By Brian Doidge, Market Analyst, Ridgetown College/University
of Guelph
January 8, 1999
U.S. & World
U.S. feed usage is shrinking and export demand expanding. The question is, will the two offset exactly? Not likely.
Feed demand is probably going to shrink more than exports increase.
Sow slaughter numbers in the U.S. are currently running about seven per cent above year ago levels, which, coupled
with the December 29 Hog & Pig report suggesting a four per cent decline in the breeding herd as of December
1, confirms more aggressive herd liquidation south of the border than had been anticipated. Additionally, farrowing
intentions over the next six to nine months were indicated as shrinking by up to six per cent. Something else that
will reduce hog numbers is an announcement by Vice-President Al Gore on Friday, January 8 (he also announced $50
million in direct aid to hog farmers) of an $80-million increase for the voluntary pseudo-rabies eradication program,
which might see 1.7 million hogs shipped to rendering plants instead of packers. Taken together, since hogs represent
about one-third of the 5.8 billion bushels of grain used as feed in the U.S., a five per cent reduction in snout
count implies perhaps a 290-million-bushel drop in corn demand. That volume would require a 17 per cent expansion
in export shipments to offset (not including the two- to three-per-cent reduction in the U.S. cattle herd expected
this year).
Despite solid export sales (i.e., export sales up 19 per cent to end of December for the crop year beginning September)
and shipments (up 21.6 per cent) to date, an annual increase of 17 per cent is a very large increase to expect
in exports, especially with economic turmoil in main export destinations in Asia. For example, most of the increase
to date has been accounted for by increases in only seven countries (Spain, Egypt, Chile, Peru, Brazil and especially
South Korea and Mexico). Notice that only one is in Asia, while the biggest growth has occurred in four nations
in the Western Hemisphere, at least one of which (Brazil) is perched precariously on the edge of financial chaos,
with another (Mexico) not far behind. Other major Asian destinations are down significantly with Japan down 12
per cent and Taiwan down 14 per cent versus year ago.
Attention in Chicago is turning to acreage expectations this spring. The problem is that while acreage levels similar
to last year and an average yield for the decade of the 1990’s (in the U.S., 122 bushel/acre versus 133 bushels/acre
in 1998) would only produce a nine-billion-bushel crop, the sharp jump in carryout stocks from this year would
mean total corn supply would drop by only about 150 million bushels for the crop year 1999/2000 and ending stocks
would remain burdensome in the 1.5-billion-bushel range or about 14- to 15 per cent of usage. Traders are penciling
in various acreage scenarios with FAPRI suggesting on Thursday a drop of one million acres to just under 80 million
acres. There will be many more guesses in the run-up to spring planting, but unless U.S. planted acreage drops
to something in the 78- to 78.5-million-acre range, Chicago prices will not move significantly higher.
There are some obvious wild cards. Yield is one, but that is anyone’s guess right now. Currency exchange rates
are another and they are moving in uncharted waters. January 1 launched the Euro dollar, a unified currency replacing
the national currencies of 11 European Union members (but not the English Pound Sterling). What took financial
markets a bit by surprise was trader reaction to the introduction of this newest world currency. The Euro moved
up sharply while the U.S. greenback, for example sank to its lowest levels against the Yen in 19 months. What
this indicates is that the U.S. dollar is no longer the only “safe haven” currency in the world and speculators
are hedging their risk by transferring huge blocks of money from the U.S. dollar into the Euro. The U.S. dollar
is likely to sink further which could spark export activity in two sectors in particular; agriculture and manufacturing.
The trick will be whether this erosion in the value of the U.S. dollar sparks inflationary concerns (fueled by
increased economic activity to fill export orders) in a U.S. economy already running near capacity. The U.S. Federal
Reserve will undoubtedly be watching the performance of the U.S. dollar versus the Euro carefully and is likely
to step in with interest rate hikes over the next six months or so to ease inflationary pressure. Most of this
would be good news for agriculture where inflation of prices for outputs such as grains, oilseeds, and hogs would
be welcome.
Ontario
The run-up in the Canadian dollar above 66 cents in the first
week of Euro trading took many by surprise, especially with the U.S. dollar moving lower. What may be happening
is that speculators are envisioning the same inflationary possibilities in the U.S. outlined here and seeing in
Canada a nation more dependent on exports which benefit from U.S. inflationary environments (i.e., agriculture
and automotive manufacturing exports) than most nations. The surge in the loonie pressured basis levels lower in
Ontario with basis at the elevator dropping a nickel for both old and new crop corn. But, basis FOB the farm and
for delivery in June and July held firm. This suggests that end users and the trade alike see a high probability
of Ontario corn prices moving from the current export competitive footing to an import competitive footing by summer,
as available supplies are squeezed because the bumper crop has moved quickly into export channels and displaced
imports of U.S. corn at major processors. That spread between export footing and import footing is currently 25
cents higher than current basis levels. However, another two- to four-cent hike in the loonie would erode much
of that possible basis improvement.
The message to corn sellers remains the same: sell corn on basis rallies, but sell in lots over a period of time.
Spread your sales over the winter and spring into the early summer.
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