May/June 2008

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

U.S. and World:

The March 31st USDA Prospective Plantings Report didn't disappoint market watchers. The USDA, based on surveys done the first week in March predicted 86.01 million acres are going to be planted in 2008, down from 93.6 million acres last year. Corn markets continued their bullish ways as 86 million acres was at the low end of trade estimates. The USDA cited favourable prices for other crops, high input prices and crop rotation as mitigating factors for the decrease in corn acreage.

The USDA Supply and Demand report on April 9 showed a decrease in U.S. corn ending stocks coming in at 1.283 billion bushels, down from the March number of 1.438 billion. World ending corn stocks were also down slightly at 102.97 million tonnes down from 104.03 in March. Corn usage for ethanol actually decreased 100 million bushels from March down to 3.1 billion bushels. Feed, seed and residual use for corn increased to 6.150 billion bushels up from 5.950 in March.

On April 15th, the nearby May 2008 corn futures finished at $6.06/bushel, July 2008 at $6.19/bushel, September 2008 at $6.26/bushel and December 2008 at $6.25/bushel. Outward into 2009 futures months in March and May were $6.34/bushel and $6.37/bushel respectively. December 2009 futures finished at $5.77/bushel.

Oil continues its unabashed pace. On April 15th the nearby May 2008 crude oil futures finished at $113.79/barrel. The nearby 2008 May ethanol futures finished at $2.53/U.S. gallon.

On April 15th the Bank of Canada lending rate was at 3.5%. The noon value of the Canadian dollar was $0.9822 U.S.

Ontario:

In Ontario, the cash crunch and decoupling of cash and futures markets continue. Many elevators are not offering traditional forward pricing for corn into the fall of 2008 and into 2009. However, this situation remains in flux and producers need to check with their potential buyers often to understand how future pricing arrangements are changing.

As of April 15th, old crop elevator bids varied regionally from -75 to -80 cents under the May 2008 futures of $6.06/bushel ($5.26/bushel to $5.31/bushel) New crop bids are in flux but those posted range from -85 to -95 cents under the December 2008 future price of $6.25/bushel. ($5.30-$5.40)

As of April 15th, there were no spot ethanol bids. For corn delivered into late 2008 and 2009 Greenfield Ethanol is accepting basis only contracts. St. Clair ethanol in Sarnia had no spot bids. Producers need to keep abreast of this situation as it's changing constantly.

Casco in London and Port Colborne as of April 15th had bids ranging from -40 to -55 cents under the nearby futures outward three months for a range of $5.55-$5.87/bushel. Cardinal had no nearby bids but was at -45 cents under the December 2008 futures of $6.25/bushel for fall delivery. ($5.80/bushel)

The U.S. replacement price for corn into Ontario as of April 15th was approximately $6.31/bushel.

The Bottom Line:

The wild ride is getting even wilder. Corn futures over $6 are the new reality as of the middle of April. With the USDA cutting back on acreage, corn markets continue their struggle to buy back acres. With the USDA survey taking place the first week of March, there may be some "switching back" in planting intentions which may show up in the later June 30th USD plantings report. The futures market will surely be weighing that in the weeks ahead.

However, the big story aside from historically high cash and futures prices, is the price discovery mechanism itself. Increasingly, there is much concern in American circles about the lack of convergence or arbitrage between the futures and cash markets. For instance the cost of maintaining a futures position at these elevated price levels has increased significantly. This has meant that elevators and processors have found it increasingly difficult to offer forward contracts. This has led to much dissatisfaction with the futures market as a vehicle to manage risk. It has become so serious that the Commodity Futures Trading Commission, which regulates American commodity markets, called an unprecedented public meeting for April 22nd to discuss what can be done.

Will there be a Canadian response to this or should there be? Cleary, U.S. replacement price will remain the hammer for corn basis and the chief factor in determining Canadian price. However, American price discovery is changing and its effect will eventually have impact on Canadian cash prices for corn.

Historically, cash corn prices are very high. However, basis is still extremely weak in Ontario. The 2007 Ontario record corn crop is still weighing on basis. Much of it is being moved into Michigan and New York ethanol plants. With cash prices above $5 it's understandable how many Ontario corn producers are cashing into the market. However, as prices have moved higher, the risks associated with moving corn go higher. This will eventually have the effect of tightening basis. When that will happen is the question everybody is asking. As of April 15th U.S. corn basis has tightened in northwestern Ohio and southern Michigan.

Are $7 corn futures around the corner? Once again, nobody knows. However, at the present time $6 corn futures have not rationed demand. Extended months of it will surely challenge that paradigm. Basis levels going into late 2008 and 2009 at these high futures price levels will surely become more fickle.

Looking ahead it's all about the weather during the planting window. At the present time, the market is focused on planting delays and weather. As of April 13th, U.S. corn planting was 2% complete, down from the five-year average of 7%. As spring progresses, these numbers will give clues to final yields and how that will affect prices.