MARKET OUTLOOK
1999 Grain Corn Outlook
By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph

Corn markets in Chicago in 1999 are likely to be dull. Demand has shrunk and supplies are large by comparison. Corn is not unique as most ag commodities feel the impact of Asian financial chaos which has pounded prices lower.

In 1999, Chicago markets will attempt to stimulate new demand to clear supplies. New demand may not come from export markets this year, although the pace of export sales and shipments (currently stronger than year ago, but slipping) will be the barometer by which Chicago futures markets drive prices. Argentine production will be significantly lower in 1999 because of acreage switching to soybeans. Argentina’s corn crop is expected to be about 12 million tonnes vs 19.1 million tonnes a year ago. Brazil is a large producer of corn, but may be hampered by La Nina dry conditions through December 1998 and January 1999. The key in export markets is that demand has shrunk with Japan, South Korea, Taiwan, and others undergoing economic depression, and in some cases, recession. Moreover, the European Union has re-introduced export subsidies to move large supplies of wheat and barley. With the USDA now contemplating the use of Export Enhancement Program subsidies for wheat flour, it is easy to envision a return to price-pounding grain trade wars. New demand will not come from feed markets either, despite lower corn prices. In the U.S., cattle numbers are declining and the upcoming Cattle on Feed report should show a U.S. herd about two per cent smaller than one year ago. The U.S. hog industry is in melt-down phase; but the contraction is centered in the traditional hog-producing states of the mid-west where the norm is small and mid-sized family operations, not the new production areas such as the southeast and west where the large-scale commercial operations have taken root. Poultry feed use continues to expand about two- to four per cent annually, and this looks likely to continue through 1999.

New demand may come from growth in industrial and food usage. Ethanol production, for example, has rebounded sharply from the 1995 stall and established new output records in October and November of 1998. Food use of corn continues to grow as consumption patterns favour corn-based snack foods in particular.

Chicago markets also expect 1999 U.S. corn acreage will not decline as significantly as you might expect given cash prices currently in the US$2.10 range. Sharp drops in world oil pricing – thanks to OPEC’s inability to restrict production – have reduced fuel costs in the U.S. Chicago calculates the cost of production for corn has declined. Chicago also thinks that Bt corn and other insect-tolerant, hybrids have improved yields significantly in any given year. Moreover, because Chicago traders think most producers “go with what worked last year” and corn surprised farmers everywhere last year, 1999 corn acreage will benefit from strong production results in 1998.

What does all this suggest for 1999? Corn acreage in the U.S. will decline in the south and southeast – where drought-stressed corn was disastrous – and switch to soybeans. However, corn acreage will likely hold in the central and eastern corn belts. Chicago expects corn acreage to remain the same in 1999 as in 1998 at about 80.5 million acres. 1999 weather prospects are uncertain. La Nina, the sister of El Nino, has taken hold which suggests the following:

• a balmy but dry start to winter turns brutally and quickly cold in January and February,
  
  
• spring has a 75 per cent chance of being drier than normal with a quick start to field work,
  
  
• west of the Mississippi is usually dry (19 of 20 La Nina summers have been drier than normal in Iowa), but this does not imply hotter than normal as well.

Chicago markets will be watching closely, but are also aware that the western and central corn belts have excellent soil moisture entering the spring of 1999. The eastern corn belt is drier, but does not face as large a risk of dryness from La Nina in the spring and summer of 1999. Overall, Chicago markets look for a 1999 crop in the 9.5- to 9.7-billion-bushel range (versus 9.8 billion bushels in 1998).

With questionable demand and a crop about the same size as 1998, Chicago will be pricing futures contracts near current levels for some time. Keep in mind, however, that price patterns in years of large supply see Chicago markets collapse at harvest (which they certainly have) only to edge higher as the year progresses. This may explain the current “carry” in Chicago futures

Basis also tends to follow this same pattern. For example, the current track basis in Ontario (adjusted for exchange) is 40 cents under Chicago in Canadian dollars, the lowest since 1980/81 (at 58 cents under) and compares to the five-year average of one cent under and the 23-year average of 10 cents under. What happened in 1980/81? By mid-June, basis had gained 69 cents. However, before you weld the door to your grain bin shut in anticipation of a major rally in basis, remember that in 1981/82 basis was also weak at 37 cents under Chicago early in December of 1981. It was also 37 cents under in mid-June 1982. The message is that storage on farm could pay this year as suggested by the “carry” in Chicago markets; however, you must sell old crop in stages whenever basis rallies because 1999 won’t be a banner year...more likely, it will be dull.

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