December 2005

by Brian Doidge, General Manager, OCPA

Market Trends

U.S. and World: USDA's November 10 monthly Supply & Demand report increased the US crop estimate yet again to 11.0 billion bushels, up from September's estimated 10.85 billion. The move above the 11 billion bushel mark was higher than pre-report guesses. Despite a 75 million bushel increase in projected usage for ethanol production, the 175 million bushel increase in production (with no changes in feed or export usage) meant that carryover stocks jumped 100 million bushels to 2.319 billion. Average projected price dropped to US$1.80 which is 26 cents lower than last year.

On CBOT corn charts, prices continue the sickening slide lower with the DEC contract currently probing US$1.91 and new contract lows. However, seasonal tendencies imply that we are at or near the low. Normally, the US Thanksgiving Holiday marks the end of the harvest period slide and the beginning of the winter move sideways.

Weekly US corn export sales have been good of late (58.9 m bushels week ending Nov 17) and are starting to catch up on last year (670.5 m year to date versus 712.5 same period last year). But they have to remain strong for some time to come, and move above year ago pace, if there is any hope of achieving the USDA's projected 185 million bushel improvement to 2 billion bushels of exports this year. Chinese export intentions, to be announced soon, could prove a barometer for US corn export sales.

Market analysts are pencilling in US corn acreage intentions for 2006. Attention is focusing on sharp increases in energy costs which result in higher diesel fuel, herbicide, and fertilizer costs as well as drying and transportation costs. Opinion varies, but current projections of reduced corn acreage are only around the 2% mark which is less than what such cost increases might suggest. Most seem to be projecting plantings around the 80 to 80.5 million acre mark. Here's an interesting comment from well-known US market observer Jerry Gulke. "This is the first time in my farming memory where, due to the rising input costs, that there is some marginal land I could rent for free and still lose money with a repeat of 2005 yield and prices, notwithstanding crop revenue insurance which likely keeps all land in production and continues to thwart market reactions to Economics 101."
In other words, US Farm Bill subsidy programs keep US production higher than low prices might warrant.

In Congress, on Friday November 18, the House finally passed its version of mandatory spending cut measures. The House proposes to cut mandatory farm program spending by $3.7 billion over five years; the Senate version proposed $3 billion in farm program spending cuts over five years. The two versions now move to conference committee to be melded into one version for passage by Congress.

House Democrats introduced a bill to extend the 2002 US Farm Bill by one year through crop year 2008. If President Bush does not submit implementing legislation based on the outcome of the Doha Round of WTO negotiations by January 15, 2008, the current Farm Bill would be further extended by an additional one year. In other words, US politicians are sending very strong signals that they are not prepared to dismantle current US subsidy and support programs.

Ontario: In Ontario, harvest results have been a pleasant surprise with considerably better yields than expected. We have increased our estimate to 133 bushels/acre with several indications that might still be low. Current Agricorp crop insurance contract reportings indicate a yield closer to 141 bu/acre for the province. Time will tell.

Winter wheat plantings are up sharply in the province, likely in the 1.1-1.2 million acre range. Most observers think this expansion is almost totally at the expense of corn acreage next spring. One interesting note. It appears that while winter wheat plantings are up sharply, wheat seed sales have dropped sharply down perhaps 45% from last year.

Basis for old crop corn in Ontario continues to strengthen, now up 40 cents from mid-August for corn delivered to mid-western Ontario feed mills despite the Canadian dollar gaining 2 cents over the same 3 months. Market sources indicate that basis delivered to feed mills will rise another dime to run .95-$1 over the DEC next week. Track basis (elevator selling price for grain corn) adjusted for currency exchange is very strong (+29) well above both the 5 year (+17) and 30 year (-8) averages for the date. In fact, it is currently the strongest it has been since the fall of 2001. Basis is likely to get stronger yet.