January USDA: Does Basis Help Tell the Story  

Last week I traveled northeast of Toronto to speak about the grain markets at the York region Soil and Crop Improvement Association. I always like traveling to the farm country on “top of the city” as they say.  It’s a reference to the many farmers north of Toronto who farm in the shadow of city.   They can often see the cityscape as they look south.   In fact, many of them are essentially farming with city traffic all around them.  It is a unique part of the Canadian farm landscape.

We had a great discussion on the grain market, some of the farmers present had taken the day off from combining corn. It was unusual as there was no snow in the middle of January giving them opportunity to finish.  It seems like every time I visit York region in January there is always some corn acres still out.  Toward the end of the meeting, I was asked the invariable question” what we can expect from the January 12th USDA report.”

Thankfully it didn’t take long to find out as the report was released earlier today. What we got was a surprisingly bullish report.  I had told the York region audience that I did not know what would be in the report but to expect some surprises. In fact, there were many surprises with the USDA reducing harvested corn acreage by 1.6 million acres to 79.2 million acres. At the same time, they raised the corn yield to 173.3 bushels per acre versus 172.3 bushels per acre reported last month. This put the US domestic corn production at 13.73 billion bushels, 200 million bushels below last month’s estimate.  Corn ending stocks were only down slightly to 1.242 billion bushels. At the same time the December 1st corn stocks came in at 10.8 billion bushels which was down sharply from expectations.

US soybean production was down 70 million bushels from the December report with a reduced yield of 49.5 bushels per acre and harvested acres falling 300,000 from December to 86.3 million acres.  The December 1st soybean stocks came in at 3.020 billion bushels compared to December at 3.152 billion bushels.  This was a big bullish surprise.  The USDA also reduced Argentinian soybean production to 45.5 million metric tonnes, while raising Brazil’s soybean production by one million metric tonnes to a record large 153 million metric tonnes.  In the wheat complex, US domestic wheat ending stocks decline 4 million metric tonnes with minimal changes on the world stage.

There are a lot of swirling numbers within the USDA report which will continue to play out over the next few weeks. They’re starting to harvest soybeans in some parts of Brazil and dodging raindrops at the same time.  In Argentina it’s just the opposite with hot and dry weather still impacting both corn and soybean production. Clearly, it looks like Argentina is going to be on the slack side of the supply output this coming year. At the same time Brazil is making up for it and the world continues to be hungry for what we are producing despite the mystery of Chinese demand. Much will depend on the weather ahead in South America.

Of course, it is always hard to tell where prices will go from here and it’s always easier to tell why things have happened looking back. We have always known over the last several weeks that US basis values for both corn and soybeans had been historically high. Essentially, what that is saying is that demand was stronger for physical grain then what the trading algorithms were calculating.  The futures market caught up a bit today, but we will have to continually monitor basis levels to give us further clues an exactly where the grain market is moving.

I also emphasized to the York region group how basis values are important for pricing our grain in Ontario and Quebec.  I put up slides documenting the large basis values for our Ontario and Quebec grains based on the Canadian dollar fluttering in the 74-cent level versus several years in the past where the dollar was either at par or close to par with the US greenback. It made for record Ontario and Quebec cash prices this past year.   It behooves farmers in Ontario and Quebec who produce or buy grain to be cognizant of this low Canadian dollar because if we start moving upward in a big way it will mean a precipitous drop in cash prices for eastern Canadian grain farmers.

Of course, that’s always a challenge for Ontario and Quebec grain producers. How do we balance our futures price with our Canadian basis levels which are largely determined with foreign exchange gyrations between the Canadian and U.S. dollar. It’s not easy and in 2023 that will continue to be the case. As it is the Canadian dollar will remain a thinly traded currency totally correlated to the inverse of the value of the American dollar. The Bank of Canada will way in as well.  It will be up to us using our daily market intelligence to capture the right balance.

It gets even more challenging this year as eastern Ontario and Quebec corn basis isn’t as robust as it usually is. However, I will leave that for another day.  The January 12th USDA report is supposed to be the final numbers on the 2022 crop here. However, keep in mind the USDA will probably continue to tweak those numbers right into September of 2023 and maybe even beyond.  The fun games will just continue along with all that South American production currently sizzling in their summer sun.