April 2009

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

Market Trends

U.S. and The World
The March 31st USDA prospective plantings report is always a seminal event in any new crop year. Corn producers and traders looked toward the March 31 report as a key benchmark for the upcoming season. The 2009 March 31 USDA prospective plantings report did not disappoint.

The USDA estimated that planted corn acreage in the United States would come in at 85.0 million acres down about 1 million acres from the 86 million acres planted last year. This was a bullish surprise to the market as many in the trade had expected a much lower corn number and a much higher soybean number. USDA estimated soybean planting to come in at 76 million acres, which would be a record. However, many in the trade had expected a soybean number to be close to 80 million acres. The USDA also reported that corn stocks on March 1 were 6.958 billion bushels, up from 6.859 billion bushels on March 1, 2008.

The market reacted accordingly sending soybeans much higher at the outset. Clearly, the USDA prospective plantings report was bullish for soybeans and not so much for corn. However what might have been more surprising from the USDA was the sharp decline in planted acres from those planted in 2008. In essence what the USDA report said was that United States farmers were going back to farming about the same acreage as they did in 2006 before the commodity boom brought in 9.1 million acres into production from "non-principle "crops in the 2007 and 2008 growing seasons.

In many ways this adds more uncertainty to the planning process. For instance with the high cost of inputs that have been documented since last fall and the decrease in futures prices since last summer and fall the specter of "production destruction" was always a possibility. Clearly, it looks like American farmers have done the economics and are not willing to plant those extra acres at these lower prices.

The news kept coming on April 9 when the USDA released its supply and demand estimates. The US corn ending stocks came in lower than expected at 1.7 billion bushels due to an increase in the feed demand by 50 million bushels. Corn exports and the corn for ethanol remained unchanged from last month. The world corn ending stocks decreased to 43.33 million metric tons because of increases in feed use and a decrease in production in South America.

As of April 12th the May 2009 corn futures finished at $3.90 a bushel, July 2009 corn futures finished at $3.99 a bushel, and December 2009 corn futures finished at $4.21 a bushel. Looking far into the future the December 2010 corn futures finished at $4.39 a bushel.

U.S. Cattle and calves on feed at feedlots of over 1000 totaled 11.228 million head on March 1st, 2009, down slightly from the 11.288 million head on February 1st, 2009.

The nearby May 2009 oil futures on April 12th closed at $52.24/barrel up from the nearby futures in March of $47.03/barrel. The nearby May 2009 Ethanol futures finished at $1.48/US gallon on April 12th, down from the nearby future last month, which was $1.55/US gallon.

The Canadian dollar noon rate on April 9th was .8147 U.S. up almost four cents from the March report. The Bank of Canada's overnight lending rate remained at .5% the lowest since the Bank started recording this information.

Ontario
As of April 12 the focus for Ontario corn producers is the 2009 crop year. In the next three weeks much of Ontario's corn crop will begin to be planted. Everybody has an estimate of how much corn will be planted in Ontario this year. However, 1.7 million acres is the figure that seems reasonable based on the number of wheat acres in flux and our new cost horizon for growing corn. Needless to say, much will depend on spring weather going forward.

Basis for Ontario corn has actually retreated and remains weak as of April 12. For instance one of the biggest differences between April and March has been the Canadian dollar gaining almost $.04 on the US dollar from its March 12 level. Old crop basis levels for elevator bids are approximately $.40 to $.45 per bushel. This is a decrease from last month when elevator bids were $.50 to $.60 per bushel.

In Eastern Ontario competition for corn has increased basis levels. As reported last month Casco in Cardinal has been very aggressive bidding for corn now and into the future months. Of course everybody still is wondering about import basis levels and when that will happen? Needless to say, there is still a lot of corn available in Ontario and that seems far off. However, export bid prices at Hamilton are getting attractive and if corn is moved into this market and basis get sloppy, our import basis might come sooner than we expect.

Old crop corn as of April 12 is currently being priced at approximately $4.40 per bushel, which is unchanged from last month's report.

All corn prices can be accessed by clicking here.

