By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph
U.S.
& World
USDA will release its November Supply & Demand estimate November 12. Most
observers are expecting another increase in corn crop size projection. F.C. Stone
and Sparks, two prominent U.S. analytical firms, both project a crop just over
9 billion bushels. This is up from USDA’s October estimate of 8.973 billion
bushels. If confirmed, such an increase would likely move carryout stocks above
the 800 million bushel mark and push stocks-to-use percentage over 8%. Sounds
negative; but remember, that would still be the fourth lowest percentage in the
last 28 years! In other words, we are nipping around the edges; supplies will
remain tight until next fall.
CORN, CHATHAM
WKLY AVG ADJ TRACK BASIS
The International
Grain Council revised its estimate of world coarse grain production upward at
the end of October from 869 mmt to 879 mmt mostly because of the larger U.S. corn
crop. World ending stocks were also increased to 132 mmt from 122 mmt. But, just
as is the case in the U.S., these higher stocks numbers must be kept in perspective.
Stocks remain very low. Compare to 155 mmt in 2001/02, 168 mmt 2000/01, and 191
mmt 1999/00. World coarse grain stocks-to-use percentage remains at levels last
seen in the early 1970s.
The weak link in corn markets remains U.S. exports. Marketing year highs in each
of the last two weekly export sales reports did little to soothe Chicago trader
apprehension. Export sales as of the end of October were 9% behind the pace of
last year, and last year had the poorest corn export showing of the last four
years.
U.S. exports over the last four years have been hampered by strength in the U.S.
dollar, but weakening in the currency through the summer was expected to aid U.S.
agricultural export sales. Perhaps it will in time, but at least for corn, major
competition from Chinese corn exports to Asian markets has hurt U.S. prices. Sharply
higher shipments of Ukraine and Russian feed barley and feed wheat into European,
North African and Middle Eastern markets have also sapped U.S. corn prices. The
message is that even though stocks in the U.S. and around the world are low, there
is an increasing number of more localized competitors in all world markets who
enjoy freight advantages (and high domestic subsidies and supports artificially
promoting expansion of production) which keep North American prices under pressure.
Little wonder then that Chicago corn futures prices have lost almost 60 cents
or 20% since peaking September 11. We are nearing major support at $2.33 in the
DEC, $2.45 in the JULY contract. Long-term support is close below at $2.29 and
$2.40 respectively. Fundamentals would suggest we will not break below these levels,
but given the anaemic performance of U.S. exports, we will not rocket higher either.
What is really happening is that the 2002 U.S. farm bill (the Food Security and
Rural Investment Act signed May 2, 2002 and covering the period 2002-2007) is
starting to take hold. Corn acreage in the U.S. is expected to increase by about
1 m acres this spring thanks to support payments more favourable to corn than
soybeans. It is entirely probable that U.S. corn acreage could exceed 80 million
acres in 2003 for the first time since 1998. Using the average yield of the last
5 years (134.1 bu/acre, and harvested acreage of 73 m acres), a crop of 9.79 billion
bushels is projected, about 750 million more than this year. The problem is that
a crop of that size exceeds demand, especially if exports continue to have trouble
because of higher prices and a relatively strong U.S. dollar. Moreover, U.S. feed
usage is expected to weaken a bit as a result of cuts in cattle inventory and
reductions in hog expansions.
The saving grace is continued expansion in domestic U.S. usage driven by expanding
ethanol production. With 67 ethanol plants operational, and another 11 now under
construction and scheduled for completion in 2003, U.S. corn usage for ethanol
production is projected to exceed 900 m bushels in 2003.
The question for price direction in Chicago boils down to this: can expanding
ethanol usage compensate for weakening export and feed demand? Action in Chicago
futures prices over the next 3-4 weeks will tell you the answer, or at least the
opinion of Chicago traders. If support holds, the jury is still out. If support
does not hold and we move lower, the answer is no.
