Market Trends
By Brian Doidge, Market Analyst,
Ridgetown College/University of Guelph
U.S. & World
March’s USDA Supply & Demand report contained no
changes at all for corn, which was a surprise in itself because most observers had been
anticipating another reduction in export sales projections. You have to think that a
reduction in export sales projection has to come at some point because sales are running
at only 75 per cent of year ago. To meet the current USDA projection of 1.625 billion
bushels requires 600 million more in sales (1.029 billion week ended March 6) over the 25
weeks left in the crop year, which means sales need to average 24 million bushels per
week. They have exceeded that in the last several weeks, but now a record Argentine corn
crop is coming on stream and the USDA increased Chinese corn production by 5 mmt in
Thursday’s report. The pace of weekly export sales will be interesting to watch over
the next two or three months.
Another very interesting factor will be the juggling act Chicago must perform balancing new crop acreage possibilities versus potential yield expectations. Usage is projected at an all time high of 9.5-9.6 billion bushels in 1998/99. As we have commented before, to meet that need either planted acreage must increase 5.3 per cent to 84.5 million acres if the 1990’s average yield of 120.7 bu/acre is used, or yield must be the second best on record at 131.5 bu/acre if planted acreage remains the same as for 1997.
What are the prospects for increased acreage? U.S. market advisory firms do not think anything like 84.5 million is in the cards. Farmers’ Commodity Corporation projects a modest increase of only 1/2 million to 81 million acres. SPARKS is more aggressive projecting a 2 million jump to 82.5 million acres. The USDA releases its Planting Intentions report March 31 so you will know their guess by the time you read this.
Something many spec funds have overlooked in projecting increased corn acreage is the fact that 1997 marked the first time ever that acreage under conservation tillage (here defined as minimum, zero, or mulch tillage that leaves at least 30 per cent residue on the surface) exceeded acreage under conventional tillage, for the U.S. as a whole. At least to date, corn has not performed as well as beans under conservation tillage in much of the mid-west (and Ontario). U.S. producers are not about to revert to conventional tillage, and there does not appear to be any magic solutions in the next two months to corn’s relatively poorer performance under conservation tillage. That would suggest a wholesale change in the trend toward soybeans. Moreover, Roundup-Ready soybeans and other similar genetically modified herbicide tolerant soybean programs, which tend to reduce herbicide costs per acre, likewise have encouraged soybean acreage in the U.S. versus corn.
As for yield prospects, many observers are using 130 - 131 bushels/acre. The USDA itself is working with 127 bushels/acre. Both these estimates seem too high to me because of the higher than normal probability of less than ideal growing conditions thanks to El Nino. The average decrease in U.S. corn yields in the year of an El Nino event compared to the year previous is 22 per cent for the five events 1974, 1980, 1983, 1988, and 1993. Projecting better than average yields looks very optimistic to me. There must be others who view prospects that same way because on Thursday, March 12, CROPCAST in the U.S. predicted 1998 yields below trendline, based on hotter and drier-than-normal conditions expected in July and August. We will have to wait until the fall to know, but obviously this factor is key to price direction.
Ontario
U.S. imports will continue all year. Four boats are
scheduled out of Toledo into CASCO facilities (one every 3 weeks or so) once the Seaway
opens late in March (earlier than normal this year because there is virtually no ice).
This indicates that Ontario corn prices will remain at or near import competitive pricing
levels all year as well.
Basis offers to producers for corn stored at the elevator are only about normal (when adjusted for exchange rate variations over the last 5 years); but basis offers FOB the farm are about a dime better than average (again when adjusted for exchange rate). Stronger basis suggests that you sell title to some more corn and replace it with "paper" corn (either buy call options or futures in Chicago). Currently, basis for corn in Ontario is holding stronger than basis for soybeans. The recent dollar rally above 71 cents has taken about a dime off soybean offers, but corn has held. Reward – a strong basis.
Keep something else in mind this new crop year. Current projects call for a better than 6 per cent increase in corn acreage in Quebec this year to 865,000 acres. Average yields would result in a crop edging toward the 100 million bushel mark, fully 21 per cent larger than only four years ago! In the last 5 years in particular, Quebec corn has displaced Ontario corn in its own feed market, the Atlantic Canada feed market, and the northeast U.S. as well. Although not a major concern over the next two crop years because of dramatic jumps in domestic usage in Ontario, when we eventually, once again, produce a corn crop exceeding usage in the province (ie. more than 215 million bushels), we had better have efficient transportation and handling facilities at hand to move corn into the Northeast U.S. and mid-Atlantic seaboard markets because competing with Quebec in its own, and the Atlantic Canada feed market, will be very detrimental to price. Competing in overseas markets is a marginal return venture for producers as well.