May/June '99 Market Trends

By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
April 16, 1999

U.S. & World
Chicago markets are focused on the weather and implications for planting progress in the U.S. Recent storm systems across the midwest have re-charged soil moisture and delayed field work, especially in the Central Corn Belt. The Great Lakes region remains dry with most of the Eastern Corn Belt having received only about half normal precipitation over the last several months. Corn planting in the U.S. is currently five per cent complete (mostly in Georgia and Texas) which is average for the period. Current medium-term forecasts call for a drier pattern toward the end of April and a warming trend. Chicago expects that this will permit rapid planting progress as the end of April approaches, especially in the western growing regions. Moreover, the U.S. National Weather Service released its 90-day outlook April 16 for May through July which calls for drier and warmer than normal weather west of the Mississippi in the Western Corn Belt and Great Plains wheat areas. The combination of a rapid and somewhat early corn planting overshadowed by the possibility of dryness later in the critical pollination period has Chicago debating price trend. Little wonder futures prices have remained within the range $2.10 - $2.32 in the MAY contract ($2.15 - $2.38 JULY) established since early December. Chicago is sending signals that prices will test the upper side of that range after having tested the bottom during early April. Several factors are at play:

The USDA’s monthly Cattle-on-Feed report released April 16 shows larger than expected placements in March (up 22 per cent versus pre-report guesses of only 16.7 per cent larger) with the total number of cattle on feed up three per cent versus an expected increase of only 1.9%. More mouths to feed than expected will help feed usage projections which may explain why the USDA only lowered projected 1998/99 feed usage by 75 m bushels (reductions of 150 - 200 m had been anticipated) in the April 9 Supply & Demand report.
Export sales have firmed significantly with the drop in Chicago prices late in March and early April. The largest weekly sales report of the marketing year (43.6 m bushels last week) has pushed accumulated U.S. corn export sales to 24.2 per cent ahead of year ago. Basis offers at the Gulf and interior terminals are all up two cents for the week and moving higher.
Freezing temperatures expected this weekend and into early next week might injure the U.S. winter wheat crop (which is currently well advanced) across much of the Great Plains and into the Central Crn Belt. Although speculative at this stage, if damage does occur – and coupled with the 15 per cent reduction in U.S. winter wheat acreage – competition from feed wheat in livestock rations would be reduced this summer and fall.

On a wider scene, two factors driven by European ag politics, are negatives for corn pricing longer term. The EU’s Agenda 2000 crop reform package passed in late March does not represent sufficient reform to avoid expanded surpluses of cereal production. Agenda 2000 cuts the intervention price (internal price for domestic users) for cereals by 15 per cent over two years, but increased subsidies directly linked to production will compensate for about half of this loss. Agenda 2000 is expected to stimulate cereal production (especially wheat) at the expense of oilseed production. Larger internal subsidies to ag sectors in member states are unavoidable, as is increased usage of export subsidies for grains to move the surpluses into world grain markets.

The second negative for corn pricing emanating from the EU concerns the announcement this week by U.S. corn processors Archer Daniels Midland and A.E. Staley (a unit of the British food giant Tate & Lyle) to ban non-EU approved corn varieties from their marketing channels. Staley and ADM together mill about half the corn processed in the U.S. Both export corn-based food ingredients to Europe where many food processors and distributors have pledged to keep genetically modified products out of their foods. Although EU approval of hybrids applies only to planting (not to use of corn products such as corn gluten feed or corn oil) many EU food processors have requested that their suppliers provide only products from EU approved hybrids. Most affected are genetically modified herbicide tolerant hybrids. The EU has approved only nine genetically modified crops and only four patents for genetic modification in corn (all related to Bt). This ban on purchases of genetically modified corn by two major U.S. processors (Staley is the third-largest U.S. corn processor) – in particular, herbicide tolerant hybrids such as Roundup Ready hybrids – will have an uncertain impact because genetically modified corn was planted on 28 per cent of U.S. acreage in 1998 and is expected to be planted on 40 per cent in 1999.

Ontario
Exports continue very strong with over 16 million bushels shipped to the U.S. and overseas (almost equally split) as of the end of March. Feed use and industrial demand likewise remains firm. The result is that basis levels in Ontario continue to move higher. Since the first of the new year, FOB farm pricing in Ontario has gained 33 cents ($2.85 January 4 versus $3.18 April 16), all of it on basis because the MAY contract is actually 3 cents lower April 16 than on January 4 ($2.18 versus $2.215)! When adjusted for exchange rate variation, basis improvement is even more dramatic, up from – .53 on January 4 to -.06 on April 16. We are moving quickly toward import-competitive basis levels as we continue to move our surplus corn into export markets. At current exchange rates, U.S. corn from Michigan can be laid into a major Ontario corn processor for about $3.33 on April 16 or about 15 cents higher than the current FOB offer. Allowing for transportation from the farm to the processor, FOB farm basis has only about another five- to seven-cents room to move higher. In other words, you should be considering moving remaining old crop corn to reward the stronger basis, and you should be considering replacing that corn with call options on the September Chicago corn futures contract, to benefit from any delayed planting or weather scare-induced rally in old crop corn pricing this summer. I wouldn’t get too anxious about new crop contracting just yet. New crop basis at 75 cents over the DEC is an anemic -.41 when adjusted for exchange and has gained less than a dime in four months.