Markets. Outlook for 2001

By Brian Doidge, OCPA Market Analyst

The Ontario 2000 corn crop was smaller than expected and of variable quality across the province. At an estimated 180 million bushels, the crop is only about 3/4 the size of the 1999 crop, and only about 80% of normal. Worse, perhaps 20% of the crop is sample grade, another 20% Grade #5, and the remainder mostly Grade #2 - #3. Lower grades and higher moisture contents were more common in eastern areas of the province. At 180 million bushels, and even with carryin stocks of about 35 million bushels, total supply is insufficient to meet domestic industrial and feed demand. We need to import feed grains from western Canada and corn from the U.S.

Western feed wheat and feed barley imports from the Prairies are running 180% of last year and are on target to exceed 550,000 mt into eastern Canadian feed markets this crop year (that’s the equivalent of more than 21 m bushels of corn feed use) versus only 354,000 last year. This is where the countervail duty against imports of U.S. corn into western Canada comes into play. Western Canada imported about 15 million bushels of U.S. corn last year and was on target to exceed perhaps 18 - 20 million this crop year....until the imposition of a preliminary duty of U.S.$1.58/bushel November 7, 2000 ($1.01/bu to offset dumping; $0.57/bu to offset U.S. subsidies). Now, demand for western feed wheat and feed barley on the Prairies has increased to fill the void at the same time that demand for western feed grains has increased in eastern Canada due to small corn crops in Ontario and Quebec. We obviously won’t run short of feed grains, but the countervail duty, transportation costs and increased demand have already pumped up western feed wheat and feed barley prices here in Ontario. For example, western feed barley was running about $130/mt early in October; it is now about $170/mt. Same situation for western feed wheat. And a rising tide lifts all boats ... for example, since the end of September, soybean meal at Hamilton has gained more than $25/mt and DDGs at Chatham have gained $20/mt. The short Ontario corn crop and western countervail duty have raised the ceiling on feed pricing.

Normally that ceiling would be lower, the result of ready and easy access that industrial and feed users in the province have to huge supplies of U.S. corn. Not so this year. Huge jumps in fuel and energy prices, especially diesel and gasoline, have sharply increased trucking costs. Where trucking corn into the London - Kitchener area from the ‘thumb’ of Michigan previously cost perhaps $0.25 - $0.35/bushel, this year trucking costs are more in the range of $0.55 - $0.65/bushel. Compounding this higher cost is the increased ‘hassle factor’ caused by the StarLink fiasco in the U.S. StarLink corn, a genetic modification by Aventis that is not approved for food use in the U.S. nor for any use in Canada, cannot legally be used by industrial processors of feed mills in Ontario. This means that importers have had to take steps to ensure there is no StarLink present in loads coming into the province. Some importers have begun testing truckloads, some are requiring certification by their suppliers, some are satisfied simply with testimonials. However, Canadian Grain Commission Memorandum No. 2000 -14 of November 29 makes it very clear what the standard is for sampling and testing for StarLink:

Any U.S. corn delivered to a licensed elevator must be certified as testing negative for StarLink corn, based on testing three (3) sub-samples, each containing 400 kernels, using lateral flow testing methodology. All sub-samples must test negative. Official testing and certification must be conducted by the United States Department of Agriculture, Grain Inspection, Packers and Stockyards Administration, Federal Grain Inspection Service (FGIS), or their licensed delegated/designated agents. U.S. corn which has not been certified in accordance with the above shall not be received into any licensed elevator. Failure to comply may result in serious penalties.

The combination of higher trucking costs and this new requirement to check for StarLink makes imported U.S. corn more expensive and more of a risk (liabilities should StarLink ever appear). This combination raises the import price ceiling (the price at which U.S. corn imports can be delivered to an Ontario user) on imported U.S. corn. The major competition for Ontario corn just became more expensive.

But that is not the end of it. The loonie lost 4 3/4 cents from March through mid-November. This makes U.S. corn considerably more expensive to buy (it takes more loonies to buy the same bushel).

Add all these things together (short crop, countervail, higher fuel costs, StarLink and loonie), and the result is that basis rockets higher. On August 1, new crop basis offers were 65 cents over DEC ’00 delivered to the elevator this fall, and about 80 - 85 cents FOB the farm. Now, basis is the equivalent of $1.10 over DEC ’00 delivered to the elevator, and about $1.20 - $1.25 FOB the farm...a gain of about 40 cents in just 4 months! Chicago futures in that same time period gained only 15 cents. Obviously, the strength in recent pricing is on this side of the border.

Is basis likely to improve further? Yes. Despite the recent run-up, track (selling) basis at the elevator, when adjusted for exchange rate, is still below both the 5-year and 24-year average, although it is closing in on the latter. This tells me there is more room for improvement.

What’s the signal? In order to benefit from higher basis, you must retain title to the corn. If strength is in futures, you can sell title to the corn and replace it with a position in Chicago options or futures, but basis improvement can most easily be captured by retaining title...i.e., store the corn for later title transfer. Keep up on offers for deferred delivery. For example, basis offers FOB the farm are in the $1.25 - $1.30 over JULY for pick-up next May or $1.50 over JULY delivered to Casco. These may improve as the winter progresses, but still flat out in the $3.75 area FOB the farm and close to the $4 mark delivered to the wet miller.

Bottom line? Store. But make sure you sell in parcels on basis rallies or good offers as they come along. Don’t hold out for $4.25 only to sell for $3.25 should the loonie rocket higher because the Bank of Canada cranks up interest rates.