May 2009

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

Market Trends

U.S. and The World
It has been a tenuous start to the planting season across the US Corn Belt as of May 17th. If last year proved anything it was that we could have a late start to the corn planting season, but still pull off huge yields at the end of the day. With US corn planting currently mirroring the numbers from last year market watchers are keying in on planting weather into the last weeks of May and early June.

The May 12 USDA supply and demand report was considered mildly bullish for corn futures prices. The USDA is projecting corn production for 2009/10 to come in at 12.1 billion bushels on yield of 155.4 bushels per acre, which is 1.5 bushels below the trend line. This is partly based on the slow rate of planting in the eastern Corn Belt. The USDA increase both ethanol use and exports of old crop corn, which took ending stocks down to 1.6 billion bushels. The world ending corn stocks were also lowered from 143.33 million metric tons in April to 139.58 million metric tons in the May 12 report. The market reacted by sending futures prices higher. However the bullish soybean complex also had a big impact on the corn market.

US corn planting progress as May 11th was about on par (50%) with 2008, but way behind the 5 year average of 71%. However, in the big corn producing states of Illinois and Indiana corn plantings have been severely curtailed below the national average. As of May 11th Illinois was only 10% planted and Indiana was 11% planted. Catching up in these states, while not impossible, will certainly be challenging.

As of May 15th the July 2009 corn futures finished at $4.17 a bushel, Sept 2009 corn futures finished at $4.26 a bushel, and December 2009 corn futures finished at $4.38 a bushel. Looking far into the future the December 2010 corn futures finished at $4.35 a bushel. The July to September futures spread closed at 9.5 cents on May 15th, which represents a neutral to bearish full commercial carry of 74%.

U.S. Cattle and calves on feed at feedlots of over 1000 totaled 11.152 million head on April 1st, 2009, down slightly from the 11.228 million head on March 1st, 2009.

The nearby June 2009 oil futures on May 15th closed at $56.34/barrel up from the nearby futures in March of $52.24/barrel. The nearby June 2009 Ethanol futures finished at $1.67/US gallon on April 12th, up from the nearby future last month, which was $1.48/US gallon.

The Canadian dollar noon rate on May 15th was .8506 U.S. up 3.5 cents from the April report and up 7 cents since the March report. The Bank of Canada's overnight lending rate fell to .25% the lowest since the Bank started recording this information.

Ontario
Have we moved to an import basis? An argument can be made that we have depending on where you are in Ontario. End users have been importing corn from Michigan mainly because of the increase in the Canadian dollar from what was $.77 US to about $.87 US since March. This made sourcing US corn cheaper and with farmers holding tight rein of Ontario old crop supplies suddenly we find ourselves close to an import basis environment in parts of southern Ontario.

The situation has been accentuated in Eastern Ontario where much corn has been exported out into Québec and the Maritimes. With the new ethanol plants on stream this has led to increased basis values in Eastern Ontario. Old crop supplies are not as plentiful in Eastern Ontario as the rest of the province and this continues to show up in basis levels in the East.

At the present time we have the classic situation where Eastern Ontario basis levels are much higher than southwestern and Midwestern Ontario. This is led to corn being trucked into eastern Ontario end users at economical values. The situation has not always held true over the past few years.

At the same time there has been tremendous trouble in some areas of the province getting corn into the ground. For instance while some corn did get planted in April, progress is behind last year and to some extent mirrors the greater eastern Corn Belt. Eastern Ontario's progress has outstripped southwestern Ontario as of May 15th. However, in the Barrie area, some corn has been planted along side fields being harvested from last year's corn crop.

Old crop corn as of May 15th is currently being priced at approximately $4.52 per bushel, which is up slightly from last month's report.

All corn prices can be accessed by clicking here.

The Bottom Line
Everybody knows what the bottom line is now. It's weather and specifically what the weather is going to do in the next six weeks. Already the USDA has reduced yield for this crop year. They will likely do that again in increments depending on weather until they start measuring actual cornfields in September and October. The actual yield and acreage of US corn will be a moving target at least until we get to the acreage report on June 30th.

Moving closer to an import basis for corn is coming a bit sooner than was expected. It came because of a couple reasons, the increase in the value of the Canadian dollar and the tight hands holding back Ontario supply. That's the caveat. It's happening when there is still a lot of old crop corn in Ontario bins.

Michigan basis levels have been fairly traditional for this time of year. However, there has been some Ontario corn move over to the Marysville, Michigan ethanol plant. This has been driven specifically by foreign exchange and the increase in the Canadian dollar. At the same time it has made Michigan corn much more competitive in the Ontario market.

The ramifications moving forward are pretty clear. What happens to price if the dollar stabilizes and we remain close to an import basis with new crop supplies at risk? While some may believe that old crop supplies will come out just previous to wheat harvest, that may not transpire. Wheat harvest will not be as big as last year and a tightening situation may keep that corn in the bin.

The main reason for this of course has been the meteoric rise in the Canadian dollar from its low earlier this year. On May 8th the dollar reached a high of 86.90 US versus March 9th when it bottomed out at 77.30 US. When you consider a nine-cent increase in the Canadian dollar that is huge. In many ways it has masked Ontario corn moving close to an import basis and in effect farmers have not benefited like they may have thought previously.

As we look ahead planting progress and spring weather in the next month are critical to Ontario corn pricing. With Ontario corn about 50% planted as of May 17th planting progress needs to speed up and get finished to maintain last year's 156-bushel yield. Also too, planting progress in Michigan, Indiana, and Illinois, which are traditional supply markets into Ontario, is far behind normal for May 17th. This may set up a scenario-moving forward of supply constrictions within Ontario.

The question is why aren't end users in Ontario raising new crop corn bids when so much uncertainty is evident on the new crop side of the market? That is a puzzling scenario. The possibility exists that end-users are not willing to increase bids because of their financial position looking forward. Clearly the memory of hedges gone badly last year still lingers in the industry.

We were looking at 1.7 million acres of corn in Ontario. However, with the planting problems we have had 1.6 million acres of corn seems more reasonable as of May 15th. With a yield expected at about 143.3 bushels this would bring the Ontario production to 229 million bushels of corn, the smallest crop since 2005/06. The next two or three weeks will have a huge impact on how this number changes going forward. The implications for cash prices in Ontario are in the balance.

Is five dollar or six dollar corn in our future or is it going to be four dollars or even in the three-dollar range? Of course nobody knows that but the corn equation may not be as bearish as once thought. Traditionally the corn market rallies into June. Ethanol production has been on shaky ground for several months now. However even the USDA concedes that more corn will be needed to produce ethanol going into the next crop year. So that demand component may be more stable than we think. You might be able to make an argument that the value of the Canadian dollar moving forward will have a much greater effect on where Ontario cash prices end up this fall.

However, the next month's weather and planting progress will have the greatest effects. Corn planting has been off to a slow start this year. As we learned last year, it's not how you start, but how you finish. The challenge for corn producers is to capture those marketing opportunities as the season wears on.