February 2007

Listen live: xxx

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

Market Trends

U.S. and World: The quest for 2007 corn acres continues. The January 12th USDA crop production and supply demand reports surprised many within the trade. The USDA cut 2006 corn production from the December number of 10.745 billion bushels to 10.535 billion bushels. (149.1 bu/acre) The ending US corn stocks to use ratio is down to 6%, the lowest since 1996. Pre-report average trade estimates had ranged from 10.640 to 10.745 billion bushels. Breaking considerably through these levels set up the corn complex for a major move.

The corn market responded accordingly. On January 12th corn futures were locked limit up 20 cents all day. The nearby March corn futures closed on January 12th at $3.96 bushel. By contrast last December 11th the December corn futures had closed at $3.55. Great volatility was evident. The nearby March 07 corn futures had finished at $3.90 on December 29st only to fall to $3.54 by January 9th and then back to $3.96 on January 12th.

The January 12th USDA report cut ending stocks to 752 million bushels, down from the 935 million bushels from the December and November 2006 reports and down a whopping 61% from January 2006 when US ending stocks were at 1.971 billion. Clearly a tight situation is getting tighter. The March 30th USDA prospective planting report looms as one of the most significant since prices exploded in 1996.

While this is very good news for corn producers the key will be planted acreage into 2007 and any signs of rationing demand. At some point at elevated price levels real rationing may show up from the livestock sector. However, balancing that against potential 2007 acres will be very difficult.

It will be very important to keep abreast of the price of oil and ethanol as we move forward. Cheap oil will tend to unravel much of the rationale for bio-fuel for corn-based ethanol. Ethanol prices mirror to some extent the price of oil. On January 2nd 2007, Feb 07 crude oil futures finished at $61.06 US per barrel. On January 11, 2007, Feb 07 futures had plunged to $51.85 only to finish at $52.99 on January 12th. February 07 ethanol futures on January 2nd were $2.29 per US gallon versus $2.02 US per gallon on January 11th. Looking into the future it's very important to follow this when looking for clues on the future of corn-based ethanol.

The Canadian dollar closed at 85.46 cents US on January 12th, 2007.


Ontario: In Ontario some of the big 2006 corn crop is still in the field. Although vomitoxin is still a concern throughout Ontario corn country, the initial big emotional realization that we have a problem is over. Ontario elevator basis, which reached a low of -45 under December futures in November and -20 to -30 under March futures on December 11th had improved further to -.03 to -05 under the March 07 futures. New crop spot basis bids on January 12th ranged from +. 05 to +10 across Ontario garnering values of $4.00 to $4.05 per bushel.

Elevator old crop cash corn prices on January 12th varied regionally across Ontario from $3.92 to $4.02 per bushel. FOB bids for corn varied regionally from $3.97 to $4.02 per bushel. Ethanol bids were at +30 over the nearby March 07 futures at $4.27 per bushel. Ethanol basis bids of +35 over the March 07 futures for February increasing to +35 and +40 over the May 07 futures for March and April 2007. On January 12th these prices ranged at the ethanol plants from $4.27 to $4.48 per bushel. Casco at London had a spot basis of +. 45 over the March 07 for delivery in January, +. 50 over March 07 in February, +. 45 for over the May 07 for March and +. 50 over the May 07 futures for April. At Port Colborne on January 12th basis ranged slightly higher. Casco prices ranged at London and Port Colborne over this four month period from $4.27 to $4.63.

The adjusted basis on January 12th was -.72 cents under the March. This number has increased from -.95 on November 30 and -.77 on December 18th. The significance of this number is, as it gets closer to zero it means the demand for Ontario corn is growing. That has shown up over this time period in the spot basis. Monitoring this trend on a daily basis will give clues to the movement of the spot basis.

The US replacement price for corn by truck into Chatham or London on January 12th sits approximately at $4.86 per bushel Canadian. As the Michigan basis improves Ontario basis should also improve.

The Bottom Line: Volatility will reign as we continue to answer "How many acres will go in the ground this spring?" Trend line yields and Informa's December estimate of 85.922 million corn acres means an approximate 13 billion bushel corn crop next year in the US. With the USDA cutting 2006 production down to 10.535 that's a huge move up in bushels.

Will US farmers be able to ramp up production by 7 million acres? Are current prices high enough to insure the acres will match usage into 2007 and 2008? Any production blip will clearly put a dent on this whole equation pushing prices to historic levels.

In Ontario producers are set to push acreage over 2 million acres this spring. However, part of that is because about two thirds of the wheat acres which didn't get planted will go into corn, pressuring basis next fall. If yields in 2007 resemble 2006 yields, we'll be exporting corn at harvest time once again. Basis levels will be pressured. Already as of January 12th,new crop basis bids into the fall 2007 have retreated .05 to .08 cents per bushel.

In many ways as corn producers, it's a new world. Market conditions for 2007 don't resemble anything familiar, unless you count the year 1996 when cash prices in Ontario at a 73-cent loonie reached $5, eventually spiking briefly to $7 per bushel. Farmers, traders, brokers and processors got here with our eyes wide open. Yes, mistakes were made along the way. However, with corn stocks diminishing quickly the market needs to find a way out. The bull market continues. Any production blip going forward will create further market conditions not for the feint of heart.