USDA Grain Projections Rise, Amid a Deepening Mirage in Canadian Cash Prices

It has been a very mild winter in southwestern Ontario.  In fact, you can feel a twist of spring in the air even in these very early days of March.  For those of us who live in cold climates, it’s something we always look forward to.  However, in the southern hemisphere the early days of March represent harvest time.  We are just now finding out the true extent of the great crops grown in South America over our winter.

The USDA released their report last Thursday March 9th.  We have been besieged by huge surpluses for the last several years and this was increased in 2016.  There was a lot of anticipation leading up to this report of any rays of light might emerge.  Interestingly enough, that didn’t happen as the USDA weighed in with increased South American crops.  The USDA is predicting a record 108 MMT crop of Brazilian soybeans up from last month where they had predicted 104 MMT.  We had been hearing about an increased Brazil soybean crop all year, but the market was somewhat surprised by the degree of which the USDA increased their estimate in one month’s time.  The USDA kept Argentina’s soybean crop at 55.5 MMT, the same as last month.

Of course all of this has added to the bearish tone in the grain futures market.  The USDA also increased Brazil’s corn production to 91.5 MMT an increase of 4 MMT over last month.  Not only were corn yields at record highs, but also the Safrinha crop is quickly going into the ground.  The USDA also raised world corn and soybean ending stocks.  To top it off, wheat production was also increased 2.83 MMT, because of increased production from Australia and Argentina.  Markets had anticipated big crops in South America but seeing it accentuated by the USDA pushed markets lower on Thursday.

To say this is no fun for grain producers is an understatement.  Lower prices don’t do much for the soul.  In many ways, it is remarkable.  How can farmers around the world keep up production the way they are?  Technology is certainly part of that equation and good weather has a part in it too.  At a certain point it will not continue, but waiting for that is much like my friend Darin Newsom waiting for Godot.  It’s been a long wait.

Futures have been heading down because of all this bearish news, but the Canadian dollar has helped.  It actually retreated under the $.74 US level this past week.  That has meant as soybean futures have retreated cash prices have actually stabilized.  However, it is not quite that way for corn, where Ontario cash prices have declined.  Needless to say, the Canadian loonie is helping out once again.

It has created the pricing mirage in Ontario that I often talk about.  Ontario cash grain prices don’t seem so bad compared to our American friends.  I had that substantiated by a colleague this past week that had returned from San Antonio, where he was at the Commodity Classic.  He said that there was somewhat of a somber mood among American producers because of their low cash prices.  It is not the same in Ontario or Québec.  That Canadian grain-pricing mirage is doing some funny things.

Simply put, Eastern Canadians cash grain prices are fooling us.  $5 in Canadian dollars sounds just fine to most of us.  That might not be able to be garnered now, but it was available.  Meanwhile, grain futures are near their lows.  Flat cash prices are king in parts of Ontario.  In a foreign exchange climate of a 74-cent Canadian dollar, those flat prices seem just fine to many farmers.

Of course if you are on twitter, you’ll know that I’m waiting for $20 soybeans.  That comes from me telling everybody that I’m waiting for the price to reach $20 on soybeans.  I’m teasing of course because I’m very aware of market fundamentals.  However, what should never be lost within this bearish market environment is that it will change someday.  At a certain point these markets will grow substantially higher, it is a matter of the averages.  On average, the weather will change and so will constant record grain production.  Of course, nobody knows when that will be, but it is coming.

The postscript on this is that risk management never gets old.  Even in this bearish market environment our farm management must embrace all the facets of risk management on our farms.  Cutting costs, gaining efficiencies and good planning is always a default management choice especially in times of low prices.  Don’t let this Canadian grain price mirage fool you.  Our revenues aren’t what they appear.  So if the loonie heads toward 70 cents US, just remember, I told you so.