December 2006

Listen live: xx

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

Market Trends

U.S. and World: Corn futures continue to move at levels not seen since 2003/2004. Last October 13th, December futures finished at $3.14 bushel. On November 10th, December corn futures closed at $3.43 bushel having come down from the $3.50 level two days previous. This represents a 29-cent increase since October 13th and a $1.06 increase in December futures since September 12th.

The November USDA crop production report confirmed the 2006/07 US crop is getting smaller. Corn production came in at 10.745 billion bushels down from the October number of 10.9 billion bushels. The new USDA yield estimate came in at 151.2 bushels per acre, which was over a bushel below the average trade estimate. The total usage was lowered by 100 million bushels, which partially offset the lower production. The carryover was listed at 935 million, which was 10 million bushels greater than the average trade conjecture, but down 61 million from last month. Part of the usage decline was a 50 million bushel reduction in exports. Global ending stocks increased to 90 million tonnes versus 89.54 million last month. The US stocks to use ratio declined to 8.1% down from 8.4% in October and 10.2% in September.

Is this the light at the end of the tunnel corn producers have been waiting for? Will the 2006/07 US corn crop continue to get smaller as we move toward the winter? Are we at the start of something very, very big? Or will there be a futures correction in the near term? Outward future months are key to answering those questions. On November 10th March 2007 corn futures closed at $3.59, July 07 futures at $3.70, September 07 at $3.56 and December 07 futures at $3.44.

The elephant in the room is the need for more acres to satisfy demand in 2007 and 2008. It is hard to imagine the USDA estimating negative ending stocks next year. However, if these price levels don't encourage more acres or the 2007 crop gets in trouble, corn futures will be explosive. The recent harvest time run up may be a forerunner of that.

Higher corn prices will eventually have an impact on livestock feeding. However, cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 11.4 million head on October 1, 2006. This inventory was 9 percent above October 1, 2005 and 8 percent above October 1, 2004. It is the highest October 1 inventory since the series began in 1996, another positive for corn futures.

Ontario: Vomitoxins! Last month I mentioned the spectre of ear moulds in Ontario cornfields and the impact that may have on basis. Unfortunately, that reality has manifested itself. For the most part the worst vomitoxin conditions are in southwestern Ontario. Buyers of corn have enacted their own individual criteria for accepting corn. As of November 10th the ethanol plants have set the bar at 2.5 ppm DON levels. Casco is accepting corn at 1ppm DON and less. Contracts previously written were accepted.

Call it what you will--chaotic, frenzied, confused, manageable. With the spectre of vomitoxins permeating fall harvest, Ontario basis tanked. Some elevators stopped accepting Ontario corn altogether. On October 13th, elevator basis bids for corn were .05 cents over December futures. On November 10th, elevator basis had dropped to -15 to -40 cents under December futures depending on regional variations. Elevator cash prices on November 10th were $3.03 to $3.28/bushel. This was for Grade 2 corn. With the mould levels elevated, some corn is being discounted further as Grade 3 and Grade 4 corn. FOB bids are in flux because of the mould situation. New crop elevator bids as of November 10th for fall 2007 vary regionally at 15 cents to 20 cents over Dec 2007 at $3.60 to $3.65/bushel.

As of November 10th how all of this will manifest itself is still not clear. It may take some time before it all can be measured and evaluated. Clearly, good quality corn with low DON levels delivered in future months may garner more attractive prices. $4 plus corn bids for 2007 as of Nov 10th can be garnered at the ethanol plants with a basis range of .25 cents to 50 cents throughout 2007.

The Canadian dollar closed at 88.44 cents on November 10th. The overnight lending rate from the Bank of Canada stayed at 4.25%.


The Bottom Line: In Ontario, for the immediate future, there are two stories. There seemingly is a big difference between what the futures market is saying and the situation on the ground in Ontario.

The $1.06 appreciation in corn futures since September 12th cannot be ignored when making market decisions. Some growers have surely rewarded the market already. However, everything points to corn futures going even higher into 2007.

In the US ethanol capacity is expected to rise by 2.4 billion US gallons translating into 2.15 billion bushels of corn. With new plant construction generating an additional 1.3 billion gallons, 2007/08 ethanol corn demand could be 3.2 billion bushels. To maintain current prices an additional six million acres is needed next year. All things equal, this will put US corn stocks/use ratio in a zone to rival the record price year 1995/96 ratio of 5%.

In this environment the market will have to find futures levels to capture these acres going into spring. Any crop problem next year will again spur futures.

At some point as the Ontario corn industry adjusts and learns, the situation regarding vomitoxins in Ontario should stabilize and basis should improve. In the meantime there will be opportunities for those who have low vomitoxin corn.

With this corn price appreciation growers need to ask themselves how this might translate into lost exports, cancelled ethanol plants and lower feed usage. With prices currently at elevated levels, price will ration demand. Looking for clues of this will aid corn marketing over the next few months. The next major market mover is the USDA Crop Production report on December 11, 2006