility comes opportunity.

 

While the current situation is scary, we will come out of it. Perhaps it can be viewed as a necessary pause in our relentless, more hectic pace, and will give us time to be more reflective and think more about the most important things in our lives.

 

Frank Backx

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Grain prices weakened further, following most other markets to lower ground. The drop in May futures in corn, wheat and soybeans from the early March highs are 42, 90 and 42 cents, respectively. Ouch!

 

Coronavirus, aka as Covid-19, has caused steep losses in stock markets around the world. There have been numerous days where that market changed 10% from the previous day. Volatility is extreme.

 

From the highs hit on Feb. 20, the TSX stock index in Toronto has lost one third of its value. The S&P in the US has lost nearly 31%. These are some of the largest drops in history over that short a period.

 

The world economy will take a severe hit, as governments enact more drastic measures, in an attempt to slow the spread of the pandemic. The million dollar question is how long will it be before things get back to normal.

 

Most now think it will be months, not weeks. However, in China, where the outbreak started, things are slowly getting back to normal, as their cases have supposedly peaked. That does give us some ray of hope.

 

The stock markets drop will also be a negative for the economy, as everyone with investments will feel poorer. Partially offsetting that, however, is the huge drop in energy prices and the lower interest rates that we are now experiencing.

 

The US Federal Reserve dropped their bank rate from one percent to zero, an unprecedented move considering how low rates already were. They are also supplying lots of liquidity to the system by buying $700 billion worth of bonds.

 

While most of the blame for the lower grain prices can be attributed to the above, their fundamentals are more negative than positive also. Corn exports are down 42 percent from a year ago. China has a miniscule 2 mln bu of US soybeans on the books.

 

The crude oil collapse is hurting the ethanol industry, and there are fears that many plants will shut down. Prices are record low at under $1.00/US gallon. Meanwhile, most expect US farmers will plant 5 million more acres to their major crops this spring.

 

The only saving grace for local crop prices is the weak Canadian dollar, which fell another 2.19 cents over the past 7 days. That brings the drop since the beginning of the year to 6.9 cents. Unfortunately, lately, the Chicago drops are larger than the basis gains.

 

Livestock markets have also collapsed, as no market is immune from the panic selling. Live and feeder cattle futures have lost 28 percent of their value since the beginning of the year. Hog futures have shed 25 percent. Ouch!

 

Unprecedented times, but it’s always the darkest before the dawn.

 

Frank Backx

 

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Grain prices were mostly lower over the past two weeks. This had more to do with the outside markets than any change in grain fundamentals.

 

USDA did update their monthly demand/supply report on March 10. US carry outs were left unchanged, which was expected. They did add 1 mln mt to Brazil and Argentina’s soybean crops, so the world ending stocks did increase more than expected.

 

The volatility in stocks, bonds and many commodities has become extreme. Much of that is blamed on the coronavirus, which is having a much larger impact on the world economies than many expected it would have.

 

Quarantines and travel restrictions are growing daily. Some businesses are asking employees to work from home. Supply chains in some industries are being restricted, and shortages are becoming more common.

 

Stock markets around the world are reacting bigtime. A 5 percent daily change is happening with regularity. The biggest moves lately are to the downside. Since Feb 20, the TSX index in Toronto has shed over 3000 points or 18 percent.

 

Then on Monday, March 9, crude oil dropped to as low as 27.34 per barrel from its close the previous Friday of 41.28, for one of its largest 1-day drops ever. In early Jan., crude traded at 64.99, so the drop so far this year has been spectacular.

 

Russia and Saudi Arabia are having a price war, trying to capture a larger portion of the declining energy demand base caused by coronavirus. The deflationary spinoff from the crude oil drop contributed to the weaker grain prices.

 

Bonds were the main beneficiary of all the turmoil. US 10-year bonds traded to a low of .35 percent. Yes, that’s .35 percent. Central banks panicked and dropped short term rates a full 50 basis points also. Not all is well with the world when rates are this low.

 

While grains declined, they are holding their own better than many other markets. Perhaps that’s because prices were already near the bottom of their ranges of the past decade. But that similar situation sure didn’t help crude on March 9.

 

The Canadian dollar fell hard on the crude oil collapse to a 4-year low. Corn basis gained a dime, while soybean basis shot up 25 cents since my last report. Once again, basis is offsetting some of what Chicago does, as our dollar, being a commodity currency, tends to go in the same direction as grain prices.

 

Flat prices for Ontario growers remain in their sideways trends and actually improved due to the stronger basis Selling rallies using flat prices still makes sense to reduce market risk. A seasonal rally in March or April, just ahead of US planting, happens about 7 years out of 10. 

