This second article of a 2-part series (the first article published last issue dealt with old crop corn pricing prospects) deals with the price outlook for the crop to be planted this spring. The 2004/05 new crop corn marketing year runs from October 1, 2004 through September 30, 2005. Price for grain corn in Ontario consists of two components: Chicago futures prices; and local basis. Chicago futures prices are beyond the individual producer's ability to control and are influenced by U.S. agricultural policy and programs, financial market impacts, price direction in other commodities (especially soybeans), U.S. corn supply, and U.S. corn demand. Local basis is determined by transportation cost to import U.S. corn into Ontario, currency exchange rate, and local Ontario corn supply and demand factors.

U.S. Chicago Futures New Crop Price Outlook:
The January USDA monthly supply and demand report surprised market observers with its cut in 2003/04 corn production and resulting reduction in projected ending stocks for August 31, 2004. Old crop usage projections above the 10 billion bushel mark for the first time ever and export sales running 30% ahead of year ago pace, have many analysts projecting a need for increased new crop U.S. corn acreage this spring. However, a record low old crop U.S. soybean stocks-to-use ratio of 5.0% (125 million bushels) in that same January USDA report has analysts projecting a need for increased new crop U.S. soybean acreage this spring as well. So the contest for more acres is on. Market analysts expect Chicago futures prices to move higher through the late winter in an effort to encourage both additional corn and soybean acreage this spring. It is highly unlikely that acreage of both crops will expand at the same time. The contest will determine price direction for both crops. Whichever crop wins relatively more U.S. acres is likely to lose ground relative to the other on price. The ratio of the new crop Chicago November soybean futures contract price to the new crop Chicago December corn futures contract price is often taken as an indication of the market's preference for acreage of one crop versus the other. At the close on February 6, new crop November soybeans traded at US$6.4875/bu while new crop December corn traded at US$2.785/bu. In both cases, these were the highest prices for February 6 since 1998. However, on February 6, 1998, the soybean-corn price ratio was 2.40:1 meaning the soybean price was 2.4 times as much as the corn price. On February 6, 2004, the soybean-corn price ratio was only 2.33:1 meaning the soybean price was not quite as strong relative to corn as it was six years ago. The lower ratio implies that the market is not quite as aggressively seeking more soybeans as corn. But is this ratio, widely being touted by analysts currently, of any real value? Many readers will have a ratio of 2.5:1 in mind as the "rule-of-thumb" benchmark for soybeans versus corn. That is an old farmer's tale; an out dated figure. In the last quarter century, the new crop soybean-corn ratio on February 6 has been above 2.5:1 only 4 times (1987, 1988, 1989, and 1997). In fact, the average ratio for that 25-year time period is 2.33:1, exactly where we are today. In fact, the ratio has been climbing for the last three years signaling a desire for more soybeans than corn. Moreover, in the five years 1997-2001, the ratio collapsed from 2.54:1 down to 1.92:1; but in those same years when the ratio was dropping signaling that Chicago wanted more corn acres, soybean acreage expanded virtually every year. The reason? The production cost relationship between the two crops was changing and favouring soybeans. The old benchmarks were no longer valid. What about the production cost relationship today? Here is where it gets interesting. There are analysts on both sides of the question. As quoted by DTN AgDaily Rich Nelson of Allendale Inc. said "with great prices right now compared to production, plus record corn yields in 2003,1 see higher corn acreage from Iowa eastward. Plugging in US$2.60 per bushel new crop corn prices for 150 bushels per acre yield in Illinois, farmers will feel a lot more confident with those numbers as opposed to banking on a soybean crop that needs continued interest from China." On the other side of the question is an assessment by University of Illinois Extension farm management specialist Gary Schnitkey. Illinois Farm Business Farm Management Association crop revenue performance data for Illinois showed that switching to more corn acres might not be a profitable option given the relationship between production costs and cash prices prevalent at the time of the study (late December). U.S. cash prices have improved since then and are more favourable to corn currently in the same study; however, a key consideration this year is the changing perception of soybean production variables. The extra costs of combating new and emerging soybean insects and diseases such as aphids, black stem-rot and drought stress have U.S. producers re-thinking their planting strategy. In an effort to control these new threats, U.S. soybean producers are spraying fields more often than they did a decade ago. Earlier planting as soybean acreage shifted north and altered tillage practices as the switch to no-till took hold have changed the insect and disease pressure pattern as well. "The more soybeans planted, the more pathogens that can be expected," DTN quotes University of Illinois plant pathologist Dr. Dean Malvick. "Plus there is a lot more minimal or no-till planting. That, combined with farmers planting early, is causing increased disease problems." The number of soybean pests is on the rise and many of today's most devastating soybean pests in the U.S., such as soybean aphids and bean-pod model virus, were unknown a decade ago. Dr. Kevin Steffe, entomologist at the University of Illinois, says "it's true that more invasive insects have increased, especially since two or three years ago, and there probably will be more, no doubt." U.S. agronomists agree that increased spraying to control these new pests and threats has taken a toll on soybean profitability. Studies show that U.S. producers are, on average over the last five years, paying US$2.50/acre to spray fungicides to treat damping-off (rotting of seeds or seedlings due to fungi). Pests such as aphids and bean leaf beetles are costing US$20/acre to treat. Five years ago, these costs were not present and have altered the profitability of soybean planting, especially when compounded by drought-reduced yields in the last three years. The result is that soybeans have become an increasingly expensive crop in the eyes of many U.S. producers; certainly perceived as more expensive to grow than in years past. Conversely, higher energy costs have hit corn production costs much harder than soybeans. Higher petroleum fuel costs have taken a toll both in the field and moving the crop to market. Increased natural gas costs drive nitrogen fertilizer costs up sharply, and corn is a major user of nitrogen fertilizer. Increased natural gas costs also greatly increase the cost of drying, and corn is a major user of artificial drying (at least for grain corn in the U.S. northern corn belt and Ontario, Quebec, etc). However, in a great part of the U.S. midwest and south, drying is not a major consideration since the crop usually dries down easily in the field. Additionally, corn seed costs have been moving up with the introduction of new technologies resistant to insects and selected herbicides. The bottom line is that the cost to produce an acre of either corn or soybeans is much higher than in the past and shows no probability of moving lower. One thing producers can hope for is increased yield to reduce per bushel cost. Producers can do a lot to enhance possibility for improved yield; but yield is ultimately in the hands of the weather, not the producer as back-to-back droughty years confirm in many areas. This is certainly a year of intensified competition for acreage in the U.S. Chicago prices move higher as the contest heats up. What does the USDA project? The first Planting Intentions report will not be released until March 31; however, the Bush Administration's US$2.4 trillion budget submission to Congress February 2 projected 2004 acreages as follows: soybeans 70.0 million acres versus 73.4 million in 2003; wheat 62.5 million vs 61.7 million; corn 79.5 million vs 78.7 million.
In other words, at least in the budget submission, the USDA foresees a sharp reduction in soybean acreage and slight increase in corn acreage for 2004 planting. Time will tell, but I suspect that the current cash price for new crop soybeans in Danville, Illinois of US$6.39 looks better than the current cash price for new crop corn of US$2.68. That's a ratio of 2.384:1 and improving. Same thing in Maumee, Ohio where US$6.31 looks better than US$2.61 (ratio of 2.417:1). Higher energy, seed, and fertilizer costs for corn are a certainty; the probability of another droughty growing season compounding soybean pest problems is not. I suggest U.S. growers will respond to higher soybean prices in Chicago, take a chance on enhanced insect and disease pressure, and plant more soybeans rather than corn across much of the eastern corn belt. In the western and southern corn belts, I suggest the swing acreage will go to corn (no drying cost) rather than soybeans (insect and disease pressure is greater here). Overall, I think U.S. corn acreage in 2004 will decrease only slightly to 78.5 million from the 78.7 million acres planted last year. If true, and using the average yield of the last five years of 136.2 bu/acre, a U.S. 2004/05 corn crop of 9.699 billion bushels is projected.
On the demand side, here's my assumptions:

