Breaking Free From the Dow: Agricultural Markets Are Poised

Next week I’ll be speaking in London Ontario at the Western Fair Farm Show about corn futures and our enigmatic Ontario corn basis.  It would be easy to get up and tell everybody you should have sold everything last Canada Day, but something tells me that’s not why they asked me to appear.  With GM shares dropping to less than $2 today, there is a lot of explaining to do.

If you watch Darin Newsom and Bryce Anderson everyday on your DTN monitor, you get the picture.  They have been tracing the movements of the Dow downward, reaching levels today we haven’t seen in 12 years.  The grains have been highly correlated with the Dow Jones ever since we blew the tops off last summer.  Now even with relatively bullish commercial market conditions, grains are still having a hard time getting from under the Dow.  Looking ahead we can only hope.

Keep in mind looking in the rear view mirror when it comes to our marketing doesn’t do a lot of good.  What you really should do is look in the rear view mirror and tear it off and throw it in the ditch.  Once you make a marketing decision, forget about it.  Move on, conditions change and we must always change with them.

Still with grain futures decreasing with the Dow, you’d think even in these tough economic times, they are getting too cheap.  In other words at a certain point the Dow is taking them down too far, to a point where grain demand will come back with a vengeance.  At a certain point, grains will break through that.  However, even though that makes sense, keep in mind we still don’t know if the Dow is going down to historic levels.

Price change might come in the strangest of ways moving forward.  Take the Ontario ethanol complex for example.  Compared to our American cousins we’re not even on the radar map.  However, Ontario has built itself a relatively strong ethanol complex when the rest of the ethanol industry stateside is currently undergoing a severe rationalization.  It has helped Ontario corn prices stay where they are.  Looking ahead, the Ontario ethanol complex may offer even more opportunity.

At the present time in Ontario, we’ve got Johnstown, Aylmer, Chatham, Suncor (phase 1), Collingwood and Tiverton operating.  Kawartha is expected to come on line in July 2009.  The Suncor (phase 2) is delayed until early 2011.  Hensall, north of London is still only a theory.

Upper Canada Ethanol (UCE), Northern (Barrie or Sarnia), First Nations (Perth South), Farm Tech (Oshawa) and Greenfield (Hensall) are known to be planned but there is no construction started or set.

In 2008 actual ethanol production in Ontario was approximately 470 million litres.  However, not all of the plants currently producing are up to capacity.  When they get there we’ll be up to 700 million litres.  By the end of 2009, when Kawartha comes on board Ontario will be pushing 800 million litres which will about match what we need to fulfill the requirement of 5% ethanol in Ontario gasoline.

What’s this mean for Ontario corn growers?  800 million litres of ethanol translates into about 82 million bushels of corn.  This year if Ontario farmers plant 1.5 million acres of corn, with a 145-bushel yield, we’ll produce 217 million bushels of corn.  That’s down from past years, but answer me this question.  Where would we be as Ontario corn growers if we didn’t have an Ontario ethanol complex that has been successful in getting up to capacity?  It would be very similar to Ontario wheat, which has a small domestic usage with everything else having to be shipped out on the world market.

At the same time of course we hear of our American ethanol cousins who got some bad hedging advice and have asked for bankruptcy protection.  The theory is of course that they’ll be resold, on pennies on the dollar and start up again when the ethanol economics are right again.  However, in Ontario you don’t hear about anybody going broke.  Sure there are plants not being built, but nobody is talking about bankruptcy protection.

However, not everybody agrees with how we got here.  Livestock interest surely chafes at how ethanol has changed the Ontario pricing paradigm.  Regardless, the Ontario ethanol complex changed the market structure for Ontario corn.  Into 2009 and 2010 it will surely affect positively on Ontario basis levels.  It doesn’t act in consort with the Dow Jones.  Needless to say, however, if there were no Ontario ethanol complex, the effect of the Dow meltdown would be that much greater.

Take that as a positive moving forward.  The last few weeks and months on the market haven’t been pretty matching loss for loss on the Dow.  However, there are fundamentals at work within this market like the Ontario ethanol complex, which are working.  Sooner or later agricultural markets are going to shed the Dow shackles and break free.