 

Frank Backx

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Grain prices slipped further over the past week. The biggest drop came last Monday, when it was reported the coronavirus had spread into countries such as South Korea, Iran and Italy. Grain markets simply followed many other key markets to lower ground that day.

 

Not helping prices either was the US Ag Outlook Forum that was released last week. This is their earliest estimate of what they think might happen this year. They foresee a huge increase in corn and soybean acres compared to last year.

 

Corn acres may be up 5 percent to 94 million, while soybean could see a massive 12 percent increase to 85 million. Total acres to all crops are expected to be 250.7 million, which is 5 million more than last year.

 

With carry-outs at comfortable to burdensome levels in the 3 major commodities, the higher acres take pressure off of yields in 2020. This obviously makes for a less bullish scenario than if stocks and acres were lower.

 

Despite the Phase 1 signing of the trade deal, China has been noticeably absent from buying many US soybeans or other crops for that matter. I suppose we’ll learn shortly if the trade deal has any teeth.

 

Trump will want to see action, as the US election is only 8 months away and it was the rural states that got him into power in 2016. He has threatened more tariffs if China does not honor their commitments.

 

With the latest drop in price, the charts look weak, which could induce more selling from the trend following speculators. March corn futures got within 4 cents of a new contract low. March soybeans are at their worst level since May, while wheat is at a 3-month low.

 

Specs on wheat are near record long. Further liquidation is likely, and wheat could be the weakest of the grains in the short run. Speculators are more short soybeans than corn, which should support soybeans the most.

 

The US dollar and gold are safe havens in times of uncertainty. The dollar index is at a 34 month high while gold hit a fresh 7 year high. Bond markets have also found renewed strength on the threat of slower world growth due to the coronavirus outbreak.

 

Frank Backx

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Grain prices were higher over the past week. Wheat was the best performer, after being the weak link the past month. Australia’s crop reporting agency sees a sharply reduced crop compared to what the USDA was expecting.

 

The price rotation between crops continues and trends in all 3 major crops remain sideways. The fundamentals are currently more bearish than bullish, in my opinion. Brazil is beginning to harvest a record soybean crop, and US acres are sure to be higher in 2020.

 

The demand story is iffy, despite the signing of Phase 1 of the US/China trade deal. African Swine fever has killed a lot of hogs, especially in China. The uncertainty about the coronavirus throws another monkey wrench into the potential demand.

 

Supporting prices currently is that prices are cheap when compared to the past 8 years. This limits the downside risk but doesn’t eliminate it completely. One needs to factor in also that the cost of production has increased markedly since 2012

The range in corn during that 8-year period was $8.44 to a low of 3.02. Soybeans traded between $17.95 and 7.81. Wheat’s high was 9.47 and the low was 3.60 since 2012. Current prices are much closer to the bottoms of their ranges.

 

However, that’s not a reason to turn bullish. Selling rallies is still the prudent thing to do considering odds favour a building of grain stocks in 2020 for the reasons mentioned above. Grain stocks have declined lately but are still at comfortable levels as we head into 2020.

 

Basis has been a bit of a saviour lately and is stronger than normal for this time of year.  This is because of the less than stellar crops in Ontario and the eastern US grain belt, which sets our prices adjusted for the exchange rate.

 

This applies only to old crop, unfortunately. Basis levels on new crop corn and wheat are sharply below what we’re bidding for those crops in your bin. The market is building in a potentially larger crop coming this year.

 

Other markets were mostly higher, including livestock. It is still surprising to me that hogs have not done better considering the losses due to swine fever. World fundamentals have improved as China buys more pork from exporters, but hog futures have barely responded.

 

Gold and crude oil also gained, despite a stronger US dollar. The US dollar index futures are very near to their highest level since May 2017. A stronger US dollar is usually bearish for commodities. This is another reason to not get too greedy when making marketing decisions in grains.

 

Frank Backx

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Grains were little changed over the past week. Prices are getting closer to the lower level of support in their recent trading ranges. Hopefully prices can catch hold near current levels to prevent more short selling by speculators.

 

Large trading funds are short 82,000 soybean contracts. This should provide support at some time. They are also short a record number of soybean meal contracts. They remain stubbornly long 52,000 wheat contracts.

 

USDA released its monthly demand/supply report today. Changes to the fundamentals were minor, so prices didn’t change much after the report. US soybean numbers were a bit friendly, but Brazil’s crop was raised 2 mln mt., to offset.

