September/October 2007

Listen live: xxx

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

Market Trends

U.S. and World

The 2007 corn, crop the largest ever grown in the United States is moving toward harvest. While parts of Ontario burned up in the summer of 2007, the important corn growing areas in the United States enjoyed good weather and adequate rainfall.

As of September 4th the December 2007 futures closed at $3.53/bushel down from its June 18th value of $4.23/bushel. March 2008 futures are at $3.69/bushel, September at $3.95/bushel and December 2008 at $4.01/bushel.

As of September 4th the US crop is doing well especially in the major corn growing states of Illinois, Iowa and Indiana. Harvest has begun moving from the southern United States into southern Illinois. Actual yields have been stellar, reflecting a big crop in the field.

The July 12th US Supply and Demand Estimates pegged US corn production at 12.840 billion bushels, up from 10.535 billion bushels in 2006-07. However, on August 10th the USDA increased their estimate of crop size to 13.054 billion bushels. This was based on 92.9 million acres planted, 85.4 million acres to be harvested with a yield of 152.8 bushel/acre. Corn futures tumbled on those estimates. Ending stocks in August increased to 1.516 million bushels up from the July ending stock of 1.508 and up from the June ending stock of 997 million bushels.

As ending stocks have increased, the percentage of full commercial carry between corn futures months into 2008 remains bearish. The December to March 2008 spread is 84%; the March to May 2008 is 77% as of September 4th. Essentially, commercial carry refers to the cost commercial traders will pay between two outward futures months to keep corn off the market. Anything over 60% is considered bearish. In this market, it reflects the comfortable attitude in commercial circles that there will be adequate corn supplies into 2007-08. As ending stocks have increased the percentage of full commercial carry between corn futures months into 2008 remains bearish. The December to March 2008 spread is 84%; the March to May 2008 is 77% as of September 4th. Essentially commercial carry refers to the cost commercial traders will pay between outward futures months to keep corn off the market. Anything over 60% is considered bearish. In this market it reflects the comfortable attitude in commercial circles that there will adequate corn supplies into 2007-08.

The question is, what happens now? Nobody knows, however, harvest still may hold some surprises. As of September 4th, corn futures are benefiting from an exploding wheat market. The September 12th USDA Crop Production Report will surely provide some clues on the road ahead.

October 2007 oil futures finished at $75.08/barrel on September 4th. The October 2007 ethanol futures closed at $1.59/US gallon.

Cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 10.3 million head on August 1, 2007. This was down 5% from totals in August 2006.

On September 4th the Bank of Canada overnight lending rate was 4.5%. The value of the Canadian dollar was 95.27 cents US.

Ontario

In Ontario it's the tale of two crops. In eastern Ontario, the crop received timely rains and looks very good right into Quebec. However, in western Ontario it is a far different picture. While there were some areas in western Ontario, which did receive spotty rainfall, much of Niagara and southwestern Ontario's corn crop suffered severe drought stress. Many fields throughout this part of the province show wide variability in yield potential. OMAFRA is projecting an average yield of 121.4 bushels/acre (2006-150bu/acre) on 2.075 million harvested acres yielding 252 million bushels of corn.

With the Ontario crop in trouble, new crop basis bids moved up from June levels. On September 4th new crop elevator bids ranged regionally from -.15 to -.20 cents under the December futures price of $3.53. ($3.33-$3.38) New crop CASCO bids at Cardinal, London and Port Colborne ranged from -.05 to -.10 under the December corn futures of $3.53 ($3.43-$3.48) New crop ethanol bids as of September 4th were +.15 over December at $3.68 bushel.

Old crop prices have reflected US replacement price since June. Old crop elevator bids vary regionally from +.15 to +.30 over the December futures ($3.53) at $3.68 to $3.83. CASCO old crops bids on September 4th varied from +.50 at London, +.55 at Port Colborne and +.85 cents at Cardinal over the December futures. ($4.03 to $4.38) U.S. replacement cost on September 4th delivered into London or Chatham was approximately $4.38/bushel.

The Bottom Line

Even with a reduced yield in the field, the inflated 2007 corn acres will produce more corn than in 2006. Last year, Ontario produced 231 million bushels of corn. This year, even with the drought, OMAFRA is projecting 252 million bushels. This surely will affect the corn basis going into fall harvest.

However, it is unlikely the crop will be affected in a major way as it was last year with vomitoxin. As of September 4th predicting yield is still guesswork. The summer weather and lack of rainfall was fickle across the province. If Ontario yields deteriorate further into fall, basis should improve. Basis may become "sloppy" reflecting the regional health of the crop in one specific area versus another.

US replacement cost always looms as the ultimate price ceiling for Ontario corn. Much of that corn traditionally comes through Michigan by truck. The Michigan crop was also drought stressed, currently pegged at 111 bushels/acre, their worst crop since 2001. With new Michigan ethanol plants like the one in Marysville set to come on stream, demand for a short Michigan corn crop will be increased, possibly limiting future movement into Ontario. This will help support basis post harvest into 2008. However producers should be cautioned. There always is the potential for "water corn" to arrive in Ontario ports at any time to thwart basis appreciation.

If there is any type of a planting window this fall, Ontario farmers will plant more wheat in response to higher wheat prices. This will mean reduced Ontario corn acres planted in 2008 fostering basis appreciation later next year.

Of course the 800lb gorilla, which is the Canadian dollar continues to pressure basis. It has appreciated over 13% since January 2007. Any move by the Bank of Canada to increase interest rates will increase the loonie further. Producers might hope for the law of averages to take over sending the loonie back down for further increases in basis levels.

Is hope on the way? If farmers can get by impending harvest time futures and basis lows, the answer is yes. As of September 4th, December 2008 corn futures are $4.01/bushel, December 2009 is $4.10/bushel and December 2010 $4.10/bushel reflecting much higher values than the last several years. With increased ethanol expansion in Ontario coming on stream in 2009, the potential for future rewards are very real for Ontario corn producers.