By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph
U.S. & World
USDA’s January 10 Supply & Demand report was not friendly to corn markets.
Export usage was reduced as expected by another 75 million bushels. Export sales
continue to run at only 92% of year ago pace and are falling further behind. Exports
are now projected at only 1.85 billion bushels compared to a robust 2.1 billion
projection in the first estimate for the 2002/03 crop back in May 2002.
Corn,
Chatham
WKLY AVG ADJ TRACK BASIS
Feed usage was reduced
by 50 million bushels because of shrinkage in U.S. livestock numbers. Feed usage
at 5.6 billion bushels has likewise been cut significantly since first projected
last May at 5.75 billion. Weakness in these two sectors of demand continues to
plague price outlooks; however, industrial usage remains the bright spot.
Continuing growth in ethanol production, with new production records set every
month, resulted in another increase in the industrial usage column. The 45 million
bushel jump took usage to a new record - 2.215 billion bushels, up substantially
from the 2.13 originally projected last May. Thanks to strength in domestic industrial
usage, ending stocks grew by only 81 m bushels despite the weakness in feed and
exports. Cash price as expected shrank a nickel to US$2.35/bushel.
The fall to US$2.35/bu is significant because cash price is now down to the level
where U.S. producers can reasonably expect the counter-cyclical payment program
to kick in. Under this program, a producer will receive a payment whenever average
cash price is lower than $2.60/bu less the direct payment of $0.28/bu already
received. In reality, anytime average cash price falls below $2.32/bu (i.e., $2.60
- $0.28 = $2.32), a counter-cyclical payment could be a possibility.
The payment is capped at the difference between $2.32 and the loan rate of $1.98
or $0.34/bushel. Below $1.98/bu, the existing Loan Deficiency program would kick
in.
In other words, a U.S. corn producer is essentially guaranteed a price of $2.60/bushel
no matter how low prices fall; and he is guaranteed to receive no less than $0.28/bu
in addition to his market price no matter how high prices rise above $2.60.
SPARKS, a prominent U.S. ag advisory service, projected a larger than expected
increase in U.S. corn plantings this spring. At SPARKS’ new acreage guess
of 81.7 million acres, up more than 1.5 million acres from last spring, and using
the average yield of the last few years, a 10.48 billion bushel corn crop is forecast.
This is burdensome because total usage is projected at only 9.7 billion bushels,
so carryout stocks would increase and could surpass 1.6 billion bushels in total.
Outlook for price is therefore not buoyant, but we have a long way to go with
a lot of variables in that equation subject to change.
One very important variable to note. In mid-January, the U.S. weather office released
an observation noting the Pacific Ocean surface water temperatures had cooled
dramatically since mid-December. They suggested that this might signal a sharp
weakening in the current El Nino event and could also signal the unusually rapid
start to a La Nina event. La Nina usually means droughty conditions in the central
U.S. Great Plains and the Canadian Prairies. Moreover, the 90-day weather forecast
calls for dryer than normal conditions across the central mid-west and Great Lakes
basin. In other words, dryer than normal conditions may continue across the Canadian
west, the western corn belt and southern Ontario. If the market begins to focus
on this possibility, Chicago traders will have to build in a weather premium that
is not obvious at present price levels.
