December 12, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
December's USDA Supply & Demand report was a bit bearish on the one hand, and a bit supportive on the other. The support came from the fact that projected ending carryout of 1.844 billion bushels was below the average pre-report guess and at the very low end of expectations. Of course it was still up from November's report of 1.819 billion bushels. The bearish factor was that anticipated export sales were reduced 50 million to 2 billion bushels. Export sales remove the surplus from U.S. grain markets, and when exports are sluggish, price has a tough time rebounding.
But rebound they will. Mark it down! The only question, of course, is when? Hopefully, sooner than you might think if we don't have another huge crop in 2005. Keep this in your mind. Total U.S. usage of 10.870 billion bushels is larger than any U.S. corn crop ever grown .... except for the 2004 crop! We need crops of this scale every year! As my secretary says, "That ain't agon'a happen."
The sleeper in the USDA report was another hike in projected corn usage for fuel ethanol production. Up another 55 million bushels from the November report to 1.425 billion, this jump exceeded the reduction in export sales, the number on which Chicago traders chose to focus. This bias focused on exports is a throw-back to years gone by. Domestic usage as the key driver in price direction, especially corn for ethanol production, is a new phenomenon and old-hand Chicago traders have been slow to adjust. Corn usage for ethanol has increased 18% in one year, and is up 43% from even two years ago. And the pace is quickening, not slowing. Fittingly, domestic U.S. corn usage for industrial processing surpassed export usage at the turn of the millenium and now absorbs 25% of total usage. It will not be very long, perhaps only two years, before demand for ethanol production alone surpasses export usage. It's a new world.
Of course, we want to keep our wits about us. Before we sound like a "pollyanna", we must also keep these factors in mind:

• With U.S. corn producers insulated from low prices, thanks to their support programs which essentially guarantee them U.S.$2.60/bushel at a minimum, reduction in U.S. corn acreage is not to be expected. It's peddle-to-the-metal when U.S. corn planting decisions are being made.
• Long-term Palmer Drought Indices have turned to generally moist across the entire mid-west with the exception of the far western plain States. Where only a few months ago drought was plaguing the western corn belt and Great Plains, soil moisture levels have been recharged. That's good for corn yield prospects in 2005. Moreover, long-term weather forecasts seem to be calling for near ideal planting and growing conditions with a dry spring, wet and cool summer, warm dry fall for 2005.
• With Asian Soybean Rust now confirmed in at least nine states, and the only controls for the fungus very expensive, it is very likely that southern and lower mid-west states will expand cotton and corn acreage.
• World competition in coarse grains is not decreasing despite low prices. The Ukraine, Russia, and Eastern Europe have quickly emerged as major suppliers to the extent that a futures contract based on Black Sea port shipment is being considered. China continues to be a wild-card, as always, and who knows about their corn export intentions?

Bottom line? Low prices are the best cure for low prices. Years ago, the reaction time required for export demand to build sufficiently to clear surpluses and allow prices to rebound was long and fraught with potholes thanks to exchange rates. Now, surging domestic demand holds the promise of dramatically shortening that reaction time. Regardless, we are in one heck of a hole and it will be painful clawing our way back up to respectable price levels.

Ontario
Well, the climbing loonie finally did quit. In the eleven trading days following the U.S. Thanksgiving holiday, the Canadian dollar lost 3 1/2 cents! Hasn't done a heck of a lot for basis offers yet, or has it? Basis FOB the farm in Quebec has jumped 20 cents. Basis offers for corn delivered to Ontario feed mills has also jumped 20 cents. Basis offers for corn FOB the farm in Ontario have finally moved up a nickel. But basis for corn delivered to Ontario elevators has not budged. The result is that the spread between basis for corn delivered at Ontario grain elevators and at feed mills has widened considerably. In fact, observers say it is too wide. The message is shop around. Seek out interested buyers. They are out there.
While you are at it, check out the Casco website for price offers three, four, and five months out. Offers above the $2.85 mark for corn delivered April and May are more attractive than offers for current delivery around the $2.25 mark.
One interesting, but disturbing item. Despite the plunge of the loonie and a little strengthening in old crop pricing, new crop forward contract basis for delivery in fall of 2005 actually moved lower, losing a nickel. With the concurrent nickel drop in Chicago over the same time period, new crop forward contract offers actually lost a dime to run only $2.70/bushel or $106/mt in the southwest.