February 2006

by Brian Doidge, General Manager, OCPA

Market Trends

U.S. and World: USDA's January 12 monthly Supply & Demand report was a negative for corn, but average projected cash price in the U.S. was increased a dime anyway. Higher carryin stocks from the 2004/05 crop and an increase in the size of the 2005/06 crop bumped total supply by 100 million bushels. Production at 11.112 billion bushels was bigger than even the highest pre-report estimate. What is interesting is that this came despite a reduction in the projected average yield from 148.4 bu/acre in the December report to 147.9 bu/acre in this January report. Planted acreage increased to 81.8 million acres (up from 81.6 m) and harvested acreage increased to 75.1 million from 74.3 million. The larger acreage more than compensated for the slight reduction in average yield. Feed usage increased 125 million to 6 billion bushels, the second highest on record behind only last year's 6.164 billion. Exports were reduced once again by 50 million bushels to only 1.850 billion. As a result of these changes, carryout stocks increased 5 million bushels to 2.426 billion. Regardless of this slight increase in stocks, the USDA increased projected average cash price a dime to US$1.90/bushel.

Downward pressure on price and basis levels in both the US and Ontario after the turn of the new year is rather common as producers move corn in the new tax season to pay down bills. However, on price charts, we have retreated significantly from the late December run-up. We seem to be establishing a sideways channel bounded by $2.18 on the topside and $1.98 on the downside on the MARCH contract ($2.29 and $2.08 on the MAY). With ample supply, and anaemic export prospects, we will be a while breaking out of this pattern.

Chicago will be focusing attention on planting intentions for this coming spring. Currently, there is little reason to expect much reduction in US corn acreage this spring given that soybean and wheat prices are equally as dismal. Soybean Asian Rust appears to have spread westward across the south into Texas which means prevailing wind patterns are more easily able to blow the spores northward into the central midwest and even perhaps Ontario. Because of that uncertainty, US producers may think twice about shifting from corn into soybeans. Continued dryness in the southern Great Plains means that the winter wheat crop is having trouble. Some wheat ground could be ripped up and replanted to corn, or simply grazed off by cattle.

Doha Round WTO negotiations resumed January 25 as negotiators from 30 nations attempted again to reach a tentative framework agreement ahead of the new April 30 deadline. The main objective now seems to be to try to set a precise formula for cutting trade barriers. Even with reduced objectives, talks in Hong Kong in December did not produce meaningful results. Consensus opinion is that WTO must produce an acceptable result in 2006 or the Round will fail because President Bush's "fast track" trade negotiating authority expires July 1, 2007 and Congress must approve a bill very early in 2007 in order to meet that deadline. Prospects do not look promising.

EU Trade Commissioner Peter Mandelson said on January 16 about the Hong Kong talks, "I can't pretend this conference was a staggering success, it wasn't." Mandelson said Europe's trading partners were not ready to take the hard decisions needed to make a breakthrough at world trade talks. "But it was a good investment and it was worth it. We were not expecting any breakthroughs and we were not disappointed. In an important statement, he acknowledged many developing countries were not convinced that market opening was good for development as they were focused on dismantling the EU's farming subsidy program. Moreover, Mandelson further commented "the U.S. was able to avoid discussion of further cuts to its domestic farm subsidy program - a far bigger issue."

Ontario: In Ontario, basis has been pushed back down to approximately the same levels as before the December 15 duty announcement. It is very common for basis to weaken into the new year and this year is no exemption. Also, buyers have a vested interest in "talking down" the basis in an effort to avoid paying higher prices for Ontario corn. Most market observers conclude that sufficient US corn was imported prior to the imposition of the duties to carry major users through the end of April when a final duty announcement is expected.