The US replacement price for Ontario corn is currently approaching $5 bushel. In fact last Wednesday I calculated US replacement price at $4.96 cents. That’s the Michigan FOB price –15 over the nearby futures price of $3.92 cents US. Add 40 cents US for transportation and convert to Canadian funds and it looks like a $5 US replacement price for Ontario corn is just around the corner.
US replacement price means what it would cost to land US corn into Ontario. It effectively puts a ceiling on Ontario cash corn prices. Right now, those cash prices are significantly below US replacement cost. That means the Ontario corn basis is extremely soft, not what it really should be.
So what’s up? I’ll let you figure that out. The Agridome is not the forum for that. Just keep in mind the Ontario corn crop this past summer ballooned to about 165 bushels/acre. This is 20 bushels more than the record yield last year and light years away from what Ontario can usually expect. There is still corn everywhere and surely much of it will be exported out into the United States.
Corn has lost about a dime in the futures market over the last week. In fact when the futures price hit $4.00 US it was almost like everybody jumped into cold water. It would seem nobody wanted to run it up any farther. Getting those additional acres will have to wait, at least for now. With the March 30th prospective planting report looming in the future, traders are searching for that pricing Holy Grail. Prospective is just that. Nobody knows. When we blow the dust off the corn planters then the real fun will start.
What will it be, 6, 7, 10, 12 more million corn acres? I don’t know. It is so different from where we were just six months ago. Trying to determine how the psychology of the market changed is always a question I ask. If you have any ideas about this you should chime in by writing me an email.
You might remember last summer when corn prices were in the $2.30 range. Many of us couldn’t understand how ethanol was ever going to be the saviour for corn farmers. Then fast and hard they surged through harvest time. I recently asked a grain trader why we were all standing around last summer talking about why corn was so cheap. He mentioned the “funds.” Once they got a sniff of making some money Vis a Vis bio-fuel, the rest as they say was history.
So where do we go from here? Of course if we knew that I’m sure we’d live on a beach somewhere instead of looking outside at –20 degrees C. I have always cautioned audiences who think that the good times might just keep rolling. However, as I’ve said many times before, “this isn’t your father’s market.” In many ways it’s all about the demand.
What you say? Keep in mind as farmers at least over the last fifteen years we are not used to a demand driven market. OK, yes we did see $7 corn in Ontario in 1996, which had to do with Chinese demand in the futures combined with a very low loonie. Aside from that aberration, we’ve always been so concerned with supply. However, this past year we had the third biggest crop in US history and price has skyrocketed. Clearly, there is something different going on.
It’s like one of my DTN readers once told me only a month ago. He said, “Phil, there isn’t really a shortage of corn is there?” At the time I started to laugh. However, since then I’ve thought about it many times. Maybe it isn’t so funny. Maybe his statement represented the change in the psychology within this new market environment. Maybe he was struggling with the demand part of the equation. We’re almost hard wired that way. Thinking there might be some type of “third force” out there in form of bio fuel is just hard to get used to.
So we need those ethanol plants built, lots of them and especially in Ontario and Quebec. However, maybe the days are gone where you built a plant and paid for it in one year. Wow, that’s not like farming. Maybe it’ll take a few more years to pay off. With $4 corn, $2 ethanol and $55 dollar oil this whole thing just might come unraveled.
But I don’t think so. The real price effect of this thing won’t take effect in Ontario and Quebec until next year. It’s unlikely there will be a mammoth Canadian crop again. There will be more ethanol capacity built. There will be gaps. Pricing opportunities will be many. Finding your way in this maze will be the real challenge.