November, 2003

by Brian Doidge, General Manager, OCPA

U.S. & World
With a record U.S. corn crop in the bin, all attention is now on demand, especially exports. The key to U.S. exports remains China. Chinese demand has been growing as their economy continues to outperform virtually all other nations. China has consistently posted annual growth in the 8%-9% range for many years. This has sparked increased consumption of all raw materials, and corn is no exception. Chinese corn stocks have dropped sharply over the past 5 years as a result. However, until recently, China has maintained corn export volumes, especially to major Asian markets such as South Korea and Japan. But that pattern shows signs of changing as Chinese corn production flattens out, domestic demand continues to surge, and stocks available for export shrink. There are rumours abound in Chicago corn pits of Chinese defaults on shipments, sales of U.S. corn to South Korea, etc.. But all of these are still rumours. The market struggles to sort fact from fiction and will continue to do so for some time.

In the meantime, Chicago traders have another question to answer. A huge corn crop and a very disappointing U.S. soybean crop have traders trying to rationalize US$8 soys versus US$2.30 corn. That ratio of 3.5:1 is far from the traditionally accepted value of 2.5:1. The question becomes, will corn move up or soys move down? Of course, the real answer is that life as many traders knew it has changed, and old market benchmarks no longer hold water. For example, U.S. soybean exports are racing considerably ahead of average, driven by continued appetite in China. Strong exports coupled with a weak U.S. soy crop have some traders (and farmers too) thinking "beans in the teens". This ignores the reality of a mammoth South American soybean crop just around the corner. Recent projections peg the South American 2004/05 soybean crop at another new record 102 million metric tonnes (mmt) with exports expected at 39 mmt. That compares to a 2003/04 U.S. soybean crop of 67.18 mmt and exports of 23 mmt. Brazil by itself is breathing down the neck of U.S. soy production with an expected crop of 59-60 mmt. And the gap in favour of South American production widens every year. Brazil alone could shortly surpass the U.S. in soybean production. This means that despite a smaller U.S. soybean crop, the huge South American crop will eventually pull down Chicago soybean prices. This means that in the CBOT's struggle to juggle high soybean prices and low corn prices, the most likely outcome could be soybeans moving lower relative to corn over the course of this winter as the South American crop progresses.

Meanwhile, the U.S. Congress continues to wrestle with the new Energy Bill. All main features in support of ethanol remain; but the stumbling block has been the impact such tax incentives have on state and municipal budgets. Continuing to take these tax exemptions from the road fund, as at present, means that local governments essentially bear the burden because they must maintain roads and infrastructure even though revenues have been reduced. The debate in Congress has been whether ethanol tax incentives should be paid from general revenues rather than this road fund. The eventual compromise might be of interest here in Ontario as well.

Ontario
In Ontario, harvest has been painfully slow, hampered by wet weather, high moisture content, stalk breakage, wind damage, etc.. The good news is that yields are exceptional. There are some reports of down-grading due to cracked corn foreign material (CCFM) ratings above 3% (the limit for grade #2 corn). A few lighter test weights due to immature corn have also been reported. However, overall, the crop is a good one although higher in moisture than most producers would have liked, especially considering drying charges around 60 cents @ 30% moisture. That certainly takes the fun out of a big crop. The big crop is also putting a premium on storage space, especially for those producers with no on-farm drying and storage capacity. The bigger than expected crop has another impact. Deliveries of U.S. corn, booked some time ago when expectations for the Ontario crop were considerably lower, have now been flowing in. Goderich, Sarnia, Port Stanley, Port Colborne, and Prescott/Cardinal all took in U.S. corn in the month October (at least 7 ships totaling more than 3.2 million bushels).

Basis has weakened across the province due to the bigger than expected crop. Most bids for delivery to the local elevator have softened to the 65-70 cents over DEC range. Most bids for on-farm pickup, usually relatively weak at this time of year anyway, have sunk to the 70-75 cents over DEC range. Bids at area feed mills have also drifted lower with the advent of new crop harvesting. Feed mills in mid-western Ontario that were offering $1.65 over DEC early in October are now offering $1.05 over DEC. Offers from dealers for deferred delivery are a little better, but have also softened with the big crop. Basis is not likely to strengthen much from current levels as the winter progresses. The Canadian dollar has picked up 4 cents just since Labour Day, and a full 13 cents since the New Year last January. That stronger loonie takes a fearsome toll on basis.