January 2008

Listen live: xxx

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

Market Trends

U.S. and World

The biggest crop in U.S. history is in the bin or on the ground in the American Midwest. American farmers have produced 13.168 billion bushels, a 25% increase over last year. Across the American Corn Belt robust harvest results have rewarded American farmers for their faith in ethanol in the spring of 2007.

States like Illinois harvested 2.31 billion bushels from 13 million acres. This was 27% more corn than last year on 2 million more acres. Ditto across much of the American Corn Belt. After questioning the American farmer's ability to grow new acres last winter, nobody should doubt their production capacity again.

The December 11th USDA Crop Production and World Supply and Demand reports reinforced a bullish tone in the corn market. U.S. corn ending stocks dropped 100 million bushels from November down to 1.797 billion bushels. U.S. corn exports were increased 100 million bushels from November at 2.450 billion bushels. Corn usage for ethanol remained at 3.2 billion bushels of the 13.168 billion bushel crop.

On Dec 11th the March 2008 corn futures finished at $4.24/bushel, May 2008 finished at $4.34/bushel, July 2008 at $4.41/bushel and December 2008 at $4.42/bushel. Outward months into 2009 have July 2009 at $4.53/bushel and December 2009 at $4.33/bushel.

On December 11th, February 2008 oil futures finished at $89.92/barrel. February 2008 ethanol futures finished at $1.94/U.S. gallon.

The Canadian dollar closed at 98.70 cents U.S. on December 11th. The Bank of Canada dropped its overnight lending rate from the November level of 4.5% to 4.25%.

Ontario

The Ontario corn crop turned out better than initial late summer estimates. As of December 11th the Ontario crop is expected to increase from last month's range of 125-130 bushels/acre to approximately 135 bushels/acre. With projected harvested acreage at 2.060 million acres the Ontario crop is set to come in over 278 million bushels, the largest in history.

Basis levels reflect the large crop just harvested. On December 11th, old crop elevators bids vary regionally in a range from -45 to -50 cents under the March 2008 futures price of $4.24/bu ($3.74-$3.79/bu). There were no spot ethanol bids. However, for January or February delivery basis ranged from -.10 to -20 under the March 2008 futures ($4.04-$4.14/bu). For March delivery ethanol bids range from -.15 to -.20 under the May 2008 futures ($4.15 to $4.20/bu). Casco had no spot bids but were offering basis over March and May 2008 futures from -.05 to +.05/bu for future delivery.

New crop elevator bids as of December 11th improved from their November values. New crop elevator bids varied regionally from -.25 to -.35 cents under the December 2008 futures price of $4.42/bushel. ($4.07 to $4.17/bu) New crop basis bids for ethanol and Casco ranged from -.05 to +.05 over the December 2008 futures. ($4.37 to $4.47/bu) The big news for new crop is at the new Johnstown plant in eastern Ontario where new crop bids are now being accepted for November and December delivery in 2008. New crop bids for 2009 are also posted. As always producers need to check these daily.

The Bottom Line

As of December 11th the largest corn crop ever is weighing on the market. Still, futures prices are buoyant reflecting the overall strength in commodity markets. With soybeans and soybean oil leading the way, corn futures in outward months are protecting their 2008 acres going forward.

The acreage tussle is already spawning phrases like "beans in the teens" and with wheat futures currently pushing over $9, farmers hold the key. Corn is set to lose acres, but nobody knows exactly how much. The March 2008 corn futures has moved 78 cents off its low in July 2007. However, if corn gives up acres into 2008, strong demand for biofuel will mean it'll need those acres back in 2009 to maintain prices at current levels. The USDA chief economist is currently predicting 2008 corn acres will fall 6% to 87 million acres.

Part of the acreage equation moving forward has to do with farm input prices. Fertilizer prices in 2008 are being challenged not only from the "biofuel revolution," but also from increased demand from China and India. With soybean futures prices solidly over $11.50 as of December 11th, many producers will be tempted to switch from corn.

With the loonie losing 12 cents from November 7th to December 11th, currency volatility continues to affect Ontario basis levels. This volatility was partly due to an American greenback in free fall. For instance the American greenback has declined approximately 38% since 2002. In 2007 the American greenback decreased 12%. This in effect makes American corn that much cheaper to foreign buyers. In 2008 this will continue to provide good support to corn futures.

These higher corn prices have challenged the pork and beef producers across North America. Feed and residual corn usage is set at 5.650 billion bushels up slightly from last year but down from 6.155 billion in 2005/06. Clues to any future price rationing should come from the livestock sector.

In Ontario, the big crop is slowly moving through the system. In fact in some areas in western Ontario there surely are some bins not full, while in the east it's a story with bin busting yields. Historically the corn basis is usually seasonally low until a time when the surplus is used up or shipped out. This year should be no different. In creased ethanol production in Ontario, Quebec and Michigan will surely help. As the crop is used up basis will improve.

Is hope on the way? Will the "ethanol gold rush" so apparent in the United States manifest itself even further in Ontario in 2008 and beyond? With the Johnstown ethanol plant now posting new crop bids and Aylmer under construction, it all represents good news for the Ontario corn basis. The challenge for the Ontario industry is to continue what was projected. If all the proposed Ontario ethanol capacity is built into 2009 and 2010, the prospect for a stronger Ontario corn economy is very real.