November, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
The U.S. is in the midst of harvesting what can only be described as an absolutely phenomenal corn crop. Production estimates now range well into the 11.3 billion bushel area with average yields around the 153 bu/acre mark! These compare to previous records of 10.1 billion bushels and 142.2 bu/acre established just the year prior in 2003. As would be expected, Chicago corn futures contract prices have taken a severe pounding with the nearby December contract flirting dangerously close to U.S.$2. Put that in perspective; in mid-March, the same contract was testing U.S.$3.44, and was at U.S.$3.22 as recently as early June! Weekly corn price charts don't show much of any bottoming action yet and seem poised to push below levels last seen in July of 2003. The next test of the depths is around the U.S.$1.90 mark in April, 2002. Below that, lies the June 2000 mark of U.S.$1.70, or (heaven forbid) the August 30, 1987 abysmal mark of U.S.$1.5075. Of course, U.S. corn producers are insulated against these prices. The U.S. national average corn price for early October was $1.78/bushel. The lower that average cash price moves, the larger Loan Deficiency Payments (LDP) get. In fact, LDPs were averaging $0.3I/bushel in early October. Add to that fixed per acreage payments and Counter-cyclical Program payments. The bottom line is that no matter what happens, U.S. corn producers are virtually guaranteed to receive the Counter-cyclical Program target price of U.S.$2.60/bushel. But enough with the downside. Overlooked by many analysts is that demand is also record large and surging higher. Feed usage could well set a new record high, moving above 5.86 billion bushels in the upcoming monthly USDA Supply and Demand reports. However, the real strength comes from burgeoning U.S. corn ethanol demand which continues to establish new production records with each passing month. Currently projected at 3.3 billion gallons, 2004/05 crop-year ethanol production will consume about 1.25 billion bushels of corn! The one uncertain area remains exports, but continued rapid economic growth in India and China augers well for increased corn usage. Keep this in mind. Total U.S. corn usage has grown by over 1.2 billion bushels (or 13%) in just the last two years! An astounding pace. Although carry out stocks will undoubtedly increase this year and approach 1.6 billion bushels, usage continues to surge. At these levels of consumption, it is absolutely essential for annual U.S. corn production to establish new record levels every year. That obviously cannot continue to happen every year. At some point, production will falter and when it does, you will see strong prices the like of which you have never seen before. It's just that it won't happen this year. Overall, Chicago seems set to follow the traditional pattern of a burp higher around the U.S. Thanksgiving holiday, followed by weakness into mid-January, and then a seasonal rally into spring planting. At 1.6 billion bushels carryover, Chicago markets won't have to "buy" May corn acres, so don't look for a sustained move higher of any consequence. However, big crops usually see harvest lows followed by a slow drift higher. It is not going to be fun.

Ontario
In Ontario, basis has finally broken lower. It has been driven down by "summer in September" which saved a significant portion of the crop. Most basis offers held firm until the very last days of September, but have surrendered a lot of ground since then when it became obvious that we were indeed going to harvest a crop. In the space of 5-6 days, we lost more than 50 cents! The trade now reports no interest in owning corn. Most of the major processors, previously worried about the lateness of the crop and prospects for sharp reductions in production, contracted for deliveries of U.S. corn to fill the possible void. Now, they are booked. Old crop demand has evaporated. If you didn't reward the market when it was there, you are now unfortunately in for a long ride. Two other factors have also combined to knock the stuffing out of basis offers. The Canadian loonie continues to soar and is poised to move above the 80 cent mark. We gained an astronomical 4 cents in September! Coupled with that of course has been excellent corn yields in the adjacent U.S. states. Reports of yields over 200 bu/acre in Indiana sure don't help. All that corn has to find a home someplace, and the strong loonie makes it easier to buy. Stiffer competition from U.S. corn drops local basis offers.

1