Corn market 2016

How big to go with corn this spring? The answer may be very big indeed

Philip Shaw

Philip Shaw
photo: File

Change is our only constant in agriculture. It seems only a few short years ago that corn farmers in southwestern Ontario used to hope to get 150 bushels per acre come harvest. In fact, much of that hope was confined to the southwest where corn was first grown in the province.

In 2015, Ontario grew approximately 2.1 million acres of corn and the average yield is likely to be at a record level above 165 bushels per acre, up from 2013 and 2014 when the provincial corn yield rang up 160.5 and 160.9 bushels per acre, respectively.

Gone are the old yield paradigms when it comes to corn. Clearly, corn has a solid place in the crop mix for Eastern Canada.

As we look into 2016, there are many factors to measure with regard to the corn market. In Ontario in 2015 there were approximately 600,000 wheat acres. Going into 2016 there are approximately one million wheat acres, so there will be 400,000 to 500,000 acres available for new production in 2016.

Ontario producers will need to weigh the options on whether to put that into corn next spring. Surely some of that will depend on weather but it will also depend on the dynamism within the corn market going into 2016.

2015 was not a good year for corn prices. In fact it has been a long slow march down in corn prices since August 2012 when corn futures reached $8.49 a bushel. Since that time corn production has increased around the world, but also in the U.S. where large corn crops have become consistent over the last few years. For instance, even after the horrendous wet season in parts of the eastern American Corn Belt in 2015, farmers managed to produce their third-largest crop in history at approximately 13.655 billion bushels. This was at an average yield of 169.3 bushels per acre, which was the second-highest yield ever recorded in the U.S.

With these yields being achieved in a somewhat difficult production year in the U.S., it makes farmers north of the border contemplate how much bigger the corn yield could have been if weather had been benign across the whole American Corn Belt.

This big crop in the U.S. contributed to the erosion in corn futures prices. The nearby corn futures price by mid-November was hovering around $3.55 per bushel, a far cry from those record levels in 2012.

It had not been straight down, however. In fact, prices bottomed out in October 2014 at $3.18 per bushel, with a lot of essentially sideways movement  over the last year.

But, of course, as we look toward 2016, nobody wants to keep going sideways.

What must happen for us to see better futures prices?

The simple answer is that there needs to be some type of production calamity in the corn market in order for prices to go a lot higher.

Of course, that is not really a secret. Nor is it a secret that nobody really wants it to happen to them! We know that our American friends will likely plant approximately 90 million acres in 2016. If they have some type of production nightmare next summer, prices will move up.

However, between then and now it might take some seriously bad production news in South America to give a little bit of fresh momentum to the futures market. Brazil continues to be a tough competitor to the U.S. in the corn market, and with its opposite growing season any production hiccup in their fields will be watched closely by the futures market.

Meanwhile, we need to recognize that there are lots of headwinds for corn, with the big global supply being one of them. The value of the U.S. dollar is particularly high, which does hinder futures price appreciation. If the U.S. Federal Reserve decides to raise interest rates into 2016, this likely will increase the value of the U.S. dollar, which will be another negative for futures prices. In fact, commodities as a whole have been suffering from the high greenback.

For the Canadian corn farmer, the futures market is one thing, but the cash market is a completely different animal and it must be watched very closely. For instance, in November 2014 the nearby December futures were $3.81 per bushel. There was a plus $.25 basis for a cash price of $4.16 to the producer at local elevators in southwestern Ontario. In Novem-ber 2015, the December futures price is $3.55 per bushel (26 less on futures than 2014) but there is a plus $.90 basis giving a cash price of $4.45. The difference is partly the Canadian dollar, which even in mid-November 2015 was approximately US$.75 versus November 2014 when the Canadian dollar was at US$.8854.

That is the power of the Canadian dollar. Foreign exchange can make up such a difference in cash prices to the farmer.

The value of the Canadian dollar going into 2016 will be key. Of course the question can be asked, is the low value of the Canadian dollar helping us or fooling us? There is no question it is helping us get a better price in Canadian funds, but it might be fooling us in that the lower value of the Canadian dollar means that it will take more corn bushels to buy inputs such as fertilizer, fuel and equipment priced in American dollars.

This paradigm really never changes for Ontario farmers, but it’s one to consider. As we look into 2016, the value the Canadian dollar will remain a very significant factor.

It will be significant because if there is any futures price rise in corn, the low loonie means there will be an exponential rise in cash price to eastern Canadian corn farmers. To some extent on corn it is a straight conversion on basis. As futures prices move up from their contract lows, that conversion will add dollars and cents to our corn price.

This will be a significant market factor to keep in mind as we price our corn and make our marketing and production plans for 2016.

Of course corn basis in Ontario and Quebec is not totally a conversion of the Canadian dollar. The price of corn in Eastern Canada is totally related to the replacement value of U.S. corn that may be imported. Ontario cash corn prices usually bottom out with harvest basis. Sometimes Ontario corn is moved into the U.S. at harvest simply to make room. As corn is used up in Ontario and the price approaches replacement value from the U.S., American corn will be brought in, which essentially raises the basis. There is always a balance and it doesn’t always quite work this way.

However, in 2016, like always, the Ontario cash price for corn will always be related to the value at which it can be replaced by U.S. corn.

There are variations on the theme in eastern Ontario and Quebec depending on their crop size. In 2015, the corn crop in both eastern Ontario and Quebec is very good and it is likely that some will be exported at Quebec saltwater ports.

In 2016, eastern Canadian farmers will find themselves facing these local market conditions and it will be important to measure just where they are in the market and how that might affect their profits.

For instance, looking again at bids through the fall, in mid-November we were seeing new crop basis bids range from plus $.65 to +$.85 over the December 2016 futures for delivery to an elevator in the fall of 2016. FOB bids would be even higher.

If there is any rise in the December 2016 corn futures price currently trading at $3.87, $5 cash corn is entirely possible in some parts of Eastern Canada.

Every corn farmer must measure whether they go big in corn acres or not. Corn’s productivity yields rewards. In 2016, with good weather, that productivity should be even higher.

This article was originally published in the January 2016 issue of the Corn Guide

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