Corn at $8: The Next Time I’m Selling a Million Bushels

I put my combine away last week after finishing corn.  Like others across Ontario this year, I had at least one farm go over 200 bushels/acre plus. (210 bushels)  However, my other farm on heavier soil after two years of soybeans planted on a stale seedbed went 176 bushels/acre.  I claim victory in both cases.  However, its funny how things go.  Now that 200 bushel/acre is getting common, I feel like I just watched a tie hockey game.

However, I got some of those high prices, so maybe I’m just getting greedy.  Needless to say, I didn’t see the greater picture any more than the best analysts in the land.  If you had told me oil would be under $60 on November 13th, last July I would have said you were nuts.  Of course last November the loonie was $1.1009, now 81 cents, how the mighty have fallen.

Clues to our price picture lie in what the cost of commercial carry for grain between futures months and the respective future months spreads.  For instance on Thursday according to Elaine Kub’s closing comments the December to March corn futures spread closed at 17.75 cents or about 88% of commercial carry.  In other words, the commercial trade really doesn’t want that corn right now, and are more than willing to wait.  As that commercial carry number gets lower, the appetite among the commercials to get that corn increases.

Compared to the overheated, testosterone induced great ethanol gold rush bull market of last year; it is a bit like eating cold poutine.  It is a bear market and if you joined into Darin Newsom’s excellent webinar this past week, you heard it first hand.  It is what it is, the non-commercials are long gone in the numbers we saw last year and the global economy continues to contract.  Needless to say, I think I’ve been here before, but it has never quite felt like this.

In Canada of course we are back to a more traditional basis/futures relationship.  We are here for a couple of reasons.  The big reason of course is our lower loonie.  It is very good news for Canadian agriculture on a whole host of fronts.  It should jump start the Canadian hog industry again.  Anything, which makes hogs more attractive to our American friends, is a good thing.  I know Canadian hog cash prices are no heck right now, but I expect that to change into 2009 and especially 2010.  The other reason we’re back to more traditional basis is because super high futures prices have retreated.  Simply put, when futures prices for corn were above $7, basis values are completely decoupled.

On the flip side of course the low loonie makes farm machinery more expensive and will surely have the same effect on fertilizer come next spring.  It also has the effect of “lulling” Canadian farmers into a false sense of security.  Hiding behind a 15-20% foreign currency bonus often times doesn’t do a lot for individual productivity.  Many years ago I used to call it “farming in our 65 cent world.”  I’m not ready to say, “we’re back”, but we may certainly be on our way.

That again would help the Canadian livestock industry.  The corn feed numbers over the last few years illustrate how much that industry has been impacted.  In Ontario corn for feed is projected at 160 million bushels for 2008/09 down 13 million bushels from last year and down 25 million bushels from 2005/06. (OCPA Supply and Demand October Report)  Increases from corn ethanol use in Ontario have made some of that up, but at the end of the day, it may become a bit of a wash.

That’s because ethanol is in trouble.  According to DTN’s Ethanol and Dairy editor, Rick Kment, the premise for a successful corn–based ethanol program is corn prices near the $2 to $3/bushel level with elevated gas prices.  We certainly don’t have that now and you should expect corn usage for ethanol to drop this winter and spring from the 4 billion mark it is currently being pegged by USDA.

Nonetheless, ethanol has been in trouble before and lived to survive another day.  In Ontario, in this current climate I cannot see Hensall being built as well as others being considered unless things change dramatically.  Even the carrot of the Ontario Ethanol Growth Fund’s $512 million dollars might not help.  However, if 2008 has taught us anything, it’s to never say never.

We’ll see.  Last week, USDA chimed in and said we’d have 12.020 billion bushel of corn and 2.921 billion bushels of soybeans.  Like I say in my speaking engagements, “that’s a lot of corn and beans.”  In this new post ethanol gold rush bear market, I can’t see it going away real soon.  Cash in on those market spike opportunities.  The next time corn gets to $8; I’m going to sell a million bushels.