January 17, 2005

by Brian Doidge, General Manager, OCPA

U.S. & World
In what has become a continuing saga, January's USDA Supply & Demand report was bearish. Not much new there. Since it's first guess in the May report, USDA has steadily increased the 2004 crop every month from 10.425 billion bushels to 11.807 billion currently. Average cash price projection has steadily decreased every month from the starting guess of U.S.$2.75/bushel to U.S.$1.90/bushel. But here is perhaps the first sign of the end of the decline; in January's report, the USDA actually increased the average cash price projection by a nickel to U.S.$1.95/bushel, the first increase for this crop in nine consecutive reports.
In those nine months, the USDA has increased production by 1.445 billion bushels, increased feed use by 350 million, increased industrial usage by 115 million, reduced exports by 150 million, and increased projected ending stocks by 1.219 billion up 164%. Traders are expecting further reduction in export usage because 10% behind last year's pace and falling back. Most observers expect the USDA will have to cut the export projection even further, which will increase ending stocks yet again. With transportation costs now 50%-75% of the selling price of corn in Asian markets, demand for U.S. corn is eroding, despite the continuing slide in the U.S. dollar. U.S. corn prices will continue under pressure as Chicago tries to move grain into a world market that doesn't need it at present.
Unlike soybeans, U.S. corn basis offers are holding firm through the first two weeks of January, despite the weakness in exports, high freight costs, and the sagging U.S. greenback. U.S. farms appear to be more reluctant to sell than the trade had expected (and hoped). That may change as weather problems across the U.S. mid-west improve, but domestic processors and users have had to step up to the plate ever so slightly in order to shake corn loose. That may be the reason behind the USDAs minor nickel move up in cash price projection.
Most market analysts agree that U.S. corn acreage this coming spring will increase for the fifth year in a row. U.S. winter wheat acreage has slipped down 4% from 2004 and down 8% from 2003. This frees just under 4 million acres of which about 2 million is expected to migrate into corn. Soybean Asian Rust worries, especially in the U.S. south and southern mid-west, will likely shift another 1 million acres into corn. The expected 2.5-3.0 million acre increase in U.S. corn planted acreage could approach the 84 million mark, last seen in 1981; while harvested acreage could well surpass the 1981 record of 74.6 million acres.
Despite poor prices far below the USDAs cost of production estimate for the "Northern Crescent" of about U.S.$2.60/bushel, corn acreage is expected to increase because U.S. corn producers are essentially guaranteed the Counter-Cyclical Program Target Price of U.S.$2.63/bushel.
Another factor contributing to expectations of expanded corn acreage in the U.S. this spring is that soil moisture levels have recovered significantly across the southern and western corn belts. With a modest El Nino event seemingly now under way, a warmer and drier early spring is projected for the far west and areas west of the Mississippi. The central and eastern mid-west should expect normal conditions. The longer-term forecasts call for a dry, warm spring followed by increased rains and normal temperatures. Nothing in the long term weather forecast looks threatening, and with recharged soil moisture in previously drier areas west of the Mississippi, corn should do well, especially in the big 3 "I" states.
However, we may have reached the bottom on price. Currently, the nearby MARCH futures contract has broken below the U.S.$2/bushel level into new contract lows and will likely test the $1.90 mark as well. But both the weekly and monthly corn charts are close to long term support levels at $1.90 and $1.85 respectively. We've slid a long ways down, but the slide might be over. Problem is that a rapid recovery seems very unlikely. Each successive Chicago futures contract is likely to test contract lows and seek the level where the previous contract expired. We should expect a seasonal price rally into the July 4 weekend, especially because spec funds are very "short" (and have actually added to their short position since the New Year) and will have to buy out, but the overall flavour of the market remains decidedly bearish. Expect Chicago futures to drift slowly sideways with a slight upward bias through June. Current "carry" (assuming a storage cost of about U.S.$0.05/bushel) equates to carrying costs which once more suggests a flat outlook.

Ontario
Not a whole lot of positives. U.S. corn continues to come in with major processors having been booked many months ago. Although current basis offers (after adjusting for exchange rate) are relatively strong compared to 26 and 5-year averages for the date, they are nothing exciting either. Planting prospects for this spring are abysmal, especially with corn currently at $2.64/bushel for fall delivery (soybeans are equally as dismal at only $6.02/bushel). Most producers cannot pencil out corn, or soybeans, or wheat, or much else for that matter. The common thinking is, therefore, to minimize operating loan exposure and grow the cheapest crop. For a lot of growers that currently means edible beans, spring cereals (oats and barley), soybeans.... any thing but corn. Seed corn sales are very slow. Financing is problematic. Expect grain corn acreage to erode significantly for the fifth year in a row. Perhaps only 1.5-1.55 million acres versus 1.62 million in 2004 and 1.925 in 2001.

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