July corn futures closed last Thursday at $3.73 a bushel. That’s a world away from the sub $2.50 levels we saw last year. However, it’s a world away from last February 22nd when the July futures price closed at $4.57. What were we thinking then? Was the sky the limit? Did everybody have ethanol on the brain? As the snow blew, I don’t think anybody had a handle on it.
Of course everybody was thinking back to 1996 when corn reached $7/bushel in Ontario. Corn had never been to such lofty levels before. Since then everybody has been waiting for that to happen again. As the “Market Trends” writer for the Ontario Corn Producers Association, I don’t feel like saying its going there. Nobody knows that. Simply put the grain markets will kill you every time you think you have them cornered. Yes, this isn’t your father’s market. There is just too much bio-fuel on the horizon to go back to those days.
The monkey on every Canadian farmer’s shoulder has been the resurgent loonie. In January it fell below 85 cents US only to rebound breaking though the 91-cent mark this past week. This unexpected move from the Canadian dollar has kept basis under control. In fact for Ontario soybeans it’s pushed into deep negative territory. The old crop corn basis on the other hand has withstood it to some extent. Old crop corn basis values have shrugged off their moribund values and have been gaining over the last few weeks.
For corn producers it’s a nervous time. Nobody wants to miss this ethanol boat. We’ve had to many years of poor corn prices. Having said that $3.50 looks a lot better than $2.30 farmers were getting last year. I don’t know if that’s what you call bullish, but that’s what a farm supply colleague accused me of last week.
When he said that, I just looked at him and said, “Did I say that?” He responded by saying I did. However, I don’t remember. My job is always to tell the story. When prices are elevated from historical levels like they are now, marketing is always more crucial. When prices are historically low, there usually isn’t much room to move but up.
So as we move into both the Victoria Day and Memorial Day weekend, weather becomes even more crucial. Conditions have been wet in the Midwest with planting only slightly behind the historical average. In Ontario plantings have been held up by rain and snow earlier. By June 30th we will know much more. Can Ontario and Quebec produce another bin buster going into fall? Can the Americans pump out 150 bushels/acre on 90.45 million acres? The next eight weeks will be full of price volatility as traders try to answer those questions.
So with that let’s stop for a moment and think about what’s actually going on around us. Some of you may have heard me say, “This is not your father’s market.” I say that because of the big bio-fuel component now in the corn market and a lesser extent in the soybean market. However, is this new market sustainable? Will society maintain the political will to subsidize ethanol production? Will the geo-political environment around the world be maintained to foster the American will to get off foreign oil?
All of these things are relevant questions. Key will be American policy. President Bush has set a goal of replacing 15% of domestic gasoline use with bio-fuels over the next 10 years, which would require almost a fivefold increase in mandatory bio-fuel use, to about 35 billion gallons. At the present time, almost all of this bio-fuel would have to come from corn because cellulosic ethanol still lags behind. Keep in mind, achieving the 15% goal would require the entire current U.S. corn crop, which represents a whopping 40% of the world’s corn supply.
So in some ways there is lots of room for things to go awry. There is lots of room for government and society to change their mind. With food being used for fuel at a rapid rate compared to the past you can almost hear the environmentalists starting to howl. What will happen then to the government protection bio-fuel enjoys now?
For corn producers and ethanol producers the time is now. It’s good for us. Plants are going up everywhere. The corn is mostly in the ground and the weather is getting warm. Nevertheless, keep in mind the road ahead holds many caveats. Depending on what happens this summer, there may be red flags everywhere come 2008. Politics and society’s dalliance with bio-fuel may be fickle at the best of times. No, it’s not your father’s market. Let’s just hope our greater political society keeps buying in.