 

At 125 mln mt, Brazil will have another record soybean crop. Their currency, the real is at a record low, making their beans very competitive. Some question if China will import as many ag products as promised in Phase 1.

 

The coronavirus is hurting the world economy, especially in China. Many manufacturing plants remain shut down, and crude oil demand has declined markedly. Travel has been hard hit, as fear of contacting the disease is rampant.

 

The last of the $16 billion is going out to US farmers now. These payments were to counter the affects of the US/China trade war. One third of US farm income is coming from these subsidies. The US is at least trying to help their producers.

 

The Canadian government seems to be totally ignoring our farm sector. Our farmers too suffered from the lower prices caused by the trade war, but without any subsidies. All they have done is added the carbon tax to grain drying etc. This is causing even more hardship on Canadian grain farms.

 

Meanwhile agriculture provides more carbon credits than any other sector. Shouldn’t farmers get credits for growing crops? For sure they shouldn’t be punished and penalized for getting grain into a marketable product.

 

Lobbyists are pressuring the government to stop charging the carbon tax on grain drying, but as mentioned, agriculture isn’t even on our government’s radar. Very sad, since ag is a huge contributor to society, the environment and the economy.

 

Frank Backx

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Grain prices were lower again over the past week, extending the January losses. Good growing conditions in South America and the coronavirus were cited as the main reasons. Weakness in other markets, such as energies, added to the negative tone.

 

Early harvest has started in southern Mato Grosso, with strong yields. The crop still maturing is receiving ample rainfall and moderate temperatures. It is appearing more certain that Brazil will harvest yet another record crop.

 

As of Feb 3, there are over 20,000 cases of coronavirus, with 427 deaths, mainly in China. The threat of the epidemic getting worse has markets worried and the media is obsessed with the contagion. It is definitely affecting some industries, such as travel.

 

It has also affected grain prices. Phase 1 of the US/China trade deal included large ag purchases by China. However, “in the event of a natural disaster or other unforeseeable event”, they may not reach the quantities promised.

 

Some think the coronavirus could give China an excuse to not honor the trade deal. History shows they have not always been the best at honoring contracts, especially when it comes to trade. Apparently, the US will raise tariffs again if they don’t meet their targets.

 

Energy futures remain very weak. Crude oil broke $50.00 per barrel for the first time in 13 months. Natural gas futures haven’t been this low in nearly four years. Energy stocks are the weak link in stock markets, so the TSX is lagging the S&P in the US.

 

The Canadian dollar has been weak lately as it is a commodity currency. This is one of the main reasons I don’t like basis contracts. Grains and our dollar both rallied strongly in December. At the start of 2020, Hensall’s board soybean basis was $2.10 over March, while soybean futures hit 9.73.

 

Today our soybean basis is 2.45 over March, while March futures closed at 8.80. If a farmer sold the basis only at the end of the year, he would have lost out on 35 cents of basis gain. Plus, to date,  he would have suffered the $.93 drop in Chicago.

 

Marketing is about taking risk off the table. Basis contracts don’t do that. In the example above, the producer would still be subject to further depreciation in Chicago. Flat price sales keep it simple compared to basis contracts.

 

Frank Backx

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Grain prices eased further over the past week for a few reasons. The weather in South America is cooperating, so analysts are raising their yield estimates. The coronavirus is turning into a negative for many markets, including commodities in general.

 

Brazil needs regular rains because of their courser soils, especially in the main growing state of Mato Grosso. That has been happening lately, and these rains are coming at a critical time, as they are in full flowering and pod fill stages now.

 

The coronavirus is spreading more rapidly than many thought it would, especially in China where it originated.  The world is a global community, so the spread to other countries is hard to contain. It adds uncertainty, which usually causes markets to retreat.

 

Soybeans prices have been the weakest through January. Despite the signing of Phase 1 of the trade deal, China has not stepped up their soybean imports from the US in the past few weeks. Traditionally, they buy most of their beans from South America after their harvest, which is getting closer.

 

Soybeans are down 70 cents since the start of the month. Corn has dropped 10 cents/bu in Jan, while wheat has gained 13 cents. The divergence in crop prices is a bit unusual. Hopefully the wheat strength will support the other crops going forward.

 

Even though soybean export sales have been disappointing lately, actual exports this crop year are up 23 percent from a year ago. However, last year’s sales were weak because of the trade war. Corn exports since Sept. 1 are down 53 percent compared to a year ago.

 

The spreads (difference between the futures months prices) are tightening in corn. This is usually positive for price direction. Corn basis is also stronger than normal for this time of year. Both of these conditions are an indicator of strong demand for the cash product.

