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A strategy for uncertain corn markets

Market fundamentals are excellent, and European sales will surely help. But what will Mr. Trump do next?

Growing corn can be an exciting and rewarding experience. Over the years we have seen amazing genetic improvements from the hybrid corn that we grow in our fields. Then, with planting taking place in late April and early May in Ontario and Quebec, it takes almost no time before the corn is poking through the soil and exploding with growth, especially under great agronomic conditions.

Some farmers on social media have even spray-painted their corn on Friday and checked it on Monday. Invariably, there’s a couple of inches of new growth as that corn plant drives itself to tassel on its way to yielding a bountiful harvest.

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When it all works, it’s a beautiful thing, (although if weather doesn’t co-operate there can be some bumps on the road!)

Needless to say, corn production in Canada continues to be resilient.

In 2018 corn is mainly used for ethanol, feed and food and industrial uses in Ontario, Quebec and Manitoba. For instance, in the East, approximately a third of Ontario’s crop goes to ethanol production at the different plants throughout the province.

Ontario has had a five per cent ethanol mandate in its gasoline for several years now and is currently moving toward a 10 per cent mandate, which will require even more ethanol. The rest of the corn crop goes into the feed and residual market, which includes DDGs (dry distillers grains). Corn is exported and imported under some circumstances. It’s vital to the health of the Ontario and Quebec economy.

In 2018 according to Statistics Canada, Ontario will produce 2.2 million acres and Quebec will produce 953,000 acres of corn. This represents an increase of 1.7 per cent and 1.5 per cent in corn acreage in Ontario and Quebec, respectively, over 2017.

In 2018 Manitoba planted 428,000 acres of corn, which represents an increase of 4.4 per cent over its 2017 acreage. With Canada’s northern climate, it will always be somewhat of a challenge to push these corn acres upward. However, there is corn acreage across Saskatchewan, Alberta and British Columbia. There is also corn production on a smaller scale in Prince Edward Island, New Brunswick and Nova Scotia.

The challenge for Canadian corn farmers is to produce the crop profitably and to find their sweet spot within the greater global corn market. Corn is traded reasonably freely around the world so it is able to move in and out of Canada depending on the price incentive.

Ontario and Quebec corn producers have enjoyed tariff-free access to the European Union since the adoption of the CETA agreement in 2017. This was also enhanced because the Europeans imposed tariffs on U.S. corn going into Europe after the Americans applied steel and aluminum tariffs on the EU earlier in 2018. It was a bit of an anomaly in 2017-18, but realistically it’s just another example of the myriad market factors which affect the movement and the price of corn.

Corn is grown and exported from Ukraine, Argentina and Brazil, but the world’s biggest producer, the United States, largely determines the overall crop price. The cash value for corn in Ontario and Quebec is largely founded on the corn futures price originating out of the Chicago Mercantile Exchange, adjusted by a “basis value.”

This basis value can be positive or negative versus the respective futures month. For instance, the new crop price of corn in Chatham, Ont., for August 11, 2018, was C$4.72. This was calculated based on a December futures value of $3.72 cents plus $1 basis value. Basis is the value which determines when grain is moved, bought or sold. It is a reflection of local supply and demand in Canadian dollar terms.

The road to determining the cash price for corn in Ontario, Quebec and Manitoba is always a long and winding one. Corn conditions and weather variables in the United States are always the major factor.

What makes 2018 very different compared to other years is that the American farmer actually planted less corn in 2018 than soybeans. This was the second time in history it has happened. In 2018 the USDA has projected U.S. corn acreage to be 89.1 million acres, with soybeans surpassing it at 89.6 million.

As of August 10, when the USDA released its first “in field” survey of corn conditions for the 2018 crop year, the December futures price for corn is $3.71. Earlier in the crop year on May 24, the December futures price reached its high of $4.29. This 58-cent decline in the futures price for corn was related to multiple factors affecting grain markets in 2018. One of those factors is the benign weather that has nurtured the corn crop throughout the summer of 2018, benefiting U.S. corn production.

On August 10, the USDA predicted U.S. domestic national corn yield was at a record level of 178.4 bushels per acre. This was greater than 2017, when yield was 176.6 bushels per acre and greater than the 174 estimated by the USDA previously in 2018. The market was also burdened by the 1.68 billion bushels, an increase of 132 million bushels from the month before. Clearly, these were bearish numbers tempering corn futures prices and futures expectations.

2018 crop weather has been good for corn production and the resultant price drop could almost be telegraphed under these conditions. However, what is different in 2018 is the effect of geopolitics on the price of grain.

With the American move to impose steel and aluminum tariffs on China earlier in the summer there was always a spectre of Chinese retaliation for such a move. That came in early July when the Chinese imposed a 25 per cent tariff on American soybean imports into China.

This was a major geopolitical reason for the $2 drop in the price of soybeans over June and July 2018. Corn prices also fell to some extent in sympathy with that move. The resultant “trade war” atmosphere has led to widespread bearishness in the grain complex.

Changing that phenomena can come quickly or not at all. When pricing grain, it’s very difficult to predict.

The challenge for Canadian corn producers is to price their corn profitably in this environment. Earlier in 2018, $5 new crop pricing was available and surely there was much contracted at that. Basis values for corn fluctuate to some extent based on the seasonal nature of the corn market in Eastern Canada, and to a lesser extent, the value of the Canadian dollar.

Historically, we’ve had too much corn at harvest time, which has been exported out to the United States at fire sale prices only to be imported back in in late spring or early summer. This caused a harvest time low with basis values improving later. However, it is changing greatly as the export market to Europe has gotten better because of CETA.

Also, too, Eastern Ontario basis has traditionally been much higher than Southwestern Ontario. In 2018, this is not as apparent. Typically, as you move east into Quebec, flat pricing of corn becomes more popular. It also can become less transparent. Knowing your local market conditions becomes more important.

Managing all of these market factors can be daunting. Standing pricing orders where farmers can set a cash price with their buyer is one way to manage the risk. Futures can be volatile as can cash basis. Often this volatility happens so quickly, it’s hard to nail down. However, standing pricing orders for corn resting there can get that done. With so many factors swirling within the corn market for 2018 and 2019, it’s a good strategy to employ.

This article was originally published in the Sept. 2018 issue of the Corn Guide.

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