By Brian Doidge, Market Analyst, Ridgetown College/University
of Guelph
November 12, 1999
U.S. & World
The USDA’s November report was very well anticipated with no surprises. However, corn stocks are now over two billion
bushels, wheat above one billion bushels, and soybeans at 400 million bushels. This all hammered home to spec traders
that the only chance for a major price rally in ag commodities next year will come from a drought which sharply
reduces production. Prices sagged after the report, especially for soybeans.
But we aren’t going far, at least for corn. Chicago corn markets are heavily spec-fund short (i.e., a large number
of managed speculative funds and trading accounts sold into the market, expecting prices to move lower). Now, the
only way out for these players is to buy out which, if enough want to do it all at once, will push prices higher.
They have to get out soon because the DECEMBER contract enters delivery notice period at the end of November. This
means the heavy short position of the spec funds will force them to buy corn futures contracts in a major way over
the last two weeks of November.
Moreover, basis levels at the Gulf, and especially at interior points in the U.S., have been marching higher for
the last four weeks. Basis offers nationally are closing in on those we saw year ago and average levels are appearing
for the first time in quite a while. U.S. farmer selling has been light. Thanks to large subsidy and deficiency
payments flowing to growers south of the border, U.S. corn farmers have cash to pay down bills and permit them
to keep grain bin doors locked. This has caught processors, users, traders and exporters alike by surprise, because
they had assumed grain would be washing over them by now (given the better-than-expected production). Lack of farmer
selling means users are now bidding up basis, to attract needed supplies. This won’t last for long because Chicago
expects a wave of cash market selling after the new tax year. Watch out for downward basis pressure late in December
and early in January to push Chicago futures back down again to current levels after a modest rally toward the
U.S. Thanksgiving holiday November 25.
Longer term, Chicago expects another decrease in corn planted acreage in the spring of 2000 because of more favourable
U.S. government subsidies and deficiency payments achieved in growing soybeans, and some uncertainty about the
market for genetically enhanced corn. SPARKS thinks the same way and this week released its first projection of
acreages in the spring: U.S. corn acreage down 1.1 per cent to 76.76 million acres; winter wheat down 1.8 per cent
to 42.63 million acres; soybeans up 1.7 per cent to 75.39 million acres. There is an outside chance soybean acreage
could exceed corn acreage in the U.S. for the first time ever, next spring.
Here’s something else to watch. The U.S. mid-west has had the driest fall since 1987, especially west of the Mississippi.
The mid-west generally only had about one-quarter of normal rainfall in October and so far in November. Kansas
has had the driest fall in half a century. Fall droughts don’t do much for prices, but if the winter remains dry,
Chicago traders will be gun-shy this spring. We stated earlier that the only hope for higher prices is a major
production-reducing drought in the U.S. ... we just might get it in 2000. Don’t bet the farm on it by storing corn
unhedged. If you are going to keep the corn on farm, buy a JULY put option around the U.S. Thanksgiving to protect
you against falling Chicago prices. Or, sell on a basis contract, collect 75 per cent of value, put an end to storage
payments, and benefit if Chicago actually does run higher.
Ontario
Harvesting is winding down with producers not scrambling to finish because there is no place to put the grain.
Some areas, such as the Ottawa valley, Perth, Huron and points north, had their best crop ever. Other areas – such
as along the north shore of Lake Erie south of 401 – are almost finished but aren’t in hurry because it’s discouraging
to combine perhaps the worst crop you have ever grown. It all depended on whether you received rain and when. Overall,
we are projecting an average yield of 120 bu/ac for the province, which is not a record, but it’s two bu/ac better
than the most recent five-year average. That would mean a crop of about 220 million bushels...big, but not a record.
Quality is good with heavy test weights normal. Mold problems have been reported with toxins present in some areas;
but overall, the problems are not large.
Basis offers reflect the crop. North and east, growers are facing weak basis because of the glut and larger freight
bills to move the grain out. South, growers are offered dime-better basis because the trade is worried it won’t
get the corn it needs. The pattern this year has seen corn trucks heading south from Huron, Perth, Bruce, Grey
into London and Chatham. Some of those trucks have been heading further south. There has been a lot of Ontario
corn accumulating quickly in the transfer elevators in Sarnia, Windsor and especially Prescott. This confirms another
aggressive start to overseas exports with 40,000 tonnes having already shipped. Look for more overseas shipments
prior to scheduled closure of the Seaway (December 20) and the Welland Canal (December 24).
On a down note, Michigan had a record average yield of 130 bu/ac this year. And while 247 million bushels is a
big crop for the state, it’s not a record, due to smaller acreage. Still, this crop will pressure Ontario basis
whenever the loonie rises above 68 cents, making Michigan corn competitive by truck into Chatham and London. Competitiveness
of U.S. corn by boat out of Toledo is likewise affected by the loonie, but must first comply with Casco’s insistence
on only EU-approved hybrids. While on the subject of tracking imports of U.S. corn by vessel, the Toledo Board
of Trade gave notice that because the CBOT November soybean and December corn futures contracts are the last to
list Toledo as a delivery settlement point, they will no longer issue weekly rail, truck and vessel loadings after
December 31, 1999.
1