 

There is major deflation in energy futures. Crude oil hit 65.40/barrel on Jan 8, but fell to 52.13 by Jan 27, for a nearly 19 percent drop. Natural gas is down 37 percent since Nov. and is near a 4-year low and not far from a 20 year low.

 

The low energy prices will keep inflation in check, which should prevent interest rates from rising. It is also a positive for economic growth, as people and companies have more dollars left over to spend on other things if they spend less on energy.

 

Frank Backx.

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Grain prices were mixed over the past week. Soybeans are the weakest link, while wheat is showing the most strength.

 

The biggest “news” was the signing of Phase 1 of the trade deal between the US and China. One would think this should have been most supportive of soybeans, as that is by far the largest portion of China’s ag imports.

 

Perhaps it is the old theory of “buy the rumour, sell the fact”, as this has been talked about for over a year. Some analysts were also skeptical about some of the details that were released.

 

Apparently, China will buy an additional $32 billion in ag products over the next 2 years above what they purchased in 2017. That’s a lot of stuff! However, China also said imports would be based on need and market conditions.

 

Some wonder how much teeth the new agreement has. What if China doesn’t buy the quantities specified? China already has a bit of a reputation for not honouring contracts. Perhaps that’s why futures dropped since the signing?

 

China traditionally hasn’t bought a lot of US corn and wheat, but to reach the dollar figures in the agreement, they will need to buy a lot of those crops also. This should be supportive of those markets.

 

Wheat is also firm due to production problems in many of the exporting countries. There were rumours Russia was pulling itself out of the export markets, as the cupboard has supposedly run bare there. France, the largest producer in the EU, planted the fewest acres of winter wheat in 19 years due to a wet fall.

 

The US government announced the final one-third of the $16 billion in subsidies announced when the trade war started will still be paid out. It seems the US cares more for their farmers than any governments do on this side of the border.

 

China’s pig herd fell 27.5 percent in 2019 from 2018 to 310 million. As a comparison, there are about 75 million hogs in the US. China did expand its poultry flocks by over 10 percent to make up for some of the meat shortfalls.

 

Chinese pork imports from the US will remain strong and help them get to the trade deal targets. China continues to buy a lot of pork from Europe also. All this extra demand from China should support world pork prices through 2020.

 

Frank Backx

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Grain prices were mixed again over the past week. Wheat was by far the strongest on technical buying. The continuation charts are at their best level since August 2018, and not far from its best level in 4 1/2 years, when futures last traded at $6.00

 

The highly anticipated USDA report released Jan 10 turned out to be a dud. While the numbers were mostly bearish, prices refused to break down. This is usually a positive for price when that happens.

 

Grain stocks at December 1 were a bit of a positive surprise, and all less than a year ago at the same time. Corn is down 548 mln bu., compared to Dec. 1, 2018 and 83 mln less than traders thought.

 

Soybean stocks are down 494 mln bui compared to a year ago, but at 3.252 bln bu, is more than expected. Wheat stocks at Dec. 1 were as expected at 965 mln bu, down 115 from a year ago.

 

US yield estimates were bearish. Corn was raised 1 bu/ac from the Dec. report to 168 bu. Traders expected 166. Soybeans were pegged at 47.4 bu, up .5 from Dec. and .9 from pre-report guesses.

 

Final carryout guesses for the 2019/20 crop were higher than expectations because of the higher yields, but were tempered by the smaller Dec. 1 stocks. The bottom line is that carry outs are falling in all crops, which is a positive.

 

US winter wheat seedings were put at 30.80 mln., the lowest in over 100 years. However, soft red wheat acres were 550,000 more than traders thought. Since Ont mainly grows soft red, the report isn’t as  friendly to our soft red basis as it could have been.

 

Tomorrow is finally the signing of Phase 1 of the US/China trade agreement. This is an anticipated event, as tariffs and negotiations have been going on since March, 2018, so markets are not responding to the actual signing.

 

Hopefully some specific details will come out shortly. There is no doubt China will import more US ag products, but that too has been widely discussed. Hopefully China will adhere to whatever they sign.

 

Agriculture has been hurt by Trump’s tariffs likely more than any other industry. Hopefully the trade deal will help the US get back some of the market share that they lost during the process.

 

China buying more US ag products could cause the US to lose some of the markets they have with all their other customers, who may now have to go elsewhere for their needs. World demand is relatively static, so the trade deal is more of a shift in demand than new demand.

 

Frank Backx

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