February, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
The USDA released its January Supply &r Demand report on January 12. The biggest surprise came in the corn data. Minor revisions in planted acreage (down 400,000 acres to 78.7 million) and harvested acreage (down 700,000 acres to 71.1 million) coupled with a 1 bu/acre reduction in average yield to 142.2 bu/acre dropped total production by 164 million bushels to 10.114 billion. Both the crop and average yield show record numbers. A downward reworking of previous USDA production numbers had been anticipated by Chicago traders. The surprises came on the demand side of the equation - all segments of corn usage were increased. Upward revisions had been expected in exports, but not all three categories. Feed usage was moved higher by 75 million to 5.775 billion bushels. Industrial usage was increased by 30 million to 2.480 billion. Exports were increased by 50 million to 1.975 billion bushels. In total, usage was higher by 155 million bushels than the December report. The lower crop and higher usage resulted in a larger than expected drop in projected carryout stocks which were down 318 million bushels to 981 million. (For perspective, the total Ontario corn crop is estimated at 220 million bushels. Obviously, the USDA makes monthly adjustments larger than that!) The significance of the 24% drop in the ending stocks projection is that the number is now once again below the magic 1 billion bushel mark. A 24% drop in projected ending stocks in one month is remarkable. Little wonder that the USDA increased the estimated average cash price by a dime to USS2.30/bushel. What is especially notable is where the increase occurred. The USDA does not project a single price (i.e. $2.30) but projects a range. In this case it was $2.15 - $2.45 which averages out to $2.30. The important point is that the bottom end of the range jumped 15 cents from the December estimate of $2.00, while the top end moved up a nickel from $2.40. The range narrowed, but the bottom moved up more than the top. The implication of this January report is that the bottom is definitely in with little or no downside risk left. In fact, at $2.30, the USDA has returned to its projected average price from the September 2003 report. However, in the September report, estimated production was 170 million bushels less than the January actual result. Feed usage was 150 million less, industrial usage 5 million less, and exports were 175 million less. Projected carry-out stocks at 1.064 billion bushels were 83 million bushels higher than this January report. When put into this context, it becomes clear that a change in Chicago market perspective took place after the September report. Attitudes changed from "bullish" to "bearish" and corn prices drifted lower. This January report marks a revision in Chicago trader attitude. Fundamentally, the message of this January report is that the "bull" market of the late fall and optimism for price movement higher is validated. The very large "long" position held by the large commodity funds would seem to be have been vindicated by this January report. Time will tell, but the seasonal move higher likely started January 12. What is also interesting in this January report is the net result for soybeans. Carry-in stocks were increased, production reduced, crush reduced, and exports increased. However, the bottom line is that ending stocks remained unaltered at 125 million bushels as did average price at US$7.25/bushel. A reduction in stocks had been expected as well as an upward revision in price. What will be interesting to watch over the next several months is whether corn can shake free of its "price follower" role of late (where corn prices responded to price direction from the soybean trading pit) and begin to move independently of soybeans. On several occasions late in 2003, corn prices in Chicago did exactly that by withstanding downward pressure when soys and wheat tanked. Corn prices in Chicago may begin to demonstrate independent price direction. Such a move will be essential if a sustained rally in corn is to take place.

Ontario
Basis in Ontario continued to erode since last report driven down by strength in the dollar. The Canadian dollar surged toward the 79 cent mark early in January. To put that into perspective, on January 9, 2004, the nearby Chicago MARCH contract closed at $2.51/bushel. Conversion at the 78.79 cent exchange rate (1.2692) prevailing on that day means Chicago was trading at $3.185 Canadian. On January 9, 2003, the exchange rate was 64.36 cents (1.5537). If the 2003 exchange rate prevails this year, the Chicago MARCH contract close of $2.51/bu would translate into $3.90/bu Canadian, some 71.5 cents higher. In actual fact, on January 9, 2003, the nearby Chicago MARCH contract closed at $2.435, only 7.5 cents less than the close of $2.51 on January 9, 2004. However, the Ontario FOB farm bid was $3.99 in 2003 versus $3.16 in 2004. Even though Chicago was 7.5 cents higher this year than last year, FOB farm offers were 83 cents lower, 71.5 cents of which can be attributed to the stronger loonie and 11.5 cents of which could be attributed to the larger Ontario corn crop. The dramatic flight higher in the loonie has had an enormous impact on pricing. However, basis adjusted to negate exchange rate variation year-to-year remains relatively strong. East year, FOB farm basis adjusted for exchange rate was 20 cents over the nearby Chicago futures price in Canadian dollars. This year, FOB farm basis adjusted for exchange rate was 3 cents under the nearby Chicago futures price in Canadian dollars. Weaker, but not nearly as weak as would be implied if you simply took the $3.99 flat price last year versus the $3.16 flat price this year. In other words, basis adjusted to remove exchange rate variation sends a far clearer message about local demand for corn. In a longer-term perspective, basis offers adjusted for exchange rate this year remain above the 5-year and 26-year average, but have dropped below year ago values because of the larger crop this year than last. The basis remains above long-term averages is because of expansion in local demand, mostly expansion in industrial processing, but also somewhat higher demand from feed usage.