July/August 2008

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

U.S. and World

The June 30th USDA Planted Acreage and Stocks Report held some slightly bearish surprises for corn market watchers. The report, which is always closely watched, on an annual basis had renewed interest in 2008 because of the delayed planting and widespread flooding and soggy conditions experienced within the U.S. Corn Belt this past spring. The USDA pegged corn acreage at 87.33 million acres, up from the 86.01 million acres indicated in the March planting intentions report.

The June survey was based on farmer interviews within the first two weeks in June. However, with such widespread flooding in big corn producing states like Iowa, Illinois and Missouri, the USDA resurveyed in the last week of June in an attempt to measure how much of the 2008 had been lost to flooding. According to USDA harvested acreage will come in at 78.940 million acres or 90.4% of planted acreage. This was down from 92.4% of planted acreage in the early June survey, implying that 1.75 million harvest acres have been lost due to flooding. However, as of July 6th, the true number is still very vague as summer weather will weigh into just how much of the 2008 crop has been damaged or lost.

The corn futures market has reacted violently over the last several weeks to the realization of delayed planting, widespread flooding and the uncertainly surrounding the USDA planted and projected harvest numbers. On July 3rd the nearby July 2008 corn futures finished at $7.46/bushel, September 2008 at $7.57/bushel and December 2008 at $7.77/bushel. As of July 3rd, outward into 2009 the May 2009 and July 2009 corn futures had pushed through the mythical $8 level to finish at $8.03 and $8.07/bushel mark, reflecting the premium the market sees on this year's crop. The December 2009 corn futures finished at $6.97/bushel.

USDA continued its downward estimate of corn use for ethanol pegging it at 3.0 billion bushels down from 3.1 in April. U.S. ending stocks for the 2007/08-crop year came in at 1.433 billion bushels. World ending stocks rose to 103.29 million tonnes up from the May number of 99.03 million tonnes. Feed and residual use of corn was maintained at 6.150 billion bushels.

Along with the June 30th USDA planted acreage report; USDA also gave clues to a rationing of demand for corn through their release of the June 1 Quarterly stocks report. They reported corn stocks on June 1st, 2008 at 4.028 billion bushels up from the 3.533 billion bushels a year ago.

For a bit of prospective, on June 20th, 2006 the nearby July futures price settled at $2.29/bushel. Two years later that price is only about 29% of current futures prices reflecting the huge changes in market structure and the current weather related problems going forward.

U.S. cattle and calves on feed at feedlots of over 1000 totaled 10.8 million head on June 1, 2008, down 4% from June 1, 2007.

Oil has been in record territory with the nearby August futures finishing at $145.29 U.S./barrel on July 3rd. Nearby July ethanol futures finished at $2.86/U.S. gallon on July 3rd.

The Canadian dollar noon rate on July 4th was .9847 U.S. The Bank of Canada's overnight lending rate was 3.0%.

Ontario

In Ontario the corn crop has avoided many of the pitfalls that have hurt the U.S. corn crop. While there are some areas of the province that got too much rain or a little hail, the crop looks good even though it may be slightly behind in its development.

Last year Ontario produced approximately 2.1 million acres of corn and harvested 2.055 million with a yield of 133.8 bushel/acre. This produced the largest corn crop in Ontario history at 275 million bushels. This year OMAFRA is estimating corn acres at 1.775 million acres. Projecting out with last year's yield would put 2008 production at approximately 238 million bushels of corn.

Basis is in flux. In fact basis as we know it may be no more because at these futures levels end users are no longer willing to accept the hedging risks associated with the higher costs. However, if we look at basis in isolation, it's been weak all year because of the big 2007 crop and it continues to be.

As of July 3rd, old crop elevator bids varied regionally from -$1.00 to -$1.10 under the September 2008 futures of $7.57/bushel. ($6.48-$6.58/bu) New elevator crop bids are in flux but are posted at -$1.04 to -$1.23 under the December 2008 futures of $7.77 ($6.55-$6.73/bu)

At the ethanol and Casco plants throughout Ontario producers need to check future cash bids frequently. As of July 3rd there are no spot bids for corn at any of these facilities. With the decoupling of futures and basis some of the ethanol plants are offering "flat prices" into 2009. However, there is a basis range of -.60 to -90 under the September future 0f $7.57 for a range of $6.87-$7.17/bu for corn delivered to Casco or some ethanol plants within the next three months. In the current market environment producers need to check daily and plan accordingly.

The U.S. replacement price for corn on July 3rd was approximately $7.78/bushel.

The Bottom Line

If there was one thing the demand driven corn market didn't need in 2008 it was delayed plantings and soggy conditions in the American corn belt coming out of spring. However, that's exactly what happened this spring as American farmers had problems getting their corn into the ground and then successive thunderstorms destroyed and stunted much of the American corn crop. How many acres were affected and how this will manifest itself going forward will be front and centre as the crop moves toward fall.

With an Ontario crop looking quite good, the spectre of $7 and $8 futures is the stuff dreams are made of for corn producers. However, it is a long way from harvest and Ontario producers could still be challenged with drought or some other production problem during the critical pollination period. Also too, with prices being historically high, substituting Ontario corn with cheaper feed wheat in the feed market may hold further sway over the corn basis moving forward. With Ontario wheat being harvested in July the spectre of wheat moving into this market is very real.

What cannot be ignored is the corn basis going forward. Historically, basis has reflected the supply and demand within a localized area plus transportation costs to renewed supplies. Traditionally, the hammer for the Ontario corn basis has always been the threat of U.S. corn coming into Ontario. However, with Ontario's big crops over the last two years, Ontario corn has headed into the United States. Needless to say, basis, as we have known it in Ontario corn is no more. In 2008 basis represents the reality of what end users are willing to pay and no more. This is an aside to the dissatisfaction on both sides of the U.S. and Canadian border with the grain complex on the lack of convergence between cash and futures markets. It has led to a market condition where corn "price discovery" is difficult to determine. Flat prices being offered at Ontario ethanol plants into 2009 is a symptom of this greater problem.

It is pretty clear in the United States and Canada that rationing of corn demand is on going. The quarterly USDA stocks are evidence of that. However, the crop damage situation within the greater Corn Belt has tempered that reality with a rationing of corn supply into 2008/09. The USDA re-surveyed harvested acres figure of 78.940 million will surely be in flux during this crop year. Corn producers need to keep track of this number going forward, as USDA will likely adjust this figure to reflect crop damage, as it becomes more known. At the end of the day, corn beat out soybeans in the spring 2008 acreage war.

With the run up in corn futures prices, the "political debate" within both the U.S. and Canada has heated up over biofuels and its effect on corn prices. In the United States there have been calls for the elimination of the 54 cent U.S. ethanol tariff. There have also been calls to change the RFS (Renewable Fuel Standards), which obviously wouldn't be good for the corn economy. In Canada there have been similar calls. Needless to say, what politics built, politics can also take down. Going forward this has obvious ramifications for corn producers.

Even at these prices there are some calling for even higher and higher prices. With oil prices at record levels and the U.S. dollar index still at near record lows, commodities are hot and corn is too. The challenge for producers is managing their price risk through a summer where weather still looms as the litmus test for where corn prices go from here. Will it be hot and dry going forward or simply a repeat of what we've had so far? Who knew we'd have a weather production problem during spring planting? Now we'll see if Mother Nature wants an encore.