By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph
U.S.
& World
We are into a weather market. Cool, wet conditions at planting in the eastern
U.S. corn belt cut corn acreage by perhaps 1 million acres. Now hot, dry conditions
in the western U.S. corn belt are cutting yield at the critical pollination period.
Weather outlooks continually change, but thus far, rains have been sporadic and
there’s little in the way of general corn belt rains forecasted. Longer-term
forecasts show the possibility of another high-pressure ridge setting up shop
west of the Mississippi. All in all, most observers think we have reached the
crucial period for price direction. USDA crop condition ratings, which began the
year at the worst ever recorded but quickly rebounded into acceptable levels,
have deteriorated since mid-June and are anticipated to continue to erode the
longer a general rain stays away. Little wonder that on July 5 when SPARKS lowered
their guess of the U.S. national average yield by 2.8 bu/acre to 137.1 bu/acre,
Chicago markets took notice.
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Corn,
Chatham
WKLY AVG ADJ TRACK BASIS
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What makes this year’s
production even more important is that U.S. corn stocks continue to drop. The
June USDA report projected ending stocks for August 2003 of 1.3 billion bushels,
only 13% of usage and fully 600 million bushels less than August 2001. Declining
supply is one thing, but what is often overlooked is that U.S. corn usage has
expanded by over 1 billion bushels – or 11% – in just the last 4 years.
Currently projected at just under 10 billion bushels, total usage exceeds USDA
production estimates by more than 350 million bushels. And the gap between expanding
demand and shrinking supply is getting wider. However, the most encouraging thing
is that growth in demand is coming from domestic usage (primarily growth in corn
ethanol production) which is up 17% in the last 4 years. Exports, which represent
the cheapest and least profitable market for producers, have been static at best,
up barely 4.7% in the same last 4 years.
Tuck something away. We have mentioned this before, but it bears repeating. World
stocks-to-use ratios for wheat, rice, corn and all other coarse grains have been
declining. We are nearing record low levels not seen since the early 1970's! Taking
advantage of abundant supplies prevalent during that last few years, end-users
have become accustomed to buying ‘hand-to-mouth’ in agriculture’s
version of ‘just-in-time’ delivery. Remember 1995/96? This could very
well be the year in which buyers have to change tactics and purchase needs early.
But remember something else. There is an old market adage that says a short crop
has a long tail, meaning in a short crop situation, prices react higher early
and quickly, then drift lower over a long period of time. You must be ready to
act quickly.
With buoyant demand and declining supply, Chicago corn prices appear to have finally
broken above resistance at $2.33 in the DECEMBER ‘02 contract and have been
flirting with the $2.50 mark not seen in the nearby contract since April 2000.
We will likely fall back and test the $2.30 level again, but given shrinking supply
and expanding demand, support should hold. Upside target is initially $2.80 range,
but that will require continuation of droughty conditions in the U.S. mid-west.
Ontario
We too need rain. Corn is at the growth stage that requires perhaps the most
moisture over the shortest period of time. We have not had significant general
rain events for some time across many regions in Ontario. Rains are projected
across the central and eastern regions the middle of this week. Hopefully, they
will be as predicted. They are needed.
Basis has been moving higher the longer the hot, dry weather continues. Of course,
the 1 cent set-back in the loonie over the last 6 days has helped too. We are
currently running about $1.35 over SEPTEMBER FOB the farm and $1.63 delivered
to feed mills, which flats out at $4/bushel. As the attached chart shows, basis
(after adjustment for exchange rate variation) has been stronger than both the
5-year and 24-year average all crop year (i.e., since October 1, 2001). However,
the 24-year pattern has almost caught up to us now. That suggests that basis
for old crop should increase through the summer, especially for on-farm stored
corn.
Corn is increasingly hard to attract and imports of U.S. corn have increased
as a result. At the end of June, 3 boats of U.S. corn left Toledo bound for
Cargill Sarnia, Casco Pt. Colborne, and Casco Cardinal. The ships into Sarnia
and Cardinal were the first this shipping season, while this was the 6th trip
for the Cuyahoga into Pt. Colborne since the end of March. Overall, imports
of U.S. corn are running less than year ago, by both truck and vessel.
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