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Finding hope in 2017 corn markets

It’s easy to be pessimistic due to global corn stocks, but demand is setting new records too. So consider posting some standing market orders, and watch prices daily

Every year farmers go to the field hoping for something better than last year, and even though now is the dead of winter, plans are being made to raise a successful corn crop in 2017.

For eastern Canadian farmers, corn has earned its status as the “go-to” crop for the region. A few years ago, this was because the price was quite high, but lately it has more to do with productivity. In 2015, the Ontario corn crop yielded roughly 170 bushels per acre. And in 2016, despite drought in many parts of the province, the overall yield is still likely to finish in the 160 bushel per acre range.

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Over the last 20 years, corn productivity has been climbing by approximately 2.3 bushels per acre per year. However, in the last five years this productivity rate has been accentuated upward, largely thanks to genetics.

Of course, productivity is a vicious cycle; the more corn we produce, generally speaking, the more corn we find on the world and Ontario corn markets, pushing the price lower. It’s a never-ending conundrum, as we saw again in 2016 when U.S. and worldwide corn production increased.

So as we look into 2017, corn producers face a challenge of abundance. In 2016, the American farmer produced a record crop of corn, which is weighing on our corn futures market. Despite not having highly profitable signals to plant corn in 2016, those U.S. farmers produced a record crop of 15.226 billion bushels, according to the November USDA crop report. The U.S. had an average yield of 175.3 bushels per acre, another record. The new record (15.226), when compared to the 2015 total of 13.601 billion bushels, seemed almost science fiction in its magnitude.

This big crop in the United States forced an early low in the corn market of $3.14 on August 30. Corn futures prices rose after that into late October only to fall to $3.37 on December 2. Needless to say, this big crop continues to weigh on corn futures prices. Projected ending stocks for the 2016-17 corn-marketing year have ballooned to 2.403 billion bushels.

With that as a backdrop, producers in Eastern Canada have a great challenge as they look out into 2017. How many acres should be planted to corn in 2017, especially at a time when soybean prices have been more buoyant? What are the factors that will affect the market in 2017, perhaps pushing the corn futures price higher? How will the Ontario cash corn market be impacted in 2017, especially at a time of a low Canadian dollar? What are the other market factors aside from supply and demand that may play a role in the price of corn in 2017?

It is easy with those large supply numbers to be somewhat pessimistic on corn for 2017. However, the one shining star within the corn complex is record corn demand at 14.610 billion bushels as of the November 2016 USDA crop report.

This demand is higher than 2015 corn production and continues to grow, which is a very good thing because it is preventing futures prices from going lower on the year when we have had record crops. It is also a very good thing because the growth in corn demand will not be easily slowed when corn production is curtailed someday through some type of weather-related event.

In times of big surplus, that reality can seem so far away but, in fact, it will happen at a certain point. This record demand will eventually help the corn price, although getting there may be an adventure.

Part of our jigsaw puzzle may be put in place this coming winter with the production of corn in Brazil. USDA is currently estimating the corn crop growing in Brazil to 83.5 MMT, but many private estimates within Brazil are higher. Argentina is also set to produce more corn this year, and those two areas in the southern hemisphere will be important to watch this winter as their crop matures. This production coming out of South America may have a further impact on the futures price.

South America, parts of the Black Sea region and a few other countries have an impact on the price of corn in some parts of the world through their exports. However, the United States is by far still the largest producer of corn in the world and the largest corn exporter.

Looking ahead into 2017, the number of U.S. acres that get planted to corn will have a big effect on corn prices. In 2016 American farmers planted 94.5 million acres of corn, which was significantly higher than the year before where they planted 88 million acres. In the spring of 2016 there was little price incentive to plant that much more corn, but it was done anyway. How might this manifest itself in 2017? Will the American farmer plant just as much corn? Or more? Or much less?

An argument could be made in the late fall of 2016 that there would be more soybeans planted versus corn in 2017. The reason for that is that soybean futures were $2 higher than at the same time in 2015 for an extended period of time in the late fall of 2016. With record soybean yields coming off the fields in 2016 and with significantly higher soybean futures prices, an argument can be made for a switch to soybeans in 2017.

Of course, at this early stage it is difficult to say. With corn productivity jumping on an annual basis, those price incentives might not be as powerful as they once were in the decision-making process, and good planting weather can also do wonders for spring corn planting.

But then, too, there are lots of unknowns ahead, including how the Trump administration will deal with ethanol and any changes in the renewable fuel standard. There is also concern how agricultural trade might be affected under a Trump administration.

In the late fall and especially after the Trump election, the value of the U.S. dollar has strengthened significantly. Eco­nomic growth rates in the United States are rising and this has also caused the U.S. dollar to rise. With the possible interest rate hike from the U.S. Federal Reserve, this will likely strengthen the U.S. dollar further. A stronger U.S. dollar is a headwind for corn futures prices as it makes it more expensive in foreign currencies. In fact, a higher U.S. dollar is mostly a negative for agricultural commodity demand. As we go into 2017, this remains a concern.

In Eastern Canada, our US$0.75 dollar as of early December has helped Ontario cash grain prices go over $4 bushel. Earl­ier in 2016 Ontario had an import basis for corn. However, a crop that was deemed damaged in Ontario from drought has been much better than expected, and Ontario basis levels have dropped partly because of that.

With the ending of the Ontario Ethanol Growth fund on December 31, 2016, those plants will lose their subsidies. However, the Ontario ethanol sector is strong because of the support they had received, and will likely be healthy into the future.

Last year Ontario planted 2.015 million acres of corn and in 2017 will likely plant that again or more, especially since wheat acres are down slightly from 2016 levels. As of early December 2016, new crop cash prices for corn are approximately $4.60 per bushel on a December 2017 futures value of $3.77.

As we look into 2017, the challenge for eastern Canadian corn farmers is to measure all of these market factors. A production calamity somewhere in the world will likely be needed to shed much of the burdensome supply within this market. 2017 weather in the prime U.S. corn-growing areas will likely determine the size of the crop again. On that path, there will be much uncertainty as the crop is made.

That means there will be many marketing opportunities for Ontario farmers, who, at the same time, must factor in the volatility of the Canadian dollar.

As winter goes along the possibilities may become clearer. Standing pricing orders are always useful. Daily market intelligence is key.

This article was originally published in the January 2017 issue of the Corn Guide

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