June 17 – Corn Prices Optimism, Pessimism in Canola Prices?

Grain markets this morning are mostly in the red as better weather is nullifying corn prices reaction to the USDA’s lower crop ratings.

“One of the things I learned the hard way was that it doesn’t pay to get discouraged. Keeping busy and making optimism a way of life can restore your faith in yourself.” – Lucille Ball (American actress)

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Corn Prices Optimism, Pessimism in Canola Prices?

Grain markets this morning are mostly in the red as better weather is nullifying corn prices reaction to the USDA’s lower crop ratings.
The stock market continues to act like a pendulum, swinging back and forth between gains and losses with every headline about COVID-19 and/or economic challenges and recovery. Yesterday, stock markets were jolted higher by a new plan from the U.S. Federal Reserve to start buying corporate bonds directly (instead of via ETFs, which they’ve been doing for the past 2 months). [1] Also supporting equities was economic data that showed U.S. retail sales jumped nearly 18% month-over-month in May, improving from the 15% fall we saw in April (when compared to March). May’s number was double that of the average analyst’s guesstimate, thus exciting investors about an economic rebound. [2]
Let’s not put the cart in front of the horse though! Federal Reserve Chairman Jerome Powell admitted to a U.S. Senate Committee yesterday that there’s still “significant uncertainty” about how and when the economy is going to recover. [3] Small businesses, travel, retail, leisure, and food services all have a long way to go before we’re back to a pre-coronavirus world. That said, in a recent report, Rabobank is forecasting that restaurant business won’t return to pre-COVID-19 levels for at least another 7 calendar quarters, or mid-to-late 2022. [4] Further challenging restaurant owners will be access to credit: many still haven’t paid for the food they bought before (terms are usually net 30 days), and suppliers are skeptical of giving more food away on credit to establishments that may not exist in a few months. [5]
COVID-19 cases globally have now topped 8 million, with the recent increase in growth rates attributed to Latin America and resurgence in a few countries, including the U.S. and China. In the U.S., 6 different states – Florida, Texas, Oklahoma, Arizona, Nevada, and Oregon – reported a fresh record for new cases in one day, which is intuitively weighing on the optimists, hoping for a return to normal sooner than later. [6]
In China, Beijing authorities closed all schools and cancelled two-thirds of all flights as their efforts to contain the virus have not worked, and it is now spreading to neighbouring provinces. [7] In that vein, China is spreading itself into neighbouring provinces, recently including India-controlled areas of the Himalayas. After 7 weeks of encroaching on India’s territory, tensions blew up and a clash between Indian and Chinese forces left 20 Indian soldiers dead. [8] The Chinese government refused to comment on how many of its soldiers were wounded or killed.

Canola Prices Feeling Heavy Again?

A weaker Canadian Loonie has helped canola prices climb to new multi-week highs, but the oilseed is facing some technical levels of resistance around the $475 – $476 CAD / MT area. [10] The ironic dynamic here is that as oil prices fall, so does the Canadian Loonie, and while that would support higher canola prices, the weakness in the broader oil markets will weigh on canola prices.
That said, canola prices continue to be supported by both crush and export volumes that are tracking above last year’s pace and appear likely to meet Agriculture Canada’s forecasts. On the bullish (but tough to see) side of things, hail throughout parts of Alberta likely wiped out a lot of acres, which will be added to the pile of fields that went unseeded this spring because it was too wet. That said, there is some more moisture for Western Canada over the next week or so, which will be a healthy reprieve for some areas that received less than half the moisture they normally do by the middle of June.
Canadian 2019/20 cumulative canola exports through Week 44
Canola prices and ending stocks estimates from AAFC's May estimate
Obviously, canola prices will also be watching soybean prices going forward, which might have a little room to run if Chinese demand materializes. However, putting pressure on soybean prices was May’s NOPA crush report, which showed just 169.6 million bushels used (or 4.615 MMT if converting bushels into metric tonnes). This was 3.5M bushels below the average pre-report analyst guesstimate, but it is about a 10% improvement of May 2019’s soybean crush by NOPA members, and it’s also a new record for the month of May!
While May’s soybean crush volumes suggest COVID-19 had a greater impacting on processing capabilities than once thought, just 159M bushels will be needed to be crushed each of the next 3 months to meet the USDA’s expectation of 2.14 Billion bushels for the total 2019/20 crop year. Inherently, this seems achievable and so we might see the USDA raise their expectations soon. Nonetheless, China buying more American soybeans (like the 1.11 MMT they bought in 4 days recently) is likely the only thing that will keep soybean prices (and therein canola prices) performing their usual downturn as we get deeper into the growing season. [11]

Crop Progress Firms Up Corn Prices (Briefly)

