February 2008

Listen live: xxx

by Philip Shaw, B.Sc.(Agr.) M.Sc.

Market Trends

U.S. and World: With the biggest corn crop in U.S. history now behind us, corn producers need to reflect on where we are. History tells us that big crops mean low prices. However, in the first few weeks of 2008, crude oil traded at $100/ barrel, soybeans at $13/bushel and the nearby corn futures broke through $5/bushel. It's pretty obvious as we move into 2008 we're in a brand new world of commodity prices.

The January 11th USDA Crop Production and World Supply and Demand reports injected a new bullish trend into an already bullish corn market. Its final estimates for corn in 2007 was 13.070 billion bushels, down from the December estimate of 13.170 billion bushels. U.S. ending stocks were also trimmed down to 1.438 billion bushels, down from 1.797 billion bushels in December. World ending stocks were reduced to 101.33 million tonnes from 109.06 in December. Corn ethanol usage remained at 3.2 billion bushels.

On January 11th, corn futures in the 2008 and 2009 months finished limit up partly in response to the bullish report. The nearby March 2008 corn futures finished at $4.95/bu, July 2008 at $5.16/bu, September 2008 at $5.14/bu and December 2008 at $5.13/bu. Outward months into 2009 are all over $5.00/bu with December 2009 at $5.01/bu.

Clearly, the January 11th USDA report has laid out the parameters for an acreage war between corn and soybean plantings this spring and beyond. With corn stocks declining and long term demand remaining buoyant, the corn complex cannot afford to lose acres in 2008 and 2009 to soybeans.

On January 11th, the nearby March 2008 crude oil futures finished at $92.16/barrel up from $89.75/barrel on December 11th. The nearby March 2008 ethanol futures finished at $2.14/U.S. gallon up from $1.91/U.S. gallon on December 11th.

The Canadian dollar closed at 98.06 cents U.S. on January 11th. The Bank of Canada maintained its overnight lending rate at 4.25%.

Ontario: Winter snows did suspend any corn harvesting yet to be completed in December. However, the January thaw did create opportunity for some producers in central Ontario to finish harvesting. This will add to the already record Ontario harvest of 278 million bushels at an average yield of 135 bushels/acre.

Basis levels for corn weakened from their already weak December levels and reflect the continued abundance of Ontario corn in storage. On January 11th, old crop elevator bids varied regionally in a range from -$0.60 to -$0.70/bu under the March 2008 futures of $4.95/bu ($4.25-$4.35/bu). There was one old crop ethanol bid on January 11th at Sarnia for -$0.25 under March 2008 at $4.70/bushel. Other Ethanol prices on January 11th ranged into April 2008 from $4.66/bu to $4.91/bu.

New crop basis for 2008 delivery weakened considerable into January 11th. New crop elevator bids varied regionally from -$0.50 to -$0.55/bu under the December 2008 futures of $5.13/bu ($4.58-$4.63/bu). New crop ethanol bids for fall 2008 varied regionally from $0.05-$0.25/bu under the December 2008 futures (some bids are under March 2009) of $5.13/bu in a range from $4.88 to $5.08/bu. Producers need to check these bids daily.

The Bottom Line: As of January 11th, corn futures prices are very high. In fact, prices are more than 2.5 times where they were in parts of 2005. Is this it? Or have we passed into a corn price stratosphere and just getting started? With electronic trading doing 70 to 80 percent of the trading volume at the different exchanges it's no time to question trader's human tendencies. The corn price run-up of 2007 broke through many price and psychological barriers.

Are $6 corn futures just around the corner? Nobody knows that. However, the 2007 U.S. Energy Bill recently signed by President Bush put consistent support through ethanol into the corn market. The U.S. is committed to producing 36 billion gallons of ethanol by 2022; 21 billion gallons will come from sources other than corn. Corn ethanol usage is set to top out at 15 billion gallons by 2015. Currently U.S. ethanol capacity is approximately 7.3 billion gallons and by the end of 2008 may surge to 13.5 billion gallons if the 2008 planned ethanol capacity gets in place.

This is an example of why corn is currently in a demand driven market. U.S. government support is key. For instance, if there wasn't government support for ethanol, it wouldn't be profitable. If ethanol was not profitable there would be much less demand for corn. Price would be much lower. It works as long as there is government support. Going forward into 2015, corn ethanol usage is mandated by law, a very good thing for corn producers.

In Ontario it's a different story. Typically, Ontario needs more corn than we produce but it's a question of seasonality. The big crop of 2007 will take time to be consumed by end users. Until it is, basis levels will be weak. Historically, this is a common pattern and the winter basis patterns of 2007/08 show it. New ethanol plants in Alymer and Johnstown are set to buy corn and produce ethanol in late 2008 but others are needed to break Ontario's historical basis patterns. Proposed ethanol plants in Hensall, Barrie, Kawartha and Oshawa, some of which may have Ontario Ethanol Growth Funding would help.

Corn prices will continue to fight with soybean prices throughout the winter going into the planting season. With preliminary estimates from USDA pegging 2008 corn plantings down to 87 million acres from 93 million in 2007, the market will have to decide who wins. Corn cannot afford to lose too many acres to soybeans. At the same time, soybeans, with ending stocks at 175 million bushels, need the acres. This is without any minor or major weather event, which would result in violent, explosive price movement, come late spring.

Almost buried in this debate is how livestock feeding will be affected. As prices rise, livestock farmers will eventually have to ration demand. To be more succinct, ethanol induced corn prices may rise until livestock producers are broke. There are limits to price. It's just a case of when it happens and who decides to no longer buy corn.

As these elevated price levels increase, the gulf between cash markets and futures markets widens. For instance, futures prices now are a function of speculative money being put into a market fighting for future acres, not necessarily corn on the ground. At the same time basis levels are weak reflecting the physical commodity on the ground. At these elevated futures price levels, in 2008 a wide negative basis spread may become more pronounced.

Going forward this winter it is hard to paint any other picture than a bull market in corn. Even the Canadian dollar has wobbled under the influence of a poor Canadian jobs report. This will eventually be a positive for Ontario basis levels. Combining this with high futures, corn producers will see attractive bids for both old and new crop corn into 2008 and 2009.