April13, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
The USDA April 8 Supply & Demand report was bullish for all three major commodities. Corn industrial usage was increased 45 million bushels due to continuing record ethanol production. Projected ending stocks dropped the same 45 million bushels to only 853 million bushels. This represents a stocks-to-use ratio of only 8.3%, the lowest since the record low of 5% in 1995/96. Reductions in ending stocks projections for both soybeans and wheat were bullish for those commodities as well. Little wonder that projected average cash prices for all three commodities were increased: corn from US$2.45 in last month's report up to $2.55/bushel this time; soybeans from US$7.35 up to $7.60/bushel; wheat from US$3.35 up to $3.38/bushel. Chicago traders took only short notice. While corn prices managed to fight off selling pressure from the soybean pit on April 8 ("the USDA report was not bullish enough on soybeans to support current price levels"). The continued selling after the Easter weekend took its toll in trading Monday April 9. Spec fund selling out of record long positions, widely projected and feared for some time now, seems to have taken hold at least in the soybean pit where two consecutive closes under key support levels sent shivers through traders. At least a short-term top is in. Spillover selling pressure from the soybean pit into the corn pit undermines a fundamentally solid corn outlook. The new crop soybean/corn price ratio continues to narrow favouring corn. The USDAs March 31 Planting Intentions report forecast a larger than expected 2 million acre expansion in U.S. soybean plantings, but virtually no change in corn acreage. If realized, and even using the record average corn yield from the 2003 season of 142.2 bu/acre, 79 million acres planted this spring will produce a U.S. corn crop of only 10.114 billion bushels, whereas usage is projected at 10.354 billion bushels. Corn markets need either more corn acres, or an even better new record yield, or price has to ration surging demand ... especially domestic demand. But domestic demand is not about to be muzzled. We have mentioned this several times in the past. It is this shift to domestic demand away from export demand that marks a key watershed in corn pricing. In the past, exports were touted as the salvation for U.S. corn production. Exports, however, are too dependent on foreign agricultural policy and fraught with too many intermediaries. With the surge in ethanol production, U.S. domestic corn processing demand has now far surpassed export demand. Domestic processing is less exposed to foreign interventions, enjoys much smaller transportation and handling costs, and certainly has fewer intermediaries. With the U.S. paranoia to expand domestic supply of everything, and reduce reliance on foreign supplies for anything, domestic demand for corn for industrial processing is not about to fall apart, as were export markets when prices surged in the past. This makes the current business environment for corn very different from price surges of the past. This one may have more stamina. One key component that we never factored into corn price projections before is the price for gasoline. Here is how it connects. A new record average price for gasoline in the U.S. was established on April 8 at US$1.82/gallon. That comes courtesy the very high price per barrel for crude oil, which comes thanks to tensions in the Middle East. Those tensions are not about to relent. Crude oil production and pricing is not about to relent. Gasoline prices are not about to relent. At these gasoline prices, ethanol works very well economically into refinery production plans even with U.S. corn prices over the US$3.25/bushel mark and climbing. We are going to see record high gasoline prices in the U.S. this spring and summer, especially in the northeast. Ethanol works to cheaply (compared to astronomical crude oil prices) extend refinery output volumes and gives refiners and retailers more product to sell at record high prices. That is why we see two Brazilian ethanol tankers unload in New York harbour; and that is why current Chicago corn prices are not about to collapse. That is why the current corn market is so unlike years past when Chicago corn prices were dependent on export markets.

Ontario
The strong demand scenario painted above has served to drive Ontario basis offers up. It is becoming increasingly expensive to import ever more scarce U.S. corn. Processors in Ontario are forced to bid more aggressively for available supplies of Ontario corn. That is why basis offers for both old crop and new crop corn stored at both the elevator and on farm jumped a dime from March 1 through April 7, even though the Canadian dollar surged higher by 2 cents. The recent collapse of the loonie since then (down three quarters of a cent in one day on an unexpected increase in the unemployment rate) can only force basis higher. Plainly and simply, we need more corn and the market has to buy both remaining old crop supplies and new crop acreage. However much buyers want more corn acres this spring, at present they do not seem likely to get them. Virtually all reports point to sharply expanded soybean acres in Ontario with little, if any, expansion in corn acreage. That is why corn basis looks to remain relatively strong just as Chicago futures prices look to continue relatively firm. If you are a producer, enjoy.

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