In Monday’s crop progress report, corn crop conditions came in lower than the expected 75% – 76%, as the USDA said that just 71% of the crop was rated good-to-excellent (G/E), down 4 points week-over-week. [12] The decline was mostly attributed to poorer conditions in western areas of the Corn Belt, which has seen higher temperatures, higher winds, and limited rainfall. The same area saw its soybean G/E ratings also drop, but this was made up for better crop ratings in other areas. Thus, nationally, 72% of U.S. soybean fields are rated to be in G/E, unchanged week-over-week.
On the wheat side of things, drought conditions in the Southern Plains is having a negative impact on winter wheat quality, as its G/E rating was lowered by 1 point to 50%. This is also well below the 64% G/E rating seen a year ago. 15% of the American winter wheat crop is now in the bin, which is in-line with seasonal averages and double that of a year ago, but it was less than what the market was expecting. Finally, the U.S. spring wheat crop is holding a 81% G/E rating, down 1 point from the previous week, but above the seasonal average for this time of year.
While there is some bullish sentiment after the significant lowering of the corn crop’s quality ratings, the weather forecast for the rest of June is relatively benign. Elsewhere, welcome rains are expected to start falling again in France as most of Europe as experienced above-average rainfall for the past week. While this is delaying the start of the winter crops harvest (and likely impacting some quality as well), the clouds are providing much-needed moisture for spring-planted crops after an extremely dry May.

Corn Prices: Up, Down, or Sideways?

Coming back to U.S. corn prices, we’re starting to get a better understanding of what demand is looking like in the new COVID-19 world, as well as crop production potential. For the latter, it starts with acres planted and more analysts are pointing to weakness in fertilizer prices as evidence that U.S. farmers planted something like 94M – 95M acres of corn, not the 97M that the USDA reinforced last week in the June WASDE. Fertilizer companies themselves have downgraded their estimates of U.S. corn acreage, with Nutrien estimating it could be somewhere between 94M – 96M, while CF Industries thinks it could be lower, between 92M – 94M. [13]
On that note, the USDA’s estimate of trendline yields of 178.5 bushels per acre off the 97M acres planted has many (including yours truly) scratching their heads about where corn prices end up if that materializes. Well, scratch no more, because the great ag economists at the University of Illinois’ Farmdoc Daily program did the work for us, looking at the likely scenarios for December 2020 corn prices based on different corn yields scenarios. [14] As a reminder, the corn prices listed below are futures prices, which implies that cash corn prices will be even lower.
Corn prices based on 2020 U.S. corn yield possibilities
On the demand side, ethanol production is running at about 76% of last year’s levels and stocks are about one-fifth below where they topped out during the peak of COVID-19 shutdowns. [15] With gasoline demand still tracking about 20% behind a year ago though, this will continue to pressure ethanol plants ramping back up, and therein, corn prices. That said, the focus is starting to turn to 2021 already in the ethanol market, as well as the potential for smaller crops in South America. [16]
Like soybeans, we might have to look to China again though as domestic corn prices sitting at 6-year highs there are leading more buyers looking to import. The rise in Chinese corn prices is largely attributed to stronger pig herds and the corn that the Chinese government has been auctioning off doesn’t really meet the needs of a hog industry that’s trying to rebuild.
Another thing to consider is what happens in wheat prices, as much more corn is going directly into the feed market, where it competes with wheat. Long time respected analyst Jerry Gulke notes that those watching corn prices should also be watching wheat prices, stating, “I’ve watched many times where wheat has broken uptrends, and then I start looking for corn to do the same thing.” [17]
Ultimately, these comments and those of all others are entirely speculative at this point, but they’ll become more certain as the calendar and growing season progresses. With the ample supply and depressed demand, there will be heightened scrutiny over the U.S. corn crop’s critical growth and pollination stages in July, which could provide some volatility (and thus opportunities). Thinking beyond this summer, FocusEconomics poll of various analysts suggest an average guesstimate that corn prices will improve to $3.41 USD/bushel by 4Q2020 and $3.58 in 1Q2021. [18] And while I mentioned in my interview with Shaun Haney from RealAg Radio yesterday, I’m not as bearish on corn prices as I was 6 weeks ago, I’m still very far from being bullish. [19]
To growth,
Brennan Turner
CEO
FarmLead
TF: 1-855-332-7653
help@combyne.ag
@Combyne or @FarmLead on Twitter
At 8:10 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.353 CAD, $1 CAD = $0.7391 USD)
Sept Corn: -2¢ (-0.6%) at $3.323 USD or $4.495 CAD
Aug Soybeans: -2¢ (-0.25%) at $8.66 USD or $11.717 CAD
Aug Soybean Meal (per short ton): -$0.80 (-0.3%) to $289.20 USD or $391.29 CAD
Aug Soybean Oil (cents per lbs): -0.13¢ (-0.45%) to 28.05¢ USD or 37.95¢ CAD
Sept Oats: -1.5¢ (-0.5%) at $2.853 USD or $3.859 CAD
Sept Wheat (Chicago): -4.5¢ (-0.9%) to $4.968 USD or $6.721 CAD
Sept Wheat (Kansas City): -4.5¢ (-1%) at $4.425 USD or $5.987 CAD
Sept Wheat (Minneapolis): +1¢ (+0.2%) to $5.273 USD or $7.134 CAD
Nov Canola: -0.2¢ (-0.04%) to $10.755/bu / $474.20/MT CAD or $7.949/bu / $350.48/MT USD
COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

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