Market Trends for August 2010
by Philip Shaw, B.Sc.(Agr.) M.Sc.
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U.S. and The World
In the United States the corn crop continues to grow toward record production in August. There was no major weather event that affected pollination; in fact weather generally has been favourable for record production across the US Corn Belt. For the week ending August 8th US corn was rated 71% good to excellent versus 68% at the same time last year.
This was reflected in the USDA's August crop production report, which increased total 2010 production to 13.365 billion bushels of corn growing in US fields. The USDA increased yield from their July estimate of 163.5 bushels per acre to 165 bushels per acre in the August report. The USDA actually decreased the old crop ending stocks to 1.426 billion bushels because of an increase in ethanol usage and food seed and industrial usage. They also decreased new crop ending stocks to 1.312 billion bushels. This was due to an increase in US corn exports to 2.05 billion bushels, an increase of 100 million bushels over the July estimate. The August report was based on an actual survey of 27,000 American farmers.
This August USDA report came after the July report, which had reduced planted acreage and ending stocks in 2010. With the August report showing a robust record corn crop in the field, while at the same time showing dwindling ending stocks, the big story was the increased demand. Despite the largest crop growing in American history, corn stocks are falling and the new crop stocks to use ratio has actually fallen below 10% at 9.7%. Clearly, the record crop in the field is needed to satisfy record demand (usage), which now stands at 13.490 billion bushels. World corn ending stocks decreased to 139.20 million tonnes from 141.08 million tonnes for 2010/11 and down to 139.03 MT from 139.59MT for 2009/10.
In many ways in August 2010, these new USDA corn numbers may have been neutral to the market in any other year. However, since July the specter of record heat and drought conditions in Russia and Eastern Europe have essentially hijacked the corn futures market, pulling corn along with wheat. Corn futures prices have been pulled much higher, because of the fundamentals but also from the screaming headlines of fires, heat and lost production in Russia and the states of the former Soviet Union.
Corn futures are significantly higher from one month ago. As of August 13th, September closed at $4.11/bushel, December closed at $4.27/bushel and March 2011 closed at $4.47/bushel. Projecting far into the future, December 2011 corn futures finished at $4.43/bushel.
The nearby September 2010 oil futures as of August 13th closed at $75.39/barrel down slightly from the nearby futures in July of $76.09/barrel. The average rack price for ethanol in the United States on August 13th was $1.93/US gallon up from $1.77/US gallon reported here in July.
The Canadian dollar noon rate on August 13th was .9614 US down slightly from the .9682 US reported here last month. The Bank of Canada's lending rate increased 25 basis points from last month sitting at .75%.
Ontario
In Ontario, the corn crop is excellent throughout the province. There are always small regional issues with the crop, but in 2010 we are setting up for a possible record yield come fall. The previous Ontario corn yield record is 156 bushels per acre recorded in the 2008/2009 growing season. With 1.9 million acres of corn growing in the fields, there is a very real possibility of 300 million bushels being harvested this fall. This is a far cry from the Mother's Day weekend when most of this crop was frozen. It shows the resilience of modern Ontario corn hybrids.
Basis levels have softened considerably into August for both old and new crop of corn. As of August 15th, the simple fact is Ontario end-users can see the potential abundance of available corn come this harvest season. There is no incentive to boost basis under these circumstances. This is an aside from the fact that there is a huge crop in Michigan, a traditional import market into Ontario. Basis levels reflect this putting a damper on Ontario new crop bids.
Another factor weighing on the Ontario basis levels is the fall storage situation. At the present time, wheat and old crop corn are taking up storage space. With the scenario of a fairly large soybean crop in the offing and a possible record Ontario corn crop, storage will be an issue this fall. It sets up the specter for a sloppy basis, where circumstance will determine the daily price of corn. An early frost could change the situation, but as of August 15th, with average weather going forward, Ontario corn looks to be high yielding and possesses higher test weights compared to 2009.
