June 30th USDA Report Surprises: All Bets Off Going Into August

The June 30th USDA planted acreage and stocks report blew me away.  Back on March 30th the USDA said the American farmer was going to grow 90.45 million acres of corn.  Frankly, I had a hard time believing that.  So when the USDA announced on June 30th 92.88 million acres were in the ground in the US, it was a new day.  The American farmers had done it.  Give them a whiff of profit and some decent weather and those corn planters rolled this past spring.

In Ontario we’re sitting at about 2.2 million acres of corn, up from the 1.5 million last year.  Not only do we have more corn but also we’ve got a completely different culture.  Where once nobody believed we’d go back over 2 million acres in Ontario, now its done and the price picture has completely changed.

On June 18th I wrote my last commentary for the Ontario Corn Producers Magazine.  One problem with picking fixed dates in a moving market is it’s hard to describe a situation accurately.  On June 18th the July 2007 corn futures finished at $4.16/bushel, September at $4.24/bushel and December 2007 at $4.23 bushel.  As I write this the July 2007 corn futures is $3.24/bushel, September $3.32/bushel, December $3.42/bushel.  It was like the sky had fallen.  There was corn everywhere.  At the end of the day Ontario producers are facing fall 2007 cash prices below $3/bushel.  The situation changed dramatically in only a couple weeks.

For many in Ontario, the “ethanol gold rush” is over.  It’s especially true because Ontario is dry.  I know first hand that corn is burning up in the field.  I measure rain in drops now versus inches.  The only problem is a 200-bushel crop at this stage costs the same as a 90-bushel crop I might have growing in the field.  Going into 2008 many Ontario farmers will be planting wheat to beat the band.  It’s pretty clear even at this early stage Ontario will be challenged to maintain corn acres going into 2008.  Too many things are coming together to work against that.

The 841 lb guerilla in the chicken coop is the Canadian dollar.  Last Thursday it closed at 94.64 cents US. It’s been at that level for a couple months now.  It was just below 85 cents on Jan 5, 2007.  Surging a dime in that short time period is close to being unprecedented.  The pressure on Canadian cash grain prices has been significant causing large negative basis levels.

Corn is one thing soybeans are another.  In my part of southwestern Ontario you see a lot of soybeans simply because the fall of 2006 prevented most of us from planting wheat.  However, in the rest of the North American farm belt there were significant choices make this past spring and that was to abandon soybean acres to corn.  In the June 30th report USDA came out with a soybean number of 64.08 million acres with a trade range guess averaging 68 million.  Wow!  Soybean prices surges higher.  The riddle had finally been answered.  A lot of soybeans were left behind this past spring.

So if aphids’ attack and soybean rust moves north we’ve got a mess right?  Hmmmm, well not so fast.  Soybean stocks have actually climbed from 990 million bushels last year at this time to 1.09 billion bushels right now.  The August 2007 soybean futures last Thursday closed at $8.60 up from a Sept 12th 2006 level of $5.87/bushel.  Needless to say the defensive price move up over the last six months to defend acres didn’t do its job.  Or can we surmise that the price move up actually kept soybean acres from moving even lower?

There still could be many price fireworks left in the summer of 2007.  If the greater Corn Belt were getting Ontario weather we’d have $9 corn.  However, they don’t so let’s forget about that.  Consider this.  What have we learned in 2007 about price, production and acreage shifts?

I think a few things.  One thing is we should never doubt the American farmer’s capacity to grow corn.  They have the production capacity, the will and the subsidy theme park to get it done.  With oil prices rising it would seem the future of ethanol still has some wind in its sales.  In Ontario, there are too many “gaps” between corn production and ethanol utilization.  New ethanol plants won’t be on stream until 2009 and many might never see the light of day.

If you had told me this was going to happen last year at this time, I’d would have told you were nuts.  That is the greatest lesson in July 2007.  Last year everybody thought something had to happen but nobody knew the timing.  Great price volatility ensued.  Going into August I think all bets are off.