• a reduction in feed usage to 5.6 billion bushels due to BSE impact on U.S. cattle inventory (which hit a 45-year low of 94.8 million head January 1 even before the BSE debacle truly took hold),
• continued expansion in industrial usage to 2.6 billion bushels,
• and a retrenchment in export sales back down to 1.825 billion bushels in response to a turn-around in the U.S. dollar as economic growth heats up and world coarse grain production rebounds as well.

Ontario New Crop Basis Outlook:
The Table projects Ontario new crop 2004/05 corn production, imports, usage, and price. A return to a more normal corn, soybean, and wheat acreage relationship in Ontario is projected for 2004/05. Winter wheat acreage planted in the fall of 2003 is off perhaps 350,000 acres from the year prior. This acreage not planted to winter wheat is likely to be split perhaps 200,000 soybeans and 125,000 corn with the balance to spring cereals and other crops. Although both soybeans and corn are experiencing the same increased pressure on their cost of production as are the Great Lakes basin states of the eastern corn belt, the increased energy, fertilizer, and drying costs will take a heavier toll on corn acreage expansion in Ontario because our corn crop is routinely at a higher moisture content than in adjacent states. Compounding the cost pressure as felt on the U.S. side of the border has been the surge in the Canadian dollar on this side. The 22% surge in the loonie in 2003 meant that our costs relative to the U.S. increased 22% in one year, and corn is an expensive crop to grow relative to some other crops. The 2003 Ontario corn crop demonstrated that tremendous revenues per acre can be generated if yield and price combine favourably; but nevertheless, costs have increased significantly over the last two to three years. Assuming 2004 planted grain corn acreage in the province of 1.85 million acres, and the average yield of the last five years of 115.1 bu/acre, a crop of 213 million bushels is projected. This would be down slightly from last year's 219 million bushels. However, increased carryover stocks and sharply higher imports of western feed grains (due to the rebound in western production) could once again reduce imports of U.S. corn. This would be especially true if the loonie loses some strength versus the U.S. greenback (likely if the U.S. economy picks up steam as the November elections approach, and the Bank of Canada does not retain the current wide spread in interest rates). A weaker loonie and strength in Chicago corn futures make U.S. corn increasingly expensive. High fuel costs for trucks and reduction in exportable winter wheat supplies because of the reduction in plantings (thus reducing back-haul opportunities for U.S. corn imports) should make transportation costs for imported U.S. corn higher. Reductions in the Ontario cattle herd (thanks to BSE impact) and the closing of the Nacan corn wet mill in Collingwood in December 2004 will reduce both industrial and feed usage for grain corn thus sapping strength in demand. All in all, total usage is projected to drop about 10 million bushels, which will overcome a projected 6 million bushel smaller crop. Softness on the demand side will mean that basis in Ontario for new crop corn will continue weak. Bottom line? Chicago new crop futures are projected to average about US $2.75 -$2.80 and new crop basis offers will likely hover in the 60 - 70 cent range to give an average 2004/05 new crop price around the Cdn. $3.35/bushel mark or $132/mt. Any marketing opportunities for 2004/05 crop corn above the Cdn. $3.80/bushel ($150/mt) level should be sold.