The Ontario Cash Grain Price Mirage And the USDA

I saw a picture of some Safrinha corn posted the other day on Twitter. It was from a Brazilian friend of mine, Sergio, who I talk with often. The corn looked to be in the five-leaf stage, off to a good start with some nice rains. It reminded me that our grain production system is never-ending. My Brazilian friend harvests his soybeans and then plants some of his land immediately into corn. That’s happening even though we have some huge crop surpluses in this world. I say that on the eve of the March 31 USDA report, which is when the USDA generally resets the goalposts on grain markets for the year.

The Safrinha crop numbers will probably just be a minor blip within the March 31st USDA report. This will be the second look at new crop projected numbers, the first look coming from the USDA conference in February. The US numbers pre-report say US corn acreage will come in at approximately 91 million acres down from last year’s 94 million. Soybeans are expected to increase to 88.1 million acres, well above last year’s acreage total of 83.4 million acres. Of course, that is just an estimate; there will be several retracements of that right up until January 2018 when the USDA resets the goalposts again. Needless to say, these USDA reports are great for grain traders.

I have a hard time with the thought that soybean acres will be more than corn acres in the United States. We all know the old axiom that the US farmer loves to grow corn. However, with cash prices at very low levels across most of the American corn belt, profitable new crop soybean prices locked in earlier would be compelling. If there was ever a year were that might happen, this might be it.

Surprises are likely, as they seem to always happen on March 31st, June 30 and in the first two weeks of January when the USDA releases big reports. Keep in mind there is much debate on whether these reports really matter for market watchers. It is true, these reports are very important for traders who trade grain in microbursts. However, this market has been bearish for a long time. We all know it, some or all of it might be dialed into the market. Future spreads do not tend to lie. A watchful, daily intelligence of those future spreads and local basis values need to be valued along with the occasional noise from the USDA.

The situation on the ground in Ontario farm country is somewhat different. The Canadian dollar has been hovering around $.75 for several weeks now and this continues to create somewhat of a price mirage to local market psychology. When you could have locked in $5 corn and $13 soybeans for 2017, isn’t that good enough? I can’t argue with that, even though it is a mirage compared to what our American friends are dealing with on their farms. The question is, what is the crop mix in Ontario this year and how might that affect our market prices over time?

In Ontario last year we had approximately 2.015 million acres of corn harvested across the province. At the same time we had 2.695 million acres of soybeans harvested. As we look ahead into 2017 it is difficult for me to see that changing. The Canadian cash price optics has been good for both crops and with corn productivity somewhat better than soybeans it’s hard to shut those corn acres down. Of course, much will depend on spring weather in Ontario. Sometimes that soybean number can increase when we face a very wet spring. Of course, we do no way close to know what weather will be.

The challenge of course within these Ontario production decisions has to do with the price mirage, which the very low Canadian dollar creates. If you can tell me what the Canadian dollar is going to do over the next year, I will have a better appreciation for what cash prices might be especially in soybeans and wheat. Ontario corn on the other hand is never quite affected by the gyrations in the Canadian dollar like soybeans are. As of now, based on where this cash price mirage is now, its difficult to see this crop mix change.

Will things be more clear post March 31st USDA? Or will there be just more smoke making our price expectations somewhat hazier? Keep in mind, no matter what happens, theirs hardly being a seed planted in the northern hemisphere as of yet. There is much price and production risk ahead. Risk management never grows old. Daily marketing intelligence will remain key.