December, 2004

by Brian Doidge, General Manager, OCPA

U.S. & World
Corn markets in Chicago closed below the magic U.S.$2 level again. They have been flirting with that level for about a month. The usual U.S. Thanksgiving move up on speculative fund short-covering has been anemic at best. It's going to be a very long winter!
The November USDA Supply & Demand report took the 2004 U.S. corn crop up yet again to 11.7 billion bushels, more than 1.6 billion bushels or 15.8% larger than any corn crop ever grown. Little wonder that the media is now awash with pictures and stories of corn stored outdoors, elevators plugged full, and transportation systems bogged down.
Think about this. The 2004/05 U.S. corn crop is 2.5 times larger than the U.S. corn crop of 30 years ago in 1974/75. However, corn usage in 2004/05 of 10.89 billion bushels (by far a new record) is only 2.25 times larger than usage in 1974/75. The stocks-to-use ratio 30 years ago was 7.5% and average price was U.S.$3.02. The stocks-to-use ratio today is 16.7% and average price is projected at U.S.$1.90/bushel.
Do you realize that the average annual price in the U.S. fell below U.S.$2/bushel only twice in the 25 years up until 1997/98; but has been above that mark only twice in the 7 years since. The average stocks-to-use ratio in the 25 years ended 1997/98 was 24.2%, but the average price was U.S.$2.47/bushel. In the 7 years since then, the average stocks-to-use ratio has fallen to only 15.7%, but the average price is only U.S.$2.03/bushel. Prices have been lower despite the fact that supply relative to demand has decreased. The underlying message is that something else has been keeping corn prices low other than supply. That is very hard to appreciate, given this year's huge crop in the U.S. The answer, of course, is the shift in U.S. subsidy and support programs initiated with the 1995/96 U.S. Farm Bill and magnified in the 2002 Farm Bill. The introduction of Loan Deficiency Payments (LDP) meant that U.S. agriculture programs no longer ensured a floor for world prices. LDPs made the floor a leaky one, but ensured U.S. producers were insulated by U.S. subsidies. Moreover, by doing away with acreage set-aside requirements, U.S. producers were not only insulated against low prices, but were encouraged to produce more despite those lower prices.
On November 19, the USDA confirmed that Asian Soybean Rust has now been found in five states: Louisiana, Mississippi, Alabama, Florida, and Georgia. It has also been confirmed on other crops such as kudzu. Since the fungus can infect almost any legume including snap beans, peas, and clover, the disease is likely to become an annual event as the spores are spread far and wide by wind. The fungus can be controlled through the application of fungicides, but at a cost of about U.S.$50/acre. The significance is that Chicago market analysts think soybean acreage in the U.S. will move lower, and that the acreage will shift toward corn, especially in southern and lower mid-west states. This thinking likely explains the sideways drift lower in corn over the last two weeks, while Chicago soybean prices have surged about 50 cents higher. With a 1.8 billion bushel corn carryover, the last thing Chicago traders want to contemplate is expanded corn acres in 2005.
U.S. farmer selling has been relatively light so far this fall, despite the huge crop. However, as storage costs mount and transportation costs increase (thanks to higher energy costs, freeze-up, and the huge crop), U.S. basis offers will sink as U.S. farmers increase selling in the new year. To add more downward pressure over the next two or three months, China plans to export about 1 million metric tonnes through February which would extinguish Asian demand for U.S. corn, especially in Korea, Taiwan, and Japan. It's going to be a very long winter.

Ontario
The loonie just won't quit. Of course, what is really happening is that the U.S. dollar continues to lose ground against virtually all other currencies and our loonie is tagging along with the others. Regardless, at close to 84 cents currently, U.S. corn is increasingly cheaper to bring in. And it has been coming in by the truckload. However, as hard as it may be to appreciate, imports by vessel from Toledo are actually down from last year at each of Sarnia, Port Colborne, and Cardinal/Prescott for the crop year to date starting August 1.
A big Ontario crop, a strong loonie, and a lot of pre-booked U.S. corn deliveries mean that basis in Ontario has dropped sharply. Old crop basis has lost 25 cents everywhere since November 1 (as of November 19), and new crop basis has lost a dime.
The crop is generally quite good in Ontario, with many regions well above average in yield and test weight. However, we are getting reports from some locations north of Lake Ontario that the later-planted crop is rather high in moisture and light test weight. Grading is lower as a result.
If you have storage at home, look ahead. Although prices for immediate delivery are only $2.24, prices for delivery 3 months out are significantly better at $2.90 for delivery into the Chatham ethanol plant and $3 delivered into Casco Port Colborne. Although still not much to write home about, these prices beat the heck out of $2.24 today. New crop forward contract for next fall were running $2.85 at most locations.

Store or Sell?
Because you don't like what you see today, ask these questions. What are the odds of a spring price rally? What are the odds of a major U.S. crop problem next year? What are the odds of the Canadian loonie sagging or the U.S. dollar recovering? Tough questions. No clear answers.