April 2008

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

Market Trends

U.S. and World

The March 11th USDA World Agricultural Supply and Demand estimates were once again neutral on corn futures markets. The USDA kept ending stocks unchanged from their January and February estimate of 1.438 billion bushels. The world ending stocks were increased slightly up 2.1 million tonnes to 104 million tonnes. Feed, seed and residual use for corn remained at the same January and February level at 5.950 billion bushels.

This news was not necessarily bullish for corn futures markets. However, at this point in the year, it hardly mattered. Over the last month, corn futures have followed soybeans in what seemed like a never ending battle for acres into 2008 and 2009.

On March 11th, the nearby May 2008 corn futures finished at $5.72/bushel, July 2008 at $5.84/bushel, September 2008 at $5.86/bushel and December 2008 at $5.85/bushel. Outward futures months into 2009 showed the real fight for acres might be next year. May 2009 corn futures were challenging $6.00/bushel at $5.95 and July 2009 was at $5.96/bushel.

On March 11th, nearby April 2008 crude oil futures had surged to $108.75/barrel. Nearby April 2008 ethanol futures finished at $2.40/US gallon.

On March 11th, the Bank of Canada lending rate was at 3.5%. The noon value of the Canadian dollar was $1.0047 U.S.

Ontario

In Ontario, producers have been riding a wave of higher cash prices with a very weak basis. On March 7th, the cash market slammed shut and completely "decoupled" from the corn futures market as many elevators stopped offering cash corn contracts for fall 2008 and 2009 delivery. The situation as of March 11th remains in flux and producers need to check daily for any changes.

As of March 11th, old crop elevator bids varied regionally from -90 to -95 cents under the May 2008 futures of $5.72/bushel. ($4.78-$4.83/bushel) New crop elevator bids were in flux with the situation changing daily. The few new crop elevator bids on March 11th were in the range between -90 to -95 under the December 2008 futures of $5.85/bushel ($4.91-$4.96/bushel).

Bids at ethanol plants varied with Chatham having no bids four months out. Sarnia ethanol had a cash price range between $5.33/bushel and $5.45/bushel for the next three months.

Casco in Cardinal had no bids for corn in the next four months. Port Colborne and London Casco plants had bids, which ranged over the next three months of $5.40 to $5.45/bushel. Producers need to keep informed daily of these bids because of this uncertain cash market situation.

U.S. replacement price for corn into Ontario on March 11th was approximately $5.98/bushel.

The Bottom Line

It has been a wild ride. While soybeans and wheat swing wildly for the fences both up and down, corn has been a steady performer. As of March 11th, the market is focused on future acres into 2008. $5-$6 futures prices for corn were once the thing of science fiction. In 2008, it's now reality as the market tries to get the acres to satisfy the deep long term demand within corn markets.

In Ontario, producers are still under the weight of last year's crop, too few buyers and a market structure, which is keeping price low, much lower than our American counterparts. Ontario corn continues to be exported into Michigan and New York ethanol plants. As of March 11th, Ontario corn is some of the cheapest in the greater American Corn Belt.

The situation for corn growers was exacerbated on March 7th when the Ontario cash market as well as other cash markets across the Corn Belt actually "decoupled" from the futures market. Hedging futures for Ontario elevators slammed shut; as many were no longer willing to share the cash risk of these forward contracts. Much of the wheat market had tied up cash in margin calls over a period of rising futures. Cash has become very scarce not only for elevators, but also for big grain companies, some hedge funds and some speculators. It will not totally clear up until wheat prices retreat and/or until harvest when hedges can be converted into cash against actual shipping of sales contracts. Producers need to be vigilant on future cash bids. With the futures market extremely volatile in 2008 the cash market may "decouple" again without much notice.

Still, there are reasons that corn futures are so high. Even though corn ethanol usage remains at 3.2 billion bushels, the U.S. will eventually top out at 15 billion US gallons of ethanol production in 2015 or approximately 5.4 billion bushels of corn. This is "legislated" demand, which is on the books.

However, there are cracks showing up in the biofuel/ethanol firewall. Part of the ethanol gold rush is this "legislated demand" which depends on the political will of the American government. Yes, they have an energy policy which guarantees this, but the food versus fuel debate is hitting pay dirt. Even President Bush chimed in recently and intimated that the price of corn was too high. Democratic contenders Hillary Clinton and Barack Obama don't mention corn based ethanol. Simply put, in some circles corn based ethanol is becoming a dirty word. It is not beyond the realm of possibility the American renewable fuel standards may be changed affecting the whole corn market in a negative way.

At the same time, institutional financing for American ethanol plants has evaporated. In the U.S. you now need deep pockets or some type of equity financing to build an ethanol plant. So there are some major cracks showing up in the ethanol complex. The bottom line is ethanol needs to remain profitable in order for corn demand to be sustained. If it does not remain profitable, the corn is not needed, and the demand turns completely around. At the end of the day, plants will be sold, bought by suitors for pennies on the dollar and continue producing. Even with the advent of cellulosic ethanol, corn ethanol will probably remain the dominant feedstock in the future.

As spring 2008 beckons, the March 31 USDA Prospective Planting Report looms as a litmus test for the corn market. A cut in corn acres is said to be coming. The USDA has already put out a preliminary estimate of 90 million acres of corn to be planted in 2008, a cut of 3.6 million acres. Cuts in Ontario corn acreage from 2007 are coming too, possibly 400,000 less acres down to 1.8 million or even less. With a 20-30% depopulation of the Ontario sow herd underway, feed use will continue to lag. This has obvious connotations for corn prices and basis.

We got here with our eyes wide open. However, we also got to $5-$6 corn futures without any type of a weather event in 2007. In fact, last year we had the most corn ever. Looking forward, corn producers should be optimistic. The world as it stands now needs corn acres in 2008 and 2009. It will be the market's job to get it. Riding that wave will surely be our challenge.