Ontario old crop corn basis levels at southwestern Ontario elevators as of Aug 13th ranged from -.45 to -.50 under the September futures compared to -.13 to -.25 under the nearby September reported last month. The Eastern Ontario old crop basis was in the – 10 to-.25 range under the September 2010 corn futures. Old crop elevator bids as of August 13th varied across the province in a range from $3.62 to $4.02/bushel. New crop corn for fall elevator delivery in 2010, as of Aug 13,th was priced at $3.72 to $3.87 bushel. On Aug 13th, US replacement price was down 2 cents/bu from last month sitting at $4.22/bushel.
All corn prices can be accessed by clicking here.
The Bottom Line
Are all the ducks in a row or is something amiss in the corn market? The wide-open spring with great planting conditions has translated into the largest crop in US history growing in the fields. The same could be argued for the Ontario corn crop. There is seemingly corn "everywhere". Why have corn futures prices risen far above the $4 mark? Why is there such a dichotomy between corn futures prices and the corn basis reality on the ground? What happens next?
In many ways, it's about chasing headlines and the tales between two markets. It's a story between market conditions affected by heat and drought in Russia and the market conditions of commercial interests here in North America. There is no question; the heat/drought related problems in Russia and the states of the former Soviet Union (FSU) have affected corn futures markets. Wheat has skyrocketed up despite still onerous world supplies. Corn and soybeans have been caught in the updraft. However, among commercial interests on the ground in North America, a record corn crop is in the offing. They can see it coming and basis levels in the cash market are reflecting those realties. Who'll win? It's a balance as always, based on timing and the weather going into September.
Still, it must be argued that corn took a bullish turn coming out of the lower ending stocks in both old and new crop coming out of the July and August USDA crop reports. In June we found out we had less corn acres than expected and both the July and August reports show lower ending stocks because corn demand continues to grow. In fact, it's growing more than even record production can keep up with. When you add in the new Chinese demand, it's pretty obvious the futures market has a job to do to ration demand for both old and new crop.
When this will manifest itself is another matter. End users are expecting high test weight corn and record yields piled higher and deeper than ever before this fall. This is being reflected in new crop basis levels, which may grow even weaker at harvest. Despite this, ending stocks will shrink and the market will have to forge new crop prices to get farmers to satisfy this demand in 2011. It's hard to say whether these lower basis values will do it. At a certain point futures and cash markets need to move together to release old crop supplies as well as garner 2011 corn acres. It will happen and when it does, corn farmers will surely have the marketing opportunities.
Considering the fundamentals of supply and demand is one thing. In 2010, it pretty obvious there is much more affecting corn prices than "the fundamentals". The Russian drought is one thing, but sovereign debt concerns in Europe remain a major factor in currency markets serving as a push button to increased value in the US dollar. This along with increased ETF influence in futures markets add to the volatility within corn markets. Keep in mind, some people might equate volatility with risk, others might equate it with "opportunity". It's a mixed bag.
In Ontario, a dry August and September may shave off bushels from what is considered a very good Ontario crop. With regular rainfall going forward we should see big pressure on harvest basis this fall. In fact, corn will probably be moved out of the province on an export floor price, depending on how big the crop is. Some of this corn may be exported to smaller nations looking for corn replacing American corn shipped into China. With the Chinese showing consistent interest in American corn, Ontario corn priced at an export floor may find its way into some traditional American markets.
What could change this? Farmers refusing to sell in the cash market are one factor. There certainly could be others related to weather and an increase in corn futures value. Frost also looms as a sledgehammer factor to all of the above. Simply put, under the present market conditions, end users and market traders cannot afford an early frost in 2010. Supply and demand is just too tight.
Ethanol is another matter. In 2010/11 35% of American corn goes for ethanol. In fact, at the present time the Americans produce more ethanol than they can blend. Current tax credits are at risk and the EPA decision for E15 (gas blended at 15% instead of 10%) continues to be delayed. Everything ethanol in the US is highly dependent on future American political decisions.
I have asked this before, with our modern 2010 corn hybrids garnering increased yields, is a $3.50 Ontario cash price the new $4? Some might argue it is, some would not. Certainly the Canadian dollar at .9682 cents US has something to say about that, or are those prices something from the "old world" which will soon be forgotten about. The challenge for corn producers is to market this big crop in front of us. In August 2010, volatility - yes, surprise - yes, the unexpected - yes. However, there is a lot of corn out there. Hedging that risk, while looking forward to capturing more market opportunities going into September is the matter at hand.