OCP Market Trends - September 8, 2003

September 8 , 2003

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

U.S. & World
Attention is focused on the upcoming Thursday, September 11 monthly USDA Supply & Demand report. Trade guesses call for a U.S. corn crop of less than 10 billion bushels based on continuously eroding crop condition ratings since late June. On June 30, 75% of the U.S. corn crop was rated in good-to-excellent condition versus only 58% for the same date last year.

By September 2, only 46% of the U.S. corn crop was rated in good-to-excellent condition. Hot, dry conditions west of the Mississippi obviously had an impact and reduced previously buoyant yield guesses.

Corn, Chatham
WKLY AVG ADJ TRACK BASIS

In the east, the crop looks better thanks to heat during August and is on a normal pace in many states. At the end of August, 72% of the Michigan corn crop had reached dough stage versus 70% average for the previous 5 years, but only 56% last year. In Ohio, 85% had reached dough versus 89% of the 5-year average and 82% last year.

As a result, market analyst production estimates vary considerably, but are generally under 10 billion bushels. This compares to 10.250 billion bushels in the USDA July estimate, and market expectations of 10.5 or better in late June.

SPARKS’ projection is among the highest in the trade at 9.931 billion bushels with the average of pre-report guesses at 9.800 billion. By the time you read this, you’ll know the USDA’s assessment of the size of the U.S. corn crop. Any number less than the average trade guess could lift Chicago markets through the early part of harvest. Above 9.8 billion bushels, and Chicago will likely drift downward. My guess is that the USDA will be above 9.8 and most likely project a crop close to 9.9 billion bushels.

Regardless, the U.S. corn crop is definitely bigger than the crop last year (9.008 billion bushels). Traditionally, a big crop puts heavy downward pressure on Chicago prices in the harvest period prior to the U.S. Thanksgiving holiday. The anaemic performance of U.S. corn exports in the 2002/03 crop year (less than 1.5 billion bushels shipped by the end of August versus 1.8 billion last year) is a major anchor dragging prices lower. Projections for exports for the 2003/04 crop are not much better. However, a new factor in the mix is the continuing surge in U.S. corn ethanol production which set new monthly records all year. Industrial usage of corn in the U.S. is now half again as large as exports whereas as recently as 2000/01 they were equal! Less reliance on exports is a positive development, the implications of which Chicago traders are digesting slowly. With 78 ethanol plants in production (all but 1 based on corn), and another 7 under construction, the pace of corn ethanol expansion in the U.S. has not slowed.

Keep something in mind. A U.S. corn crop of less than 9.9 billion bushels will likely reduce carryout projections for August 2004 to under the magic 1 billion bushel mark. That would imply a stocks-to-use ratio of around 10%, the lowest in 7 years. The last time the U.S. corn stocks-to-use ration was that low (1996/97), average price was US$2.71/bushel which is currently a full $0.50/bu above the August USDA cash price projection for the 2003/04 crop of $2.20/bushel. There is some topside once we get through the majority of the U.S. harvest and get a clearer handle on the actual crop size. Look for Chicago prices to be range-bound through harvest with a possible seasonal move higher after January.

On price charts, we have reached a very critical stage. DEC 03 tested resistance at the $2.47 level after a sustained surge from the $2.10 area in mid-July. Heavier overhead resistance is just above at $2.50. Depending on the September USDA report, we most likely stand more of a chance to test resistance again and then fall into a downward drift through early harvest. Initial support will emerge at $2.33 with major support just below at $2.26. These values define the likely sideways trading range for Chicago corn prices heading into harvest.

Ontario
Corn crop conditions vary markedly across the Province depending primarily on the conditions at spring planting and moisture received in August. Some locations, such as the Niagara region, had sharp reductions in planted acreage because of poor spring planting weather. Other areas, such as western and southern Middlesex County, had limited rainfall in July and August and are dry. But other areas, such as the region along the north shore of Lake Ontario, had a seemingly endless string of damp, overcast days in July that extended the wheat harvest but helped corn. Overall, the crop is late.

We are perhaps 7-10 days behind normal development and thus need a later than normal first frost. Hopefully, when you read this, frost has not come yet.

If the end of the growing season is extended by a late first frost, we stand a good chance at a larger than average crop (perhaps 220 million bushels or more). If frost ends the season earlier than we would like, yields will be reduced and perhaps only an average crop will be harvested (perhaps 200 million bushels). Regardless, moisture levels will likely be higher. Given high energy costs, that means higher drying charges are to be expected whether you dry at home or at the elevator. However, low interest rates (the Bank of Canada dropped the overnight Bank rate yet again to 2.75% on September 4) mean that carrying costs are lower.

Should a producer store corn this harvest? The answer depends on two factors: Chicago futures and Ontario basis.
The spread between the DEC 03 and JULY 04 corn futures contracts in Chicago (ie. the “carry”) on July 25 was 20 cents.

The same spread on September 5 was only 10 cents. In other words, in July when Chicago was anticipating a big, even record, U.S. corn crop, the spread was big thus offering more incentive to store and deliver later in the season. A large “carry” in Chicago markets was signaling producers to store corn at harvest. As expectations for the U.S. corn crop declined over the summer, the spread narrowed. The narrower “carry” by September in Chicago was signaling that exporters, processors, and users wanted to own or control more corn early. New crop DEC 03 was bid up relative to JULY 04 thus reducing the spread. A reduced spread reduces the incentive to store corn. Chicago says “sell early”.

New crop basis has been a mixed bag of signals in Ontario as the summer progressed. In early May, when we were anticipating an increase in planted acreage and before the extended wet and cold spell arrived, new crop basis was 75 cents over DEC 03 (-.22 when adjusted for exchange rate). By July 2, when we knew acreage had been reduced and the crop was definitely behind, new crop basis was 85 over DEC (+.10 when adjusted for exchange rate). As heat arrived in August with most areas receiving timely rains and the crop began to catch up, new crop basis eroded. By August 22, new crop basis was -.08 when adjusted for exchange rate. As the season wound down and the possible damage from even a normal first frost date became more evident, new crop basis gained strength coming up to par by September 5. The message? Currently new crop basis is undecided about storing or selling, just as are estimations of crop size.

26	Ontario Corn Producer July 2003