OCP Market Trends - April 14, 2003

April 14 , 2003

By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph

U.S. & World
Chicago USDA’s April 10 Supply & Demand report once again reduced export projections (marking the 6th consecutive monthly reduction), by another 75 million bushels to only 1.675 billion bushels. Offsetting most of this weakness in exports was a 50 million increase in projected feed usage, and another 20 million increase in industrial (mostly ethanol) usage.

Corn, Chatham
WKLY AVG ADJ TRACK BASIS

Carryout stocks moved up by a marginal 5 million bushels to 1.009 billion and average cash price was left unaltered at US$2.30/bushel although the range was narrowed in by a nickel on each end at $2.25 - $2.35 versus last month’s $2.20 - $2.40.

U.S. corn exports are having an especially tough time in Asian markets where cheap Chinese corn exports continue to confound optimistic U.S. observers. The USDA increased Chinese corn export projections to 13 m mt, a new record. It was not very long ago that U.S. trade enthusiasts promoting U.S. support for Chinese accession to the WTO were touting the seemingly huge potential Chinese market for U.S. ag and food exports once China joined WTO. Quipped one observer after the April 10 USDA report, “so much for WTO and the big corn imports that China was going to book.”

On the subject of WTO, the March 31 Doha Round deadline was missed as expected for agreeing to modalities (fancy term for an agreed schedule of targets and timelines for reductions to export subsidies, trade-distorting domestic subsidies, and enhancements to market access). Major trading blocks are not moving from entrenched positions, and the developing nations are increasing their chant that no agreement on agriculture means no agreement on anything.

Free trade enthusiasts are now saying that missing the deadline is ‘no big deal’, just puts more significance on the Ag Ministerial meeting in Cancun in September. After all, they say, the Uruguay Round (the round of trade negotiations immediately preceding the current Doha Round) ran on and on for 7 years and agriculture was a sticking point there too.

True, but the Uruguay Round only concluded when the U.S. and EU made an exclusionary, last minute, ‘behind closed doors’ bi-lateral agreement on agriculture (the Blair House accord) that ‘saved’ the whole Round. Opponents say in reality the Blair House Accord served only the interests of the U.S. and the EU, no one else. This time, developing nations are saying they will never accept another last-minute deal between the U.S. and EU. Canada, of course, says nothing.

U.S. corn planting is underway, but the March 31 Prospective Plantings report threw a curve at Chicago market observers. Most had been anticipating an increase from last year although not quite as robust an increase as previously expected. However, the USDA report anticipates 2003 corn acreage unchanged from 2002 at 79 million acres and soybeans down 1% at 73.2 m (if realized, the lowest soybean acreage since 1998).

You might expect that the combination of less than expected expansion in corn acreage intentions, and projections for another dry summer, would spark Chicago prices higher. Not so. Since March 31, the nearby MAY corn contract has picked up only 3 cents and all new crop corn contracts have done nothing. In fact, every day but one in the last 2 weeks since the March 31 report, Open Interest in the Chicago corn futures pits has dropped, meaning traders are losing interest in hopes of a rally in prices and simply leaving the corn pit. You can’t fuel a rally with no interest.

Ontario
In direct contrast to weakness in Chicago futures prices, basis in Ontario is strong. As the chart tracking Ontario basis offers for corn sold by elevators shows, basis continues very strong despite the surge in the Canadian loonie to 4-year highs near the 69 cent level. In fact, whereas the 5-year and 26-year average basis offers for this time of year are both about -.04/bushel (meaning the Ontario price is 4 cents less than the nearby Chicago futures price in Canadian dollars), the current basis is +.47/bushel! What is also very unusual is that the 2002 crop (to which this old crop basis information relates) is the biggest in the last 3 years, yet current basis is double offers of 2001 and 8 times 2000.

Part of the explanation may be dramatic declines in the volume of western feed grains coming east and the reduction in total imports of U.S. corn. Since August 1, 2002 (the start of the western grain crop year), only 95,300 mt of western feed wheat and feed barley have been sold into eastern feed markets. This is only 42% of last year’s pace, a record low volume, and shrinking. Normal volumes are some 3 to 4 times larger than current levels. Without this western competition in eastern feed markets, corn basis offers rise.

One traditional offset to short supplies in Ontario has been imports of U.S. corn. However, large sales of Michigan corn to the U.S. eastern seaboard last fall, and the startup of the new ethanol plant in Caro, Michigan in November 2002, mean that Michigan corn supplies are harder to attract. As a result, imports of U.S. corn into Ontario since the start of the crop year (September 2002) are only 558,867 tonnes or about 74% of each of the last two years. Monthly import volumes are falling further and further behind the pace of the last two years. Since September 1, imports by vessel from Toledo into Sarnia are only 837,000 bushels versus 3.032 million bushels for the same period last year, 3.316 m bushels into Port Colborne (with the most recent delivery April 6) vs 3.182 m last year, 1.394 m bushels into Cardinal/Prescott (most recent delivery April 8) versus 591,000 last year to date. The first two vessels out of Toledo this year were cargoes of U.S. corn bound for Port Colborne and Cardinal. This marks the fourth year in the last five that the first ship out of Toledo was carrying corn bound for Ontario.

One result of the strength in basis is that price for old crop corn as reported on check-off sales has remained buoyant. In fact, average weighted market price reported on check-off sales for the crop year to date is rising (i.e., $3.89/bu for sales in January; $4.07/bu for sales in February; $3.95/bushel average for all sales reported since October 1).

Bottom line? Look for Chicago corn markets to take longer than normal to get the seasonal spring rally going, and even then it will be weaker than usual. Basis in Ontario will remain firm. Move remaining old crop corn supplies and book another portion of new crop sales.

13	Ontario Corn Producer May/June 2003