Our Canadian Loonie Adds a Consistently Different Canadian Layer to Grain Marketing

Loonie Starburst Butterfly 510
This past week planters were rolling in Essex County in the extreme tip of southwestern Ontario.  I had let a friend know that I’d be more than willing to drive a tractor to get that crop in the ground.  The provincial crop insurance agency Agricorp had extended the crop insurance deadline to July 7th.  I called my friend and he said he had three planters going trying to get the crop in the ground.  In this extreme southwest part of Ontario, planting season has certainly been an adventure.

The Essex County example is somewhat salient today because it is the closest region to the US Eastern corn belt, which has been deluged with rainfall this late spring and early summer.  For instance Illinois has had 2 to 3 times the normal rainfall that they usually had in June.  Since May 1st Illinois has accumulated 14.7 inches when usually they get 8.4 inches normally.  As of July 9th, Illinois corn conditions have decreased to 61% good to excellent after being 80% good to excellent on May 31st.  Needless to say, our grain markets have responded to the trouble in American fields.  Essex County just happened to be a convenient geographic casualty on the Canadian side.

For the farmer who has crops with wet feet it is a bit of the worst of times.  For instance, myself I never like to see my soybeans in heavy clay wet soils.  I’m a bit behind the eight ball anyway because I did not get any wheat planted last fall.  It means that my crop rotation has being blown to shreds and all this heavy rain has made for a beat up crop.  However, many people told me that soybeans are the great liars and that that crop may eventually turn out very well.  I have my doubts, I farmed all my life, and I think I’ve seen this movie before.

Needless to say, the USDA will chime in with their latest production numbers tomorrow morning.  If you look at the corn yield number you can see predictions between 163 bushels per acre and 169 bushels per acre.  The soybean predictions are from about 43.5 bushels per acre to 46.1 bushels per acre.  The USDA has stood pat at 166.8 bushels per acre and 46 bushels per acre respectably.  Then came the flooding rains.  The market has reacted to some extent and farmers are waiting for the USDA to change their official numbers.  Unfortunately, as DTN has documented, the USDA does not change production estimates much in their July reports.  Its more likely that we will have to wait until August and even October to know exactly what is happening in those production fields for both acreage and yield this year.  If the market runs amok, in the mud, so be it.

Of course all of those crops with wet feet will be balanced out by the crops in the Western and northern corn belt, which are doing better.  In Ontario, we will have the same debate.  Throughout much of southwestern Ontario too much water has damaged crops, not so much in Eastern Ontario.  In my mind it would be very unlikely that we repeat the higher yields that we had in 2014.  The question is will the new reality of $12 plus new crop soybeans and $4.75 a bushel new crop corn be a savior for everybody.

I call that a market opportunity.  For the longest time in 2014 the price of Ontario corn declined into the $3 range.  Soybeans prices declined as well, but it was all mitigated by a Canadian dollar in free fall.  This past week, with our Greek friends defaulting on their debt payments to European creditors, it was good for the US dollar and bad for our Canadian loonie.  This coming week Bank of Canada governor, Stephen Poloz may cut interest rates again.  If that happens, expect the loonie to fall precipitously on that day.  That alone, will boost Canadian cash grain values even higher.

Of course, that facet of our Canadian grain marketing is nothing new.  As Canadian farmers, we are very used to keeping abreast of Canadian dollar movement.  The difference this time is the futures market is somewhat more bullish and the Canadian currency market is not.  It may be shaping up as the perfect storm for better price opportunities for Canadian grains and livestock.  We’re already a third of the way there; the stars may align to take us a little bit further.

As of July 9th the new crop corn basis in Ontario ranges from $.35 to $.90 over the December 2015 futures price.  The new crop soybean basis ranges from $1.85 to $2.14 over the November 2015 futures.  The SRW wheat basis is $1.33 over the September futures price.  If you only go back 2 years, the loonie was at $1.05 US and those basis values might be the same with negative signs in front of them.  That’s how powerful the value of the loonie can be for Canadian farmers.

So when the Bank of Canada makes their announcement this week, hold your breath.  We have a different layer to our crop marketing vs. our American friends.  With the US crop damaged and macroeconomics boiling, our cash basis levels will flex greatly.  Daily market intelligence is key.