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Taming bearish corn markets

We’re back to the corn prices we saw before the great ethanol boom, but weather is always a wild card

Heading into harvest, it’s easy to see all the reasons why the bear market could dominate our winter. But the market is fluid. Nothing ever stays the same forever, especially in corn.

The 2016 growing season in the United States has been excellent for corn production, and it’s making distant memories of the 2012 drought that reduced U.S. corn yields and sent prices into the stratosphere.

Such a severe drought doesn’t happen very often. At that time it drove corn futures to an all-time high of $8.49 a bushel, which not surprisingly then made the whole world want to grow corn, and which in turn is why prices have slid the long way down ever since.

But market demand is its own story. For instance, this year the USDA is projecting corn demand to be 14.5 billion bushels. This is huge especially considering that last year at the same time corn use in the United States was lower than this by 500 million bushels.

The world still wants corn, especially at lower prices. It is almost like a challenge of abundance. Good weather and improved genetics and crop management produce ever bigger corn crops.

However, that abundance usually comes with lower prices and bigger surpluses. At mid-July 2016 the old-crop corn stocks-to-use ratio was still sitting at 14.7 per cent, compared to last year’s 12.4 per cent.

Strong corn production in the U.S. is the key to sustaining these markets.

Getting here has been an adventure, however, and it has taken the better part of eight years since that first run-up in corn futures prices to the $8 level.

Before 2008, U.S. corn farmers were given the challenge to produce corn for ethanol to satisfy the renewable fuel standards (RFS) brought in under the U.S. Energy Act. At the time this meant that corn production would need to climb significantly in order to satisfy this demand. As prices went up because of increased ethanol demand, the 2012 drought added to the corn price effervescence.

Today’s ethanol demand for corn in the United States is 5.275 billion bushels, but production has risen over time to feed this demand, and we are now back to futures prices similar to those before the great ethanol boom erupted.

The implications for corn producers especially in Eastern Canada are telling. Over the last eight years, corn prices have been significantly higher than the $3.30s we saw in August. Many younger producers have become used to those prices.

At the same time, corn productivity has shown healthy annual gains partly based on improved genetics and management techniques. This has led to higher profits than usual in the corn market.

Now, in 2016 it looks like those days are over.

Big production in the U.S. has been the biggest reason for the lower futures prices. On August 12, 2016, the USDA released its corn estimate of 15.153 billion bushels, up significantly from its estimate of 2015 at the same time of 13.6 billion bushels. Even with the huge demand figure of 14.5 billion bushels, U.S. ending stocks are expecting to come in at 2.4 billion bushels. These huge supply numbers have swamped the corn market.

Clearly, it is what it is, but for producers with corn there is hope. Markets are cyclical and the corn futures market is legendary for its gyrations. The U.S. corn yield projection from USDA is 175.1 bushels per acre going into the September USDA report.

Any change in U.S. yield projections will have an impact on prices. The Brazilian crop was down 10 per cent in 2016, meaning Brazil will import U.S. corn for their poultry sector.

Interestingly enough, change may come from North American production in 2017 with the possible formation of a La Niña weather pattern and unfriendly crop conditions. Although, this might be a factor for prices in 2017, some of it will surely catch some of the 2016 old crop.

Weather is always a wild card, and this surely will continue.

In Eastern Canada the saving grace for Ontario and Quebec cash prices has been the value of the Canadian dollar as of August 2016 valued at approximately US$0.7680. This has been extremely important to cash price, although in some ways, it’s a bit of a price illusion as low corn futures prices in the $3 to $4 range translate into Canadian cash prices of $4 to $5 a bushel. As the Canadian dollar gyrates, so too does the cash price.

The Canadian dollar is a thinly traded currency compared to the U.S. dollar. As the U.S. dollar moves, usually the Canadian dollar moves in the opposite direction. Global instability usually means strength in the U.S. dollar and acts as a drag to agricultural commodity demand.

Brexit’s continuing instability should support the U.S. dollar, and future moves by the U.S. Federal Reserve to possibly raise interest rates would support it too. This will continually give clues on the direction to the Canadian dollar and basis levels.

The Canadian dollar affects basis levels for corn, but the eastern basis is also influenced by the quality and quantity of corn supplies within Ontario and Quebec. In 2016, the crop size is still being measured, but it will clearly be significantly less than the 170 bushels per acre recorded in Ontario in 2015. In fact, Ontario has been importing corn in the summer of 2016 and if drought conditions continue in many parts of the province, an import basis may become much more common.

In other words, expect higher basis levels than the past few years for Ontario corn. Drought does have its price, and for many regions of Ontario in 2016, the corn crop is paying that price.

This will be very challenging to Canadian corn farmers. In August 2015, the Canadian dollar was valued at approximately US$0.91. In August 2016, it is approximately US$.7680. That movement in the Canadian dollar during late 2015 was the whole story with regard to pricing cash corn during that period. This is always the inconvenient truth of pricing corn in Canada. Futures prices move and do what they do, but when you have a precipitous drop in the value of the Canadian dollar like we saw last fall, sometimes that is the key factor to pricing Canadian grain. It is really nothing new, but going into the harvest of 2016 foreign exchange is likely to remain very important.

The market reality in August 2016 for corn is bearish, but keep in mind that the market is very fluid.

Nothing ever remains the same, especially when it comes to corn futures prices and the corn market.

It also may mean, the bottom is yet to be found. Much will depend on the U.S. dollar value going forward as well as how South America adapts to changing corn prices. With the Brazil crop size down this year, will they plant more next year? Argentina is expected to plant more corn in the fall as the new government has changed the schedule of export taxes on commodities.

No discussion about the corn market is ever complete without talking about ethanol. In the U.S., ethanol demand is the highest ever, but much will depend on the outcome of the U.S. presidential election. A different president may have a different opinion about continuing the ethanol mandate.

In Ontario, subsidies from the Ontario Ethanol Growth Fund come to an end on December 31, 2016. The administrative end of the program comes at the end of March 2017. Ontario’s ethanol refiners will have to find their way forward.

It is a low-price corn scenario, which we’ve seen before. However, change is our only constant in agriculture. Combines are yet to roll and late-summer weather could still change the U.S. yields.

USDA reports will surely continue to serve as flashpoints for price volatility. The challenge for eastern Canadian corn growers will be to market where they are profitable and comfortable. There will be corn-marketing opportunities ahead. Daily market intelligence in both the cash and futures market will be key.

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

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