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What’s in store for corn markets in 2018?

For Canada’s corn growers, it is the best of times and the worst of times

There is no question that growing corn is a rewarding thing to do. Increases in productivity over the last several years have helped farmers boost yields across Canada as well as throughout the greater American Corn Belt. This has led to an abundance of corn on the ground almost everywhere, but with a corresponding drop in price. We can’t have everything.

Now, as we look out into 2018, corn growers have a myriad of corn market factors to consider.

Corn growers are caught in a vicious cycle. With burgeoning new technologies embedded in every corn seed, there is a constant yield improvement, which is increasingly turning into a default. Some might argue that corn yields are going up exponentially.

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Importantly, this phenomenon is true not only in Canada and the United States. It’s also taking place around the world, and it has led to a corn market of ever-increasing supply that in turn drives down corn futures prices.

Of course, we’ve seen vicious cycles in agriculture before, including the kind that leave us asking: What has to come first, the chicken or the egg? Does corn supply have to collapse, or can we hope the global demand will grow even faster?

Regardless, as we move into 2018, we’re getting a fairly clear picture of what we will be facing. The challenge for corn farmers will be to find marketing opportunities despite this cycle.

We need to ask ourselves a few questions. How much corn will be planted in the United States and in Canada, especially in Ontario and Quebec in 2018? Will there be a shift away from corn to soybeans? Will the corn futures price remain in a low range between $3.38 to $4? Will corn demand continue to grow within this cheaper price environment? Is there a black swan event looming on the horizon, which may send corn futures prices much higher?

In the middle of winter, estimating and musing about the 2018 corn crop remains only hypothetical. However, a look back at the 2017 growing season gives us some indication of where the market may be heading.

During 2017, American farmers planted 90.4 million acres of corn, harvesting 83.1 million acres according to the November 2017 USDA report. At the start of the 2017 growing season there was much conjecture within the market that higher soybean futures prices might actually lead to the United States planting more soybeans acres than corn. However, this did not happen; soybean acres came in at 89.5 million acres planted.

The pricing scenario going into winter of 2018 is similar. For example, November 2018 soybeans at the end of November 2017 were $10, while December 2018 corn futures were $3.83. The U.S. cash price using DTN’s national corn index on December 1 was approximately $3 per bushel, with many sub-$3 prices across much of the corn belt. Soybean cash prices were $9.19 per bushel.

How these ratios will affect planting intentions in the spring of 2018 is anybody’s guess. However, like 2017, there is a signal to plant soybeans over corn. Whether it manifests itself in similar corn acres in 2018 will be a major factor in corn futures prices.

USDA released some early projections in late November 2017. They predicted that 2018 corn would come in at 91 million acres with an average yield of 173.5 bu./ac. At current demand this would result in a 2.6-billion bushel ending stock, a huge number. At the same time they predicted that soybeans would tie corn for acres at 91 million, with an average yield of 48.4 bu./ac. and 376 million bushes in ending stocks. These are very big numbers versus 2017.

The acreage numbers will be important in 2018 for shaping the future of corn supply. Increasingly, it’s obvious how resilient the newer corn hybrids are. Statistics Canada this year is predicting an Ontario corn yield of 169.5 bu./ac., which is close to a record. At the same time in the November USDA report the U.S. corn estimate of 175.4 bu./ac. was a record yield.

This came about despite a growing season that was uneven in many parts of the U.S. Even though the USDA initial figure for 2018 is 173.5 bu./ac., with benign weather, that yield could be substantially higher, even more than 2017.

This could catapult us into an ending corn stocks situation that would be worse than onerous, and that would have the effect of keeping corn futures prices in the low range.

This range as we headed into winter was seeing March corn at $3.53 per bushel and December 2018 corn at $3.86 per bushel. This is happening in an ever-expanding supply situation, but demand cannot be ignored. Simply put, corn demand is strong and has been at near-record levels over the last couple of years.

In 2017-18 total corn usage in the U.S. is slated to come in at 14.435 billion bushels. With last year’s production from the November report of 14.578 billion bushels, there is not a lot of room for a production calamity. Needless to say, so far the corn supply is outstripping the record demand and it needs to stay that way for prices to stay low.

The big demand components for U.S. corn are feed and residual at 5.575 billion bushels; food, seed and industrial at 6.935 billion bushels; and ethanol at 5.475 billion bushels. These components, along with exports, make up total demand. The ethanol component of this demand continues to grow slowly but it is unlikely to ever repeat the explosion of 2008. However, low corn prices will likely continue to stimulate feed and food demand. Corn exports from the U.S. largely depend on price as well as the value of the American dollar. Recent moves by the Trump administration against Mexico, the largest American export destination for corn, has led to a curtailment in shipments.

There are more geopolitical issues beyond the tension between the U.S. and Mexico. For instance, China is moving toward a policy of a 10 per cent ethanol blend in gasoline nationwide by 2020. At the present time there are approximately 205 million cars in China, which consume 3.8 billion gallons of gasoline. China has huge corn reserves and much of that would be consumed in expanding their ethanol mandate by 2020. An expanded Chinese ethanol corn policy may ultimately result in an increase in corn demand by 1.4 billion bushels. Of course, it should not be forgotten that this is unlikely to help the corn price in 2018, but it could ultimately be part of future demand helping out our corn price.

In Ontario, corn production in 2017 was approximately 2.015 million acres. Historically, Ontario consumes more corn than we produce. In the past, this has meant that corn has been exported during harvest time (low basis) only to be imported back in during the later parts of spring and summer, when it creates a better basis.

However, this is changing as corn productivity in Ontario continues to grow. It is conceivable that in the future, Ontario corn may remain on an export basis continually. (Conversely, if Ontario domestic demand for corn can be increased substantially, cash basis levels may be sustained at certain times a year, while the Eastern Ontario basis will likely continue to always be higher than cash basis levels in southwestern Ontario.)

The Canadian dollar will have an effect on this to some extent. However, its value does not affect corn basis levels in Ontario as much as it does Ontario soybeans and wheat, where the cash price optics in Canadian funds often look so different than cash prices in the U.S.

Of course, what’s needed to lift corn futures prices is some type of production calamity somewhere in the world to bring corn supplies down. History tells us that this will happen someday. However, when corn futures prices reached $8.49 in 2012, we taught the rest of the world to grow corn. Overseas production in Brazil and the Black Sea region continue to be resilient.

To Canadian corn farmers hoping for $6 corn again, I say, keep hoping. But at the same time, always remember that hope is not a marketing plan.

There hasn’t been a kernel of 2018 corn planted yet. There surely will be marketing opportunities ahead as there are all kinds of potential risks in the coming year. The challenge will be to capitalize on some of these corn-marketing opportunities in a generally bearish environment.

Let’s keep our eyes open. In 2018, there surely will be some surprises.

This article first appeared in the 2018 issue of the Corn Guide.

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