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Market Commentary

By Kevin Hachler

March 13, 2012


At the beginning of this calendar year, the corn market was still trying to figure out how to deal with a 2 billion plus bushel US carryout.  Chicago corn had drifted towards $4.00 from $4.50 at harvest and speculative money was betting that prices would fall further.  Since then, it appears that the corn market has solved the problem of having too much corn and prices have recovered.  

Users of corn have been making money, while producers of corn have been reluctant sellers.  Now, demand has increased enough such that the USDA's corn carryout estimate has shrunk below 1.5 billion bushels.  Speculative shorts in the market scrambled to cover positions and Chicago corn tested the $5.00 mark in recent weeks; a jump of 24% from its lows in early January.

Despite the higher corn prices, ethanol margins remain positive and continue to support maximum production.  Feed users are also making money, but there are questions about whether or not feed usage at 5.3 billion bushels is overstated.  While a harsh winter likely increased the need for corn, a 22% jump in feed usage compared to last year is difficult to believe given that there are fewer animals being fed.  In recent years the USDA has struggled to get a good handle on quarterly stocks and has adjusted feed use as a way of explaining wild swings in stocks.  Analysts are watching to see if feed usage estimates will be lowered on March 31st as a way of explaining an unexpectedly high stocks figure.

Offsetting the potential for lower feed usage is the prospect of increased exports.  The Ukraine is the world's third largest corn exporter with annual exports projected at 730 million bushels.  Only the US (1.6 billion bushels) and Brazil (790 million bushels) were expected to ship more corn than the Ukraine this year.  About 500 million bushels of the Ukrainian corn crop has already been exported, leaving roughly 230 million bushels left to ship.  So far, conflict in the Ukraine has managed to stay out of major corn growing areas and away from the main shipping ports.  Buyers however, are reluctant to add to purchases until the situation becomes more stable.  Although it is impossible to know by how much Ukrainian exports will fall, it is difficult to imagine that they will fall by more than 150 million bushels for the current year unless the conflict spreads rapidly to the Western regions of the country.

The US is likely to be the biggest beneficiary of any reductions to Ukrainian corn exports as corn production prospects for South America have been moving lower.  Full season corn in Brazil was adversely affected by dry weather early in the growing season and wet weather more recently has delayed planting of the second season corn crop.  Argentinean weather has improved to help finish off the corn crop, but overall South American corn production is expected to fall by upwards of 700 million bushels compared to last year.

Looking ahead, the corn market is likely to consolidate recent gains ahead of the major crop reports at the end of March.  The March 31st Quarterly Stocks and Prospective Plantings reports should set the tone for the next major market move.  As long as weather co-operates this summer, the corn market can still absorb additional exports and reduced acreage compared to last year.  US corn inventories could be maintained with a 90 million acre crop and a modest 160 bushel yield, but most analysts are estimating that acres fall somewhere between 92 to 94 million. 

The threat of Chicago corn prices that start with a three may have subsided for now, but given that supplies are comfortable, prices much higher than here are also not warranted.  It would take an acreage surprise, poor growing conditions this crop year, or a major escalation of conflict in the Ukraine to spur a major leg higher.  If these factors fail to materialize, the corn market could start to look forward to its next 2 billion bushel carryout dilemma by summer.

Here in Ontario, farm bins remain full of corn and domestic users have good coverage into summer.  Producers have finally let go of some ownership during the recent market rally, but still have a long way to go.  If and when they do finally decide to sell in the coming months, the domestic users may be largely covered.  Upside in basis levels will hinge on the value of the Canadian dollar as export values are likely to dictate what the local market can pay.

Early surveys suggest that producers are not willing to give up on growing corn just yet, and if conditions warrant, they may try to grow as much as last year.  Even if production falls, corn carried over from this year will help to meet market demand next year.


The world's soybeans are displaced in both time and space.  The US is running out of supply in the short term while the rest of the world is actually awash in soybeans.  With acres set to be record high this spring, even the US may be swimming in soybeans by this fall.  The soybean market appears set to swing drastically from deficit to surplus.  Trying to figure out what this means for prices is proving difficult as evidenced by massive swings in the Chicago soybean market in recent days.  Old crop Chicago soybean futures do not necessarily need to go higher to get the job done as spreads between markets in terms of time and space can do much of the work.

So far, heavy selling by producers and commercials in the US has been able to accommodate strong demand for both export and crush markets.  A shortage looms this summer however as producers and commercials are running out of old crop soybeans that they can sell and export sales on the books already overshoot the USDA estimate by 4%.  The USDA is forecasting ending stocks for the current marketing year at a minimal 141 million bushels.  Ending stocks realistically cannot fall much lower than current levels because not every bin in the US will simultaneously run empty of soybeans on September 1st.  Something has to give.  Either export sales need to be cancelled, crush needs to be reduced, or imports need to be increased to solve the balance sheet. 

Strong exports to China have thus far defied talk of impending cancellations.  The time to cancel export sales is running out fast as weekly shipments continue.  To date, more than 86% of the USDA's forecast for exports has already been shipped.  The current pace of shipments only needs to continue for a few weeks before cancellations are no longer an option.  At this point, the market will need to import from South America or curb crush in order to bridge the gap until new crop.

Prospects for the soybean crop in South America have been hampered somewhat by early season dryness and harvest has been slowed by wet weather more recently.  Despite this, South American production should still be upwards of 5% larger than last year's record harvest.  Values in South America have fallen sharply in recent days.  Logistics are much improved compared to last year and export prospects are diminishing.   China is sitting on a glut of soybeans, crush margins there are negative, and the market is concerned about China's economic health.  Diminishing values in China and South America would relieve pressure on US old crop prices.

New crop Chicago prices are likely to take some direction from old crop, but will largely need to trade as a separate marketplace.  The amount of soybeans carried into next year is likely to be as close to zero as possible.  As such, new crop supply will not be affected by old crop carryout, and new crop soybeans cannot be used to satisfy demand for soybeans now.  In other words, factors that may be supportive to the old crop soybean market this summer may be nothing more than neutral to new crop soybean values.

Because the North American soybean pipeline will be starting from zero this fall, a big crop is needed.  What is not needed however is too big a crop given that world supplies are high and margins in China are weak.  Soybean acres in the US are expected to be large this spring; potentially even record large.  The Prospective Plantings report at the end of March will give new crop beans a sense of direction heading into spring.  Current new crop Chicago prices of $11.50 leave room for the market to swing in either direction.  Producers should have some soybeans booked to protect against good weather, but should also leave room for any surprises that may come.

In Ontario, producers have sold almost all of their old crop soybeans.  Old crop basis levels are likely to remain volatile as crushers will look to balance ownership with a slow pace of meal sales.  The market is heavily inverted, and end users will be reluctant to own too many soybeans in an environment where the appetite for meal is uncertain. 

Soybean acres in Ontario are expected to be up significantly from last year, but new crop basis levels continue to be very strong.  Last year, end users and exporters were heavily sold going into harvest and logistical pipelines stayed empty for much longer than anticipated.  This pushed values far higher than expected through harvest; a time when basis levels tend to fall.  End users and exporters appear reluctant to repeat last year's scenario and are already posting strong numbers to secure ownership.  The Canadian dollar has stabilized for the time being near the 90 cent level.  This has given producers here a roughly $1.50 boost compared to a par dollar and has encouraged a great deal of forward selling by producers.