March 2008

Listen live: xxx

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

U.S. and World:
The February 8th USDA World Agricultural Supply and Demand Estimates were neutral on corn futures markets. The USDA kept ending stocks at 1.438 billion bushels, the same as their January estimate. World ending stocks were up slightly to 101.9 million tonnes from 101.3 in January. Corn for ethanol use remained at 3.2 billion bushels. Feed and residual use remained at 5.950 billions bushels, the same as January.

Such uneven news could easily be construed as bearish in the corn complex. However, with the USDA cutting soybean and wheat stocks the "fight for acres" going forward into 2008 kept corn futures buoyant.

On Feb 10, March 2008 corn futures stood at $5.08/ bushel, May 2008 at $5.21/ bushel, July 2008 at $5.31/ bushel and December 2008 at $5.30/ bushel. Outward futures months into 2009 as of February 8th are all higher than $5.30/bushel, except December 2009, which was at $5.05/ bushel.

Ontario:
In Ontario the big 2007 crop continues to weigh on basis levels. Old crop elevator bids as of February 8th varied regionally in a range from -.75 to -.80 cents under the March 2008 close of $5.08/bushel. ($4.33 to $4.28/bushel) New crop elevator bids as of February 8th also weakened considerably since January varying regionally at -.70 to -80 cents under the December 2008 futures of $5.30/bushel. ($4.50 to $4.60/bushel)

Ethanol bids as of February 8th are in flux. Some Ontario ethanol end users have their needs covered with both U.S. and Ontario corn outward into August. Producers need to check often to see if this has changed.

Casco had no spot or future bids at their Cardinal plant on February 8th. At Port Colborne Casco bids ranged from -.35 to -.40 delivered into May for a cash range of $4.73 to $4.92/bushel. At London there is one bid at -.45 under the July 2008 futures at $4.87/bushel for May delivery.

The Bottom Line:
Historically, the Ontario corn basis has always reacted to seasonal pressure in the fall only to recover as the corn is used up toward spring. It happened in 2007, it happened in 2006 and so on. However, it may be different this time.

It is no secret the run up in corn futures prices has impacted the livestock industry. In Ontario it is no different. Even with the largest corn crop in Ontario history and low basis values Ontario's feed use is dropping. By some estimates feed use is down 20% in some areas within Ontario as hog producers are adjusting their numbers and cattle producers do the same. This drawback makes for greater supplies of Ontario corn going into spring further dampening basis.

This situation is being impacted by the import of American corn. It is not widespread however it is happening and it may have been bought months ago when conditions were different. At the same time Ontario corn is being exported into the United States. To an outsider looking in it might not seem to make much sense, however the wide open door to American corn imports will always serve as a hammer for Ontario corn basis.

Another factor, which surely will weigh on the Ontario corn basis are corn futures values. Last month I wrote about the increasing gulf between the futures values and the cash market. If futures values continue at levels near $5-$6, Ontario basis will not keep pace reflecting the "corn jammed into the Ontario pipeline" versus the Chicago future price. Much corn has being booked at flat prices above $4 for fall 2008 delivery. This will continue to contribute to a soggy basis environment going into fall 2008.

Of course it all might blow up in a cloud of dust depending on what happens to the 2008 Ontario corn crop. By default with Ontario farmers planting 1.3 million acres of wheat last fall, the Ontario corn crop will be smaller than in 2007. By default that creates more production risk going forward to satisfy Ontario demand which should grow with new ethanol capacity coming on stream with plants at Aylmer and Johnstown. Looking ahead into 2009, this surely will be one of the factors, which may impact the Ontario corn basis in a positive way.

Ontario farmers hold the key. They have been heavy sellers at flat prices of both old and new crop corn. Key in the Ontario acreage debate will be the cost of production difference between corn and soybeans as 2008 planting decisions are made. With soybean prices spiking and with U.S. soybean ending stocks down to 160 million bushels, Ontario producers may surprise the market and grow a lot more soybeans. With the increased wheat acres already there by default, 2008 Ontario corn acreage could easily drop to 1.7 to 1.9 million acres.

Clearly, at a par dollar, $5 futures prices and a very negative basis Ontario corn producers are still navigating in uncharted waters. The March 30th USDA projected acreage report looms ahead, not quite like it did in 2007, as a litmus test for this market going forward. Nonetheless, with wheat and soybean prices making significant moves, corn prices will need to keep pace. The challenge for corn producers will be to build a bridge over the widening gulf between high corn futures and Ontario cash corn prices. As we move ahead, new industrial uses for Ontario corn in late 2008 and into 2009 should help.