February, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
Avian influenza (bird flu) has been confirmed in poultry in six Chinese provinces and now the state of Delaware in the U.S. The strain found in Delaware is milder than the one in Asia which has killed 13 people in Vietnam and 5 in Thailand. Vietnam and Thailand are the only nations where bird flu has been confirmed to have jumped to people from poultry. Most evidence suggests that the leap occurred where humans were in direct contact with infected chickens. Regardless, in an effort to contain the strain, 50 million chickens have been killed in Asia as well as the 12,000 chickens on the Delaware farm. The significance for corn markets is that 50 million chickens eat a lot of corn. Chicago markets will assess the possibility that while poultry product exports to Asia are likely to increase in the short term, there is a case to be made that exports of Chinese corn may resume given a significant reduction in corn demand as poultry feed in China. That's a concern because the absence of China as an exporter in Asian corn markets has been the key driver behind the 50 cent rally in Chicago's MARCH '04 contract since late December.
Little wonder that Chicago old crop corn price charts are looking top-heavy currently. There is a slightly different taste to new crop corn price charts where DECEMBER posted new contract highs to close the first week of February. There will be a divergence in price direction between old crop versus new crop Chicago corn futures over the next few months. The race will go to new crop futures, which will gain relative to old crop futures. Old crop futures are dominated by the heavy "long" position held by managed trading funds. Old crop futures will be increasingly sensitive to demand side shocks (such as bird flu) as we spend more time above the US$2.80 mark. At some point, the funds will want to collect profits on their old crop "long" positions by selling out. Given the size of their positions, the rush to sell could/will drive old crop futures prices down sharply. On the other hand, new crop futures are caught up in a bidding war with new crop soybean futures to attract acreage this spring. Given the tightening world coarse grain stocks situation, a big U.S. corn crop is key and expanded acreage is essential. But a record low U.S. soybean stocks-to-use ratio is crying out for more soybean acreage as well. The contest between Chicago new crop corn and soybean futures contracts will continue until the USDAs Planting Intentions report to be released March 31. Look for old crop corn futures to weaken relative to new crop corn futures. Something to watch. The U.S. Climate Prediction Center released its latest assessment of the El Nino/Southern Oscillation condition as of February 5. The Center calls for a "neutral" condition through March meaning neither El Nino nor La Nina is developing across the central Pacific. However, what is interesting is that the Center also describes a very turbulent weather pattern in the Pacific that will affect North American weather into late winter and early spring. These severe weather patterns in the Pacific are cited as the reason for increased southern jet stream activity in North America which causes strong winter storms to track across the central and eastern U.S. The pattern is projected to remain through at least March bringing a wetter period to the U.S. south and southeast as well as severe storms such as tornadoes. The heavier snow cover portends below normal temperatures everywhere east of the Continental divide with a cooler than normal start to spring. For the Great Lakes basin, the latest 30-day forecast calls March to be significantly cooler and wetter than normal, while the 90-day forecast (through April) calls for significantly cooler conditions with normal precipitation. As we get closer to spring planting, these weather projections suggesting a delayed start to the season will take on increased significance, especially as Chicago markets attempt to attract increased corn acreage in the eastern corn belt.
For the record, on February 6, the USDA announced the 2004 national and county loan rates for corn, grain sorghum and soybeans as authorized by the 2002 U.S. Farm Bill. This is the earliest such an announcement has been made. The new rates are not currently of great significance because cash prices have moved considerably above the loan rate thus negating the probability of collecting a loan deficiency payment for most U.S. grain and oilseed producers. However, the loan rate for corn and grain sorghum was reduced as required by the 2002 Farm Bill from US$1.98/bushel down to US$1.95/bushel. The soybean loan rate was left unchanged at US$5.00/bushel as required by the Farm Bill. Current national average cash price for grain corn in the U.S. is US$2.46/bushel and has never been below US$2.12/bu in the last 12 months meaning loan deficiency payment opportunities have been very small if any at all. Currently the national average cash price for soybeans is US$7.82/bushel and has never been below US$5.60 in the last 12 months.

Ontario
Basis in Ontario dropped a nickel but then recovered the same over the last month as the loonie attempted a run at 79 cents before plummeting back to test the 75 cent mark. Old crop spot basis at the elevator is 60 cents over the MARCH contract, but FOB farm offers are 80 over and offers for delivery to western Ontario feed mills averaged $1.12 over MARCH. Producers generally held onto grain corn at harvest while selling their wheat and soybeans. As prices have rallied, old crop selling has picked up. Producers need to watch offers for deferred delivery, especially at area processors where offers approaching or exceeding $4 for delivery in the May time period have attracted attention. Offers close to $4 for delivery of new crop in December are attractive and need careful assessment.
Imports of western feed grains into eastern Canada are running at 240% of last year and exceeded the volume of all of last year (ie. 171,000 metric tonnes) by the end of January. We will very likely import about 300,000 mt by the end of Ag Canada's crop year July 31.
Imports of U.S. corn into Ontario were very strong early in the crop year setting new monthly records in October and November, but have tailed off sharply with the closing of navigation on the Lakes and Seaway. Imports of U.S. corn into Quebec have dropped sharply and are at their lowest point in at least the last five years thanks to a very large Quebec corn crop. In fact, Quebec corn is moving into eastern Ontario processors.

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