Corn farmers continue to be bedevilled by low corn futures prices. In Ontario just over a year ago, for instance, the December 2015 corn futures price on August 4, 2014 closed at $4.15 per bushel. This year on August 5, the December 2015 corn futures price closed at $3.78.
In the history of agriculture, this type of price movement is very common. It isn’t unusual to see the price of a particular commodity lower than it was the year before. In the case of corn, new technology and modern management methods have certainly given producers the ability to produce in spades, and we have also seen a fluid market environment, where the whole world has begun to enjoy growing corn, especially at the price levels we’ve seen in the recent past.
Of course, that $3.78 corn futures price on August 4, 2015 is a long way down from corn’s record level of $8.49 achieved in August 2012, but it’s hard to forget how much fun corn production can be at those futures price levels.
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What has also become apparent since then, however, is that everyone wants a share of that pie. Even though global demand has been increasing at record levels, supplies have been keeping up and ending stocks have grown over time.
Nobody knows the future, and the 2015 crop is not in the bin yet, but its potential is still huge, and Canadian farmers will have to use their best market acumen to garner profits from corn moving ahead.
According to the July USDA report, there were 88.9 million acres of corn planted in the United States in 2015. The USDA has pegged corn production at 166.8 bushels per acre for an impressive 13.530 billion bushels.
This is not a record crop, but it is still one of the largest of all time. At the same time, the USDA reports that total use for the 2015-16 marketing year will be 13.735 billion bushels, which is at record levels, so ending stocks should move down as long as demand is maintained.
In the 2015 growing season, corn production in the United States has been severely impacted by wet conditions in June, which at the time of this writing had not been estimated. For instance, large expanses of Indiana, Illinois, Missouri and Iowa received excessive amounts of rain in June. This is likely to affect corn yields as well as harvested acres in later USDA reports. This may factor in a smaller U.S. corn crop being realized in the later months of 2015.
The size and the scope of the 2015 U.S. corn crop is still to be determined. Futures prices will react to whatever the market feels the value of corn will be at any future date. However, the real story for Canadian grain farmers in 2015 is the precipitous drop in the value of the Canadian dollar.
In fact, you could argue that this has been the whole story for Canadian agriculture since the dollar was at par in December 2012. The simple fact is that grain and other agricultural commodities are priced in U.S. dollars. It is the default currency of the world. Our Canadian cash prices are largely based on the foreign exchange calculation and as our Canadian dollar gets cheaper compared to the U.S. dollar, Canadian cash prices to producers are higher. In many ways, this devaluation in the Canadian dollar has shielded Canadian farmers from the futures price malaise in corn.
Of course looking ahead to the devaluation of the Canadian dollar gives us opportunity, but it remains an extra layer within Canadian grain-marketing management to get right. As producers, how do we hedge our risk with regard to the futures value of grain, versus the value of the Canadian dollar? Many times those two factors do not move in the same direction and it makes for a more complicated marketing decision. Just looking at grain futures without a keen eye on the movement in the Canadian dollar can lead to frustration. It is all part of risk management, and with corn looking ahead it will remain a very important part.
What are some of the factors that may affect the Canadian dollar movement going into winter? Simply put, the Canadian dollar is traded on currency markets every day and its value is a measurement of its demand.
Interest rates are a key factor. When the Bank of Canada raises interest rates, typically the Canadian dollar goes up and when it lowers interest rates, typically the value of the Canadian dollar is down. At the same time, the Canadian dollar typically has an inverse relationship to the value of the U.S. dollar.
In the last several months the U.S. dollar has been gaining in value, partly because of the healthier U.S. economy and the outlook for the U.S. Federal Reserve to increase interest rates. This constant movement of U.S. and Canadian variables has a distinct impact on the Canadian dollar and thus our Canadian grain prices.
Although the Canadian dollar is an extremely important factor affecting cash basis values for corn, there are historic factors that always come into play with regard to the behaviour of the Ontario corn basis.
Historically, Ontario exports corn into the United States at harvest time to create space and then imports it back in the following late spring or summer. This creates a very low basis at harvest and possibly a higher “import” basis later. However, in later years Ontario has produced more corn, which sometimes means we export all year. 2014 was not one of those years. Much Ontario corn was exported out early with U.S. corn being imported later. In 2015 we have approximately 2.055 million acres of Ontario corn, which may produce 325 million bushels of corn.
How this is used throughout the marketing year will largely impact the corn basis. Daily intelligence is key.
There is opportunity here for eastern Canadian corn producers. With the Canadian dollar down it has mitigated the price drop in futures. However, don’t be fooled by the optics. If futures prices ever rise substantially, with the Canadian dollar at the 75- to 80-cent range, cash prices will go much higher. It is all about the relationship between futures values and the value of the Canadian dollar. When the value of the Canadian dollar is substantially lower than par, movement in cash prices can be even more volatile.
The road ahead will certainly be an important one for market action. Monthly scheduled USDA crop reports will continue to serve as flashpoints for corn futures price movement. The October USDA report and the final USDA report in January 2016 are very important reports which can spur violent price movement. This is in addition to any other news from USDA.
There are also all the other macroeconomic factors that can and will affect the grain futures markets. The continuing pressure on the euro from Greece and strength of the U.S. dollar will continue to weigh on grain futures prices.
As well, corn from areas like the Black Sea region and South America will continue to find its way into world markets, and late-summer and fall weather in the United States will impact U.S. crop size.
In sum, rallies within this marketing environment surely need to be rewarded.
With new-crop cash corn currently running at $4.25-bushel in southwestern Ontario, as of August 5, 2015, it is a leap of faith looking forward.
There may even be a “black swan” event affecting the market, which may change everything. The challenge for corn farmers looking ahead is to assess all of these factors and how they will affect futures values and basis.
Risk management never grows old. The challenge is to keep on top of it.
This article was first published in the September 2015 issue of the Corn Guide.
