It was sub-zero temperatures in SW Ontario the last couple of days and although this made it crazy cold for putting machinery away, it did open up a window for harvest to ramp up. It’s funny, I travelled last night 40 kilometres north of here to a function and I passed more combines and farm equipment in the dark than I did since October. Frozen soil and sub-zero temperatures make for a clean harvest. Combines, grain buggies and tractors were running as clean as a July wheat harvest.
Hopefully, these conditions last for a couple more weeks. We’ve got too much crop still left out in Ontario and Quebec. The frozen farm tundra helps, and of course better prices might help too. Late today, we learned the Americans think they have a farm trade deal with China. However, it seems to be a verbal thing, as one side or the other sees no need to write it down.
Needless to say, crop prices advanced on the effervescent tweets coming from the American president last Thursday. As I write this soybeans are up 12 cents as a reaction to the possible resumption of normal trade with China and agricultural commodities. Keep in mind over the last year and a half we have been waiting anxiously for this news, only to be disappointed many times. However, this time, apparently, its real. I feel like laughing out loud.
Into the mix this week we had the latest USDA report on world agricultural supply and demand. The December report is usually pretty quiet, and the December 2019 report was exactly that. The USDA is still projecting corn production to be 13.66 billion bushels and soybeans to come in at 3.555 billion bushels. Corn is expected still at 167 bushels per acre and soybeans at 46.9 bushels per acre. 2019 is an old movie.
What everybody should be focused on is the apparent trade deal announced today, which we really know nothing about. There should be no illusions of grandeur. I don’t think the Chinese are incredibly happy to start buying soybeans with reckless abandon again. American soybeans will likely only be a residual supplier. The thing that might change is non-commercial demand. Non-commercials had moved to a net short position last December 3rd, which is likely now being revered. They follow headlines and shouting about a trade deal that might actually be there could shift momentum.
Keep in mind, demand is most of our problem now in agriculture. Let’s check those futures prices again. March corn is $3.77 and January soybeans closed at $8.98, nothing to write home about. Supply is not our problem, even with all the problems we had this year, futures prices are low. The one caveat is that the cash market is reflecting some of the problems in harvest fields. Whether it’s in Ontario or Quebec, or some American states, basis has been buoyant. The question is when will convergence comes between futures and basis?
Of course, arbitrage can be a funny thing. A pile of rocks in an Eastern Ontario field is a pile of rocks but put them in a Home Depot on a Saturday morning in April and they are bought for the flower garden. At various tourist haunts, I’ve seen gum ball machines full of dry corn, where you get five kernels for 25 cents to feed the birds. You know the drill. That’s why basis is important and with corn still in the snow across Eastern Canada, arbitraging basis is a big deal.
Case in point is the $2.10 plus basis for corn FOB south of Montreal! That’s a fat dollar more than I can get at an elevator in SW Ontario. However, in the Montreal area, corn is about 80% harvested but quality is rough, and merchandisers are scrambling to fill needs. It makes marketing a challenge. It’s an Eastern Canadian thing. Our midwestern American friends don’t think of foreign exchange and have corn everywhere. It makes for a different world for selling crops.
That is always the proverbial marketing challenge for Canadian crop farmers. On the one hand you have grain futures volatility and on the other hand you have basis volatility which sometimes is much wider than futures gyrations in Canadian currency. It means that our grain marketing strategy as Canadians has to be different than our American friends.
Add to this the 123 MMT and 53 MMT of soybeans which are growing in Brazil and Argentinian fields as I write this. Big supplies are on the way along with the 14 million more American acres next year. At the same time Bank of Canada Governor Stephen Poloz has said Canadian interest rates will remain low, with a corresponding low Canadian dollar. So, what’s that mean for cash Canadian grain prices?
It’s hard to say, and even harder to plan for. However, keep in mind, its uniquely Canadian and because of that, you need Canadian strategies. That trade deal might have been stuck between the US and China today. Needless to say, it’s a big variable. The challenge for Canadian farmers is to create their own Canadian centric grain marketing plan. Daily marketing intelligence is key. Sometimes this is difficult especially in areas of Canada where crop prices lack transparency. However, we should never stop trying. At the end of the day, it can be quite rewarding.