November 2009

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

Market Trends

U.S. and The World
The 2009 North American corn crop continues to tease and surprise through a difficult harvest season.  Despite huge projections of high yields and big production, difficult harvest weather has added a little mystery of just how much corn has made it to the finish line and just when that finish line may be.  There is still big production out there, but quality issues within the big US corn crop and harvest weather ahead will surely shape the ultimate numbers coming out of fields in 2009/10. 

On November 10th the USDA released their latest crop production report and World Supply and Demand Estimates.  USDA is now saying that US corn production will come in at 12.921 billion bushels, down from the 13.018 billion bushels in their October projection.  This reduction reflected the 1.3 bushels/acre cut from their October estimate pegging US yield to be 162.9 bushels per acre.  This reduction was expected because of harvest and quality problems and may be further reduced in their January report.  However, despite these reduced projections, it still represents a 9 bu/acre increase over last year and the second biggest corn crop on record. 

In the November USDA report exports were reduced by 50 million bushels, which reduced total usage down to 12.980 billion bushels from the 13.030 billion bushels, reported in their October report.  Although this export decline is troubling, supply versus usage is still tight.  With weather concerns and doubts still dogging the 2009 crop in the field, the supply, demand paradigm could grow more perilous going into winter.  Corn usage for ethanol remained at 4.2 billion bushels.  US corn ending stocks are now pegged at 1.625 billion bushels. 

This has been reflected in higher futures prices since the last Market Trends report in October.  As of November 13th, December 2009 corn futures closed at $3.90/bu up 28 cents from the October report.  March 2010 corn futures finished at $4.05/bu, July 2010 corn futures finished at $4.23/bu and December 2010 finished at $4.37/bushel.  Prices have been volatile, with the December 2009 corn futures price topping out at $4.13 on October 23rd.

U.S. Cattle and calves on feed at feedlots of over 1000 totaled 10.474 million head on October 1st, 2009 up from the 9.879 million head (revised since the last report) on September 1st, 2009.

The nearby December 2009 oil futures on November 12th closed at $76.35/barrel up from the nearby futures in October of $71.77 barrel.  The nearby December 2009 ethanol futures finished at $2.01/gallon on November 12th up from the nearby futures of $1.85/gallon from the October Market Trends report.

The Canadian dollar noon rate on November 12th was .9517 US down slightly from the .9593 reported in the October Market Trends report.  The Bank of Canada's lending rate remained at .25%.

Ontario
In Ontario we are reaping the vestiges of a cool, cloudy summer with a couple of frost events in late September, early October putting a punctuation mark on a difficult growing season.  Simply put, quality issues will dog the 2009 Ontario corn crop through this fall, winter and into spring 2010.  Low test weight corn is showing up across the province. 

In the extreme southwest, Essex and Chatham-Kent, corn yields are high with very slight test weight issues.  However, as a general rule, as you move north, both yield and test weight suffer affecting grade and generating discounts at regional elevators.  Corn, which had later, planting dates in these areas, is suffering the worst, dropping to grade # 5 or sample grade.

As of Nov 13th crop conditions have been variable. North of London to highway 8 corn is generally grade 3 and 4, from highway 8 north corn has made grade 4 and varies from there as you move north.  There is 40% moisture corn north of Toronto, across to Walkerton and over to the Sunderland area.  East of Toronto the situation is similar with better corn close to the lake and deteriorating in quality as you move north.  Corn in the Ottawa valley is grading 3 and 4.  Some of the poorer grades of corn will look to be harvested toward spring 2010.

Despite the obvious quality challenges Ontario corn yield is good, in fact excellent in southwestern Ontario, with many producers topping out over 200 bu/acre.  Despite the problems with quality in some areas, these acres are relatively small compared to the overall Ontario crop, which is still projected to come in at approximately 140 bushels/acre.  Much will depend on what Agricorp does with regard to "releasing acres" which don't make grade.  However, this is unlikely to happen before spring 2010.

