By Brian Doidge, Market Analyst, Ridgetown College/University
of Guelph
February 8, 2000
U.S. and WORLD:
Last issue, which was prepared before the USDA’s January 12 Supply & Demand report, detailed four positive
factors fueling the move to higher prices: strong feed use, dryness in South America, dryness in the U.S. west
of the Mississippi and lack of farmer selling. Now we have a fifth supportive factor: declining carryover stocks
as confirmed by the January 12 report itself (down 270 m bushels or 15% in one month from the December report).
For the first time in four years, projected U.S. old crop corn stocks on August 31 will be lower than the previous
year. That is a fundamental shift in outlook and something large-managed trading accounts and large spec funds
have had to absorb since the report. It’s little wonder that both Chicago old and new crop futures prices have
gained 12 cents since the report and are trending higher.
We turned a corner on January 12. Demand is expanding while supply is shrinking. The report made crystal clear
that a U.S. corn crop of 9.6 billion bushels is needed merely to meet 2000/01 usage requirements and stop further
erosion in stocks. Using an average yield of 134 bu/acre (which would be better than 1999’s 133.8 bu/acre, the
third best ever), 9.6 billion bushels would require harvested acreage of 71.6 million acres, one million more than
in 1999 and an increase of 1.6 per cent. However, planted acreage is projected to be down perhaps 1.5 per cent
from last year, not up. So, Chicago markets must achieve these accomplishments within the next three months:
- Buy more corn acreage away from soybeans (projected to increase 1.5 per cent
and perhaps more; outside chance U.S. soybean acreage might surpass corn acreage for the first time ever) which
will be especially hard to do, given the more favourable treatment of soybeans compared to corn under USDA income
support programs; or
- Bet heavily on an exceptional yield to fill the void (would be the fifth excellent
yield in a row and the sixth in the last seven years); or
- Move prices higher to build in a weather premium; or
- Move prices higher to reduce demand.
In all of these scenarios, Chicago corn prices must move higher relative to soybeans.
This situation also explain why attention is starting to focus on the chances for crop production problems this
spring and summer. The U.S. Climate Prediction Center released a report on February 3 saying that this year’s lingering
“La Nina” event is the fifth strongest in the last 50 years and usually results in drier than normal conditions
in the central and southwest U.S. What is the impact so far this year? Since last summer, Nebraska and North Dakota
have been the driest in more than 100 years; Illinois and Texas, driest in more than 12 years; and South Dakota,
Iowa, Wisconsin, and Minnesota, driest in the last five years. U.S. long-range forecasts call for below-normal
precipitation in the central and western corn belt. Iowa State University meteorologists give a 30 per cent chance
drought will reduce Iowa corn yields to 90 per cent of trend which is hardly the situation that would result in
the third best yield ever recorded as required in our assessment here. The U.S. hard red winter wheat crop (centered
in the southern Great Plains) – already the smallest acreage since 1972 at less than 42 million acres, has been
hard hit by droughty conditions. It is rapidly deteriorating, according to monthly crop reports, with 61 per cent
of Oklahoma’s crop rated in fair, poor, or very poor condition.
The message? There is more upside potential in Chicago corn markets than downside.
ONTARIO
Basis in Ontario lost a nickel when Casco London and Commercial Alcohols withdrew from the marketplace late in
January and early February, but has recovered that nickel recently. What is impressive is that recovery comes despite
the move of the loonie above the 69 cent mark, threatening 70 cents during the same time period. We are continuing
to ship corn into the U.S. and there has been another overseas export shipment (7,000 tonnes out of Trois Riviere
late in January) which is unusual during the winter months. This would seem to confirm the potential for very active
export movements out of the Lakes and lower St. Lawrence River when the Seaway re-opens the end of March. Iranian
business seems assured with shipments likely out of Hamilton/Sorel and Prescott.
On January 13, Merrill Lynch in the U.S. announced that it was exiting its agriculture and metals futures business
to concentrate on financials and energy markets. Merrill Lynch Canada has decided to exit the dedicated private
client futures business which means that it will no longer provide sales, execution or clearing services to private
client accounts. All activity in affected businesses will conclude February 25 with no trading after February 18.
Access in Ontario to brokers active in agricultural commodity futures and options trading continues to shrink.
This restricts producer marketing alternatives – with very few exceptions – almost exclusively to tools offered
through grain trade elevators, dealers, and processors.
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