March 22, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
World supplies of major grains and oilseeds got tighter in the United States Department of Agriculture's (USDA) most recent projections of supply and demand (i.e. March report). For example, the USDA projected world corn ending stocks for the 2003/04 crop at 2.669 billion bushels versus 4.050 billion bushels at the end of the 2002/03 crop and 5.064 billion ending the 2001/02 year. World 2003/04 wheat ending stocks of 4.590 billion bushels compare to 6.109 billion at the end of the 2002/03 crop year and 7.399 billion at the end of 2001/02 crop year. World 2003/04 soybean ending stocks of just 1.318 billion bushels compare to 1.443 at the end of the 2002/03 crop year, but are larger than the 1.183 billion at the end of the 2001/02 crop year. It is interesting to note that while projected world ending stocks of both coarse grains and wheat for 2003/04 are significantly smaller than either of the last two years (corn only 52.7% of stocks just two years ago; wheat stocks 62% of two years ago) and soybeans are actually more plentiful than two years ago (2003/04 ending stocks 11% higher than 2001/02), it is tightness in soybean supplies that is getting the media's attention and driving Chicago futures prices higher for all commodities. That is because the South American soybean crop being harvested in 2004 has run into significant production problems (drought, too much rain, soy rust). Argentina's projected soybean crop of 34.7 million metric tonnes is actually smaller than the 2003 crop, and Brazil's production is somewhere around the 50 mmt mark, well off initial estimates of 61-63 mmt. Strength in soybean prices spills into corn prices because of the need to attract and retain corn acreage this spring. When new crop soybean prices move up, corn gets carried higher too because we need corn. The current unofficial USDA acreage estimate calls for 80.5 million acres to be planted to corn this spring versus 78.7 million in the spring of 2003. Current demand projections of 10.5 billion bushels for the 2004/05 crop year imply that a yield equaling or exceeding last year's record 142.2 bushels/acre will be required of the 2004/05 crop on that acreage just to keep stocks from shrinking sharply smaller. That's a tall order; so the need to keep or preferably expand corn acreage means corn prices must keep pace with new crop soybean prices. Reports of South American soybean crop problems all winter long encouraged traders to think that the U.S. had the only large exportable supplies of soybeans until the South American crop came to market. Chicago futures rocketed higher to ration demand. Surging prices meant that return on investment ratios began to attract the interest of stock and bond investors soured by anaemic returns in financial markets. Sparked by this major influx of new investor capital into managed speculative funds, Open Interest in ag commodities soared, especially the "long" positions held by managed spec funds in soybeans and corn futures. All this new money coming into Chicago ag trading pits meant that prices surged higher. Chicago soybean futures prices have reached levels last seen in 1988. Chicago corn futures prices are back to levels from 1995. However, both commodities are now heavily spec fund "long", meaning spec funds hold very large "long" (bought) positions in Chicago futures contracts. When these spec funds start to lose enthusiasm, and want to collect profits, they have to get out selling. The rush to sell might not be pretty as everyone tries to exit at the same time. Even a brief look at long-term commodity price charts will tell you that corn and soybean and wheat prices do not spend a lot of time at current price levels. Opportunities to sell at these prices do not come around often and certainly do not last long. Currently, the old crop JULY corn futures contract is flashing multiple sell signals (the MACD is in sell mode on a high ADX; RSI features a bearish divergence; BCI, while still in bull mode, is shifting to sell and will cross over if the recent high of $3.10 is not exceeded shortly). A turn to the downside will find support at $2.97 in the JULY, then$2.82, then $2.70. The tide will turn when traders realize that China will sharply expand soybean acreage this spring. When, and if, that happens, prices for all commodities will erode quickly.

Ontario
Basis in Ontario has weakened significantly since mid-January. Prior to that time, basis adjusted for currency exchange rate had o been relatively strong and above both the 5-year and 26-year averages for the date, but sliding lower from September onward. By mid-January we slipped below the 5-year average, and by early March had slipped below the 26-year average as well. In fact, basis offers by mid-March were the weakest for the date so far this decade. The reason is that the big Ontario corn crop finally started to move. Sales have increased and basis has come under pressure as a result. Sales of Ontario corn were slow off the mark in the fall with many producers holding onto corn stored on the farm. Producers preferred to sell a high-priced and large wheat crop, and to sell a very high-priced but not so abundant soybean crop. As a result, U.S. corn imports flooded in with imports for the September-November time period setting a new record. Imports of western feed wheat and feed barley surged as well with movement into the eastern feed market more than double last year's pace through the end of February. This influx of competing feed grains kept basis offers at import replacement levels through the early winter. However, the surge higher in Chicago corn futures contracts finally attracted the selling interest of Ontario corn producers. Flat prices for old crop on farm above the $4/bushel mark prompted many producers to sell. As Ontario corn began to move, basis weakened; but the impact was masked by surging Chicago futures prices. Weakening basis (and the 75 cent loonie) meant U.S. corn imports were uncompetitive and volumes began to subside. Imports in December fell below the record volume of December 2001. Imports in January fell below equivalent monthly levels for each of 2003, 2002, and 2001. As basis continued to weaken, exports of Ontario corn increased. Exports overseas as of mid-March already exceed the annual total for each of the previous three years. There is a message here. Exports show a weak basis; imports show a strong basis. If it were not for strong prices in Chicago, the current weak basis would attract far more attention.

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