Ontario basis levels have declined into harvest with the flip from "new crop" to "old crop" taking place in late October.  As harvest has progressed basis levels have declined in a typical harvest pattern and may decline further as harvest moves to completion.  Grade discounts are muddying the basis water further as corn graded #3, #4 and #5 are subject to discounts of $2, $10 and $20/tonne respectively.  With quality issues in some areas being very acute, corn basis may become very "sloppy" with wide variations within regions and among elevators.  Producers will need to be cognizant of this when looking to market problem corn. 

All corn prices can be accessed by clicking here.

The Bottom Line
What's coming off in the field now across North America holds the key to future price movement.  In fact the late maturing crop caused by the cold summer and later planting dates has already manifested itself in much higher prices for corn producers.  For instance only two months ago on September 8th the December corn futures bottomed out at $3.05/bushel, only to top out at $4.13/bushel on October 23rd.  Quality issues and harvest problems forced price movement and its not done heading into late November and December. 

In their November USDA report 12.921 billion bushels was the first reduction off 13 billion bushels some analysts were expecting.  With some corn froze across the US corn belt, the next widely anticipated market report will be in January 2010 when USDA will have a better measurement of how much corn is out there and how much damage has been done.  Quality issues concerning test weight usually means reduced yields and the January report may reflect that.  Some private US resource intelligence firms such as Lanworth out of Illinois are pegging US corn production at 12.3 billion bushels, a huge drop from where USDA is.  However, despite the "debate" about actual yield in the United States producers must realize we're still talking about the second largest US corn crop ever and the highest yield per acre of 162.9 ever recorded. 

Currency issues continue to be a large part of the corn market equation.  The US dollar reached its 15-month low on November 11th and has acted as a stimulus for all commodity prices including corn.  It's a doubled edged sword for Canadian producers as the value of the loonie usually moves in an opposite direction of the US greenback.  Watching US dollar movement over the next few months will be key to corn futures movement.  With the US government's rising debt levels combined with an economy failing to generate increased employment, future US dollar prospects are a wildcard.  In 2009/10 historical movement in the US dollar may not hold true and watching how this affects corn futures markets will be key. 

None of this helps at home if your corn is sample grade.  However, while this Ontario corn growing season has been compared to 1992, at the end of the day "it is not quite."  As one Ontario merchandiser told me, "at least this year we've got corn which can be graded, in 1992 for the most part that wasn't the case."  There will be challenges for Ontario growers marketing this crop, but a provincial yield of 140 bushels/acre is still in the works as of mid November.  Large discounts will apply for lower grade corn and producers will have to be cognizant of local market conditions and their own ability to store some of this crop.  Good mid November weather conditions have made this easier. 

Corn basis levels have moved even across Ontario corn country and will be further pressured by bushels hitting the market to take advantage of "$4 cash corn off the combine."  Despite our quality issues in certain parts of the province the classic situation is setting up in Ontario of too much corn at harvest, then working through it to higher import levels come spring.  This may be complicated this year by Ontario merchandiser's intentions of moving "Grade 2" quality American corn into Ontario markets to blend for Ontario end-users.  Ontario corn basis will be the victim if that scenario occurs.  The value of the Canadian dollar hovering around 95 cents will also be a major player. 

Looking ahead, short term market action will surely focus on the big US corn crop still in the field.  If weather turns ugly and quality concerns increase expect even greater volatility in nearby corn futures months.  However, at a certain point even in this difficult fall, there will be some focus on new crop supplies and potential corn acres in 2010.  In the November USDA report world ending stocks were cut to 132.41 million tones compared to 136.25 million tones last month.  This puts the world ending stocks-to-use ratio at 16.4%, which is considered tight but not constricting.

For Ontario corn producers there sure will be marketing challenges ahead.  Low test weight corn means ethanol plants will need to use more to get the same results.  Much of this is the same in the feed trade.  Of course there is still the balance of harvest ahead with all the uncertainty that brings.  "$4 cash corn at harvest" was only a faint hope two months ago.  Does it mean $5 corn is on its way?  Of course nobody knows, but what is true is the 2009 corn crop has been full of surprises, much of that manifested in this harvest season.  Expect more short term futures volatility ahead combined with a harvest basis swayed by currency fluctuations.  This fickle fall has created marketing opportunities for corn coming off and for intended new crop acres for 2010.  A daily watch of the markets is vital to capturing these corn pricing opportunities.