The Bottom Line
As of April 6 the USDA is not listing planting progress for corn in the United States. However, corn in the ground in the southern United States with some corn in Texas already has to endure some heavy frosts. It is an example of what will be affecting the greater corn market over the next month. It is one thing to talk about what may affect the market; however, in the next month corn will be going into the ground across US Corn Belt and in Ontario. The market will be very sensitive to planting delays during this time.

Traditionally at this time of year we are into the spring rally in grains, which typically lasts into July. That may happen again this year. Typically between the March 31 USDA prospective plantings report and the June acreage report there is movement with regard to the number of acres planted. Sometimes like last year that's significant. If US farmers counter the projected corn acreage reduction and plant more corn then there will be an obvious impact on corn stocks going forward. Spring weather especially over the next six weeks will help determine that.

Still, with US ending stocks at 1.7 billion bushels, users are comfortable going into the cropping year. Higher prices last year combined with the economic meltdown since last summer had a very real effect on reducing corn usage both domestically in the US and around the world. For instance, in the US there is a drop of 700 million bushels in corn usage this year from last year. Turning this around certainly will take time. For instance the USDA is actually projecting a 500 million bushel increase in corn usage for next year based on projected ethanol demand. Needless to say these issues with corn usage declining continues to be a negative in the corn futures market.

This is having an obvious effect on both the old crop in new crop market for corn. With corn usage declining and with adequate stock levels new crop bids are not aggressive. Of course this may all change with poor planting conditions in 2009, but with 85 million acres set to go in the ground and trend lines yields, end-users are willing to wait at least for the immediate future to put premium into new crop bids.

The corn usage paradigm continues to be complicated by the rationalization within the US ethanol sector. Even though US ethanol production is supported by government mandates, ethanol margins are poor at a time when gasoline prices are low and demand is declining. There have been some high profile bankruptcies like VeraSun and Aventine recently declaring Chapter 11 bankruptcy. However, some of these plants have been bought by other firms who have renewed ethanol production. So the sector remains in flux with corn usage highly dependent on the future health of this industry.

In Ontario planting will commence this month. Many of the same variables with regard to spring weather that will weigh on the futures market will also impact here. For instance according to the March OCPA monthly supply and demand report a 1.7 million acre crop at 143.3 bushels per acre will yield a total production of 243.6 million bushels. With imports projected to be 65 million bushels of corn from the United States projected supply for 2009/10 will be 323.4 million bushels. Our total use is projected for this period to be 305 million bushels. Clearly, with our usage expanding over the last few years any production hiccup will upset that wagon train forcing basis levels higher.

However, at the present time new crop bids for Ontario corn reflect a situation where corn is abundant. At a certain point this spring or summer that will either continue or explode because corn usage in Ontario is much higher than it was a few short years ago. For example in 2005/06-corn usage in Ontario was about 281 million bushels. Projections for this year are 24 million bushels more. Ontario's relatively new ethanol sector is mainly responsible for this, albeit feed usage over this time has declined.

It is easy to project a bearish market situation going forward. Since last summer when corn futures prices almost reached eight dollars there has been much bearish news. Cash corn prices to Ontario producers still might seem higher than what we became accustomed to over the last few years. Much of that is due to the lower Canadian dollar, which despite gaining $.04 over the last month against the US dollar is still helping cash prices. Our traditional spring rally may continue, but keep in mind it is traditional and July is usually a reckoning month for that.

At a certain point the combined economic stimulus packages put together by Western governments will surely have an effect on aggregate demand going forward. That will surely be a positive for corn prices moving forward. Also too, the disappearance of 9.1 million acres planted acreage in the USDA report will weigh in. At a certain point the world will need those acres back and at least for this year, they won't have them.

Lurking always are the noncommercial traders or speculators who pushed the corn market up and brought it crashing back down last summer. Recently there has been an increase in noncommercial activity within the corn futures market. This activity is always fickle but does lend excitement into the market going forward. Ontario corn producers need to keep that in mind.

Is hope on the way? Is the acreage battle about to begin? Well, 2009 is a much more complicated picture than the previous two years. There will be marketing opportunities for both old crop left over and new crop sales going forward within the next month. As planters roll in the next few weeks it will be key for producers to keep their eye on both the futures and cash market.