Market Trends
By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
U.S. & World
January’s USDA Supply & Demand report took Chicago by surprise, especially big spec funds that had been selling corn since the fall. Feed usage jumped sharply and industrial usage was up as well. As we pointed out last issue, this should not have been a surprise. Feed usage in the first quarter (Sept. - Nov.) set a record at over 3 billion bushels. Industrial usage was also strong, thanks mostly to corn used in ethanol production which established new records in November and December of 98,000 barrels/day. The 240 million bushel increase in domestic demand exceeded the USDA’s 125 million bushel cut in export demand resulting in a 109 million bushel decrease in carryover stocks expected the end of August to 844 million, actually lower than year ago (883 m bu). Lower stocks took spec funds by surprise as they had been projecting increases in carryout stocks to above the 1 billion bushel mark. Needless to say, Chicago has moved up since the January 13 report.
And now we are coming up to another monthly USDA report February 12. It is almost a given that the export projection will be reduced again. U.S. corn export sales are running at only 73 per cent of year ago and will come nowhere near even the reduced January report estimate of 1.75 billion bushels. The U.S. is running up against weak demand and stiffer competition in world markets. Argentina has a marvellous corn crop. A friend whose family farms south of Buenos Aires reports dramatically better yields than anything seen before. Such results must be widespread because the Argentine government is projecting 61 mmt for all grains and oilseeds combined. It is expected that a major portion of the Argentine corn crop will cross the South Atlantic to South Africa where reduced acreage and droughty conditions are expected to make that nation an importer of about 500,000 mt this year.
Argentine corn is also being used to pressure internal U.S. rail freight rates. For example, major feed users (poultry and pork) in the southeast U.S. are complaining that rail freight rates from the central mid-west are running in the 50 cent/bushel range to Savannah, Georgia. These same reports indicate that freight from Argentina is only about 35 cents/bushel to the same port. With Argentine FOB export port prices currently $25/mt or 64 cents/bushel under FOB US Gulf prices and freight cheaper, there has been a lot of noise about Argentine corn imports into the southeastern feed market. Murphy Farms in South Carolina (Rose Hill, North Carolina; largest swine producer in the U.S. with about 3 per cent of total U.S. hog production; feeding 1.9 m hogs/day) has been mentioned as a likely importer, but Wendell Murphy has repeatedly denied suggestions that the corporation would import Argentine corn. This suggests that the real intent is not to import corn, but to pressure U.S. rail freight rates down, especially in light of the reportedly consistently poor performance of Union Pacific in meeting grain delivery commitments.
While on the topic of rail movement of grain, CN Rail recently announced its intention to acquire Illinois Central. IC is a major U.S. railroad and is reputedly the only line whose major run is north-south (Chicago to New Orleans) as opposed to east-west as is the case with all other major North American carriers. This acquisition will give CN a straight run from the Canadian Prairies through a Duluth, Minnesota connection with IC to New Orleans grain export terminals. The distance is actually very similar to the distance from the central Canadian Prairies to Vancouver, but grain in New Orleans is infinitely better positioned to service the emerging Central and South American markets. Remember, Mexico recently became the world’s number one grain export destination. This acquisition will also permit improved CN competition with CP Rail which owns Soo Lines in the U.S. terminating at St. Louis on the Mississippi River. What we are witnessing, as we have been saying for several years, is the emergence of a North American marketplace (Mexico included here), and consequently a North American transportation system, thanks to the NAFTA. The old pattern of a regulated Western Canadian marketing and transportation system designed primarily to funnel western grains to the West Coast will not survive in such an environment. The Class 1 railways have both seen beyond such a structure and are/have made moves to be competitive in a North American setting. The impact on Ontario grains and oilseeds will be minimal in the short term; but in the longer term, CN’s direct connections through the Sarnia tunnel to New Orleans and the Central and South American marketplace and beyond could come in very handy for exports of value-added Ontario ag and food products (such as yellow and white food grade corn products benefiting from the competitive advantage of being aflatoxin-free).
Ontario
Basis offers in Ontario have followed the dizzying ride of the looney very carefully. However, in order to make sense out of basis as a marketing signal, you have to correct for exchange rate variation when comparing over time and this year to previous. For example, at the turn of the New Year, the looney stood at 70.09 cents, Chicago MARCH contract stood at $2.6575, Board basis to producers was 90 cents, and FOB farm basis was $1.10. By February 6, the looney was again at 70.00 cents after having collapsed to 68 cents and recovering, Chicago MARCH was $2.7000, Board basis to producers was $1, and FOB farm basis was $1.20. Board price was $3.55 at the New Year and $3.70 on February 6, fifteen cents better (5 cents stronger in Chicago MARCH and 10 cents better Board basis). However, the apparent improvement is not as large when Chicago is adjusted by the exchange rate. The adjusted producer Board basis at the New Year was 23 cents under Chicago MARCH in Canadian dollars; but was only 7 cents stronger on February 6 when the producer Board basis was 16 cents under Chicago MARCH in Canadian dollars. In effect, the local basis (strengthening only 7 cents) has not quite kept pace with the relative surge in Chicago pricing (strengthening 10 cents). The signal? A slight weakening in Ontario markets during the month of January. The message? Never reward a weak market ... meaning don’t sell.