December 2007

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

Market Trends

U.S. and World

The November 9th USDA Crop Production and Supply and Demand report continued a trend started in October by making a huge crop slightly smaller. The USDA projected 2007/08 corn production to come in at 13.168 billion bushels, down from its October number of 13.318 billion bushels. The November number was based on 86.1 projected harvested acres at a yield of 153.0 bu/ac, down from the October USDA projected yield of 154.7 bu/ac. US ending stocks were also reduced to 1.897 billion bushels down from the October number of 1.997 billion bushels. World ending stocks came in at 110.39 million tonnes. Corn usage for ethanol demand stabilized in the November 2008 USDA report coming in the same as October at 3.2 billion bushels.

World ending stocks came in at 110.39 million tonnes which was almost the same as the 110.36 million tonnes recorded in October. However, this represents only a 5% increase in world ending stocks from last year's 104.98 million tonnes, despite the largest US corn crop ever grown.

On November 9th December 2007 corn futures finished at $3.86/bushel, the March 2008 corn futures at $4.04/bushel, May 2008 at $4.13/bushel and December 2008 at $4.31/bushel.

Looking ahead, the focus of the futures market will be turning away from this big crop and focusing on the acreage competition into 2008. Soybeans futures are currently trading above the lofty $10 futures levels. A US acreage shift from corn to soybeans in 2008 is expected. A 5 million acreage cut to US corn is to be expected. However, if that number grows to 7 or even 8 million acres, the 2008 corn ending stocks will be severely challenged.

Oil prices in October/November have been in overdrive challenging long held record levels. On November 9th December 2007 oil futures closed at $96.32/barrel. The December 2007 Ethanol futures price on November 9th finished at $1.87/US gallon.

The Canadian dollar closed on November 9th at $1.0648 US. The Bank of Canada overnight lending rate remained at 4.5%.

Ontario

In Ontario, it's still the tale of two crops, great in the East, not so great in the West. However, the drought stressed crop in western Ontario is turning out to be not as bad as many expected. Nonetheless, the 2007 Ontario corn crop is now projected to come in within a range of 125-130 bu/ac down from the 2006 yield of 150 bu/ac. Based on the expected harvest acreage of 2.060 million acres the Ontario crop looks to come in over 257 million bushels, the most corn ever produced in Ontario.

On November 9th, basis levels in Ontario reflect historic harvest weakness. On November 9th, elevator bids range from -40 to -45 cents under the December futures price of $3.86/bushel($3.42-$3.47). Spot ethanol bids varied regionally from -10 to -20 cents under the December futures price of $3.86 ($3.67-$3.77). These bids vary in by future months. Producers need to constantly check these prices. There were no spot bids at Casco's locations on November 9th.

For new crop bids in 2008, basis weakened into November 9th from healthier October 2007 values. On November 9th, new crop elevator bids were set at -35 cents under the December 2008 of $4.31 ($3.97/bushel). New crop fall 2008 ethanol bids range from -15 under Dec 2008 in Chatham at $4.17 to +5 at Sarnia at $4.47. New crop 2008 Casco bids range from even to +05 over Dec 2008 in a range from $4.32 to $4.37/bushel.

The Bottom Line

On April 24, 2007, corn planting started in earnest in Ontario. That day, the Canadian dollar finished at .8964 cents US. On November 7th as much of that April planted corn was safely in the bin, the Canadian dollar reached an intraday modern day high of $1.1009 US. Simply put, nobody saw this coming in 2007. For corn producers in Ontario, the soaring Canadian dollar is a huge negative factor on cash corn prices. It's unprecedented and for Ontario corn producers moving forward, it's our largest challenge for improved cash corn prices

A very big reason the loonie got this high this quickly is a US greenback in a free fall. In the week ending with November 9th, the US dollar was at a 26 year low versus the British pound and the weakest against the loonie since the Bank of Canada started record keeping in 1950. The paradox for producers is a weak US dollar is very positive for corn futures prices effectively making US grain cheaper for buyers. Nonetheless, for Canadian corn producers it's like burning a candle on both ends, high futures and weak basis.

Still with such negative Ontario cash corn fundamentals, corn prices are higher than some of the sub-$3 levels producers experienced in 2005 and early 2006. Part of the salvation lies in the biofuel demand reflected in a US basis, which is uncharacteristically strong within this harvest window. Storage within the US is adequate even for the largest US corn crop ever. This has been reflected back through supply channels ultimately being reflected in Ontario values. US replacement price on November 9th was approximately $4.07/bushel landed into Chatham or London.

Outward 2008 futures months offer $4 plus prices. This is partly a reflection of the acreage war ahead with soybeans. However, the commercial carry between futures months remains bearish at approximately 90% between the January to March 2008 corn futures. What this means is that commercial users are not concerned about running out of corn to satisfy demand.

The acreage war for 2008 in Ontario is already over. Producers planted approximately 1.3 million acres of wheat this past fall, which will by default, take down Ontario's 2008 corn acres from 2007 levels. At a certain point new crop basis will need to strengthen to encourage corn acres into 2008. In addition, new ethanol refining capacity in Ontario at Johnstown and Alymer will start to impact corn basis going into late 2008.

As we move forward, corn demand is still very strong even at a time when the "food versus fuel" debate is finding some real traction around the world. Despite that, corn futures are in the high range of their historic levels. As we move beyond 2007 production numbers toward 2008 planting intentions, the price fireworks should heat up. With the combination of high corn futures and an above par loonie, we're in uncharted water. Balancing the futures versus any potential basis gains has never been more essential.