Corn, Ethanol And Livestock Can Co-Exist In Canada
Market action this week has been volatile. Last week we were wondering what the USDA prospective plantings report was going to say and then last Tuesday we found out. According to the USDA farmers are going to plant about 85 million acres of corn and 76 million acres of soybeans. Since last Tuesday markets have been boiling with both commercial and noncommercial traders trying to figure out what to do.
The report did surprise me. I thought that there would be a lot less corn and a lot more soybeans. Needless to say the market was surprised too. I guess you could say that we are into our seasonal rally, which generally takes us into July. When the acreage report comes out at the end of June, that’s when we might see even bigger fireworks.
The futures market is one thing and your local basis in Canada wherever you live is another. As I said a few weeks ago in London Ontario, the futures market is a sexy thing to talk about because price movement usually is much more volatile and the nonfarm media seems to fixate on futures prices. So when I saw Pat Hill’s recent market matters blog regarding the Ontario corn basis, it was a refreshing interlude among all the different futures prices I watch everyday.
Pat Hill’s market matters blog needs to be required reading for all of you reading this column. A few days ago I read her blog posting and she was talking about flying into Washington DC in order to be prepared for the USDA announcement or at least that’s how I read it. A few days later she sent me a note saying she had heard a Dr. Al Mussell of the George Morris Center in Guelph Ontario speaking at a Farm foundation presentation. Dr. Mussell was describing the Ontario corn demand basis situation in the context of the growth in Ontario ethanol production and its effect on the livestock industry. I’m sure Pat might have been hearing little voices from me so she e-mailed me and asked me to comment on what Dr. Mussell said about corn prices and livestock production in Ontario.
I don’t want to repeat what Pat has written in her blog entitled “Ontario Corn Basis Drivers “. However basically it had to do with the theory that the Ontario corn basis is being driven to an “import basis” by the emergence of the Ontario ethanol sector. Also it was mentioned that the strengthening basis would decrease feeder livestock demand, which in turn will dampen long-term corn demand forcing the basis back to an export level, which has been more traditional in Ontario. As you can see from that blog posting I don’t agree with that at all.
Knowing what is going to happen in the future is something of course everybody wants to know but nobody does. Take our corn situation in Ontario right now. At the present time there is corn everywhere in Ontario. Now some of you might doubt that but the corn basis in Ontario right now at elevators is plus $.45 over the nearby futures mark giving us a price of about $4.50 for a bushel of Ontario corn. However the US replacement price for corn today in Ontario is approximately $5.38 a bushel.
What does this say about corn as a feedstock in Ontario at the present time? What it says to me is corn is a bargain price for Ontario livestock. Yes, you could argue if we didn’t have an Ontario ethanol complex that the price of corn might be a dime cheaper but the reality is Ontario corn production has been so vibrant the last couple of years that import values for corn haven’t been realized until late summer. In 2009 at the present time it looks to me that import values for corn won’t be here until maybe August. However, if the corn basis gets sloppy, there are exports bids out there right now for Ontario corn in Hamilton Ontario. So if we start actually exporting corn offshore that will act as an exhaust valve for Ontario corn bringing an import basis sooner rather than later. Needless to say, this situation at the present time is a boom for anybody in Ontario who wants to produce livestock.
So I’m very glad that Pat Hill gave me the chance to counter the views expounded by the spokesman for Guelph’s George Morris Center in her blog posting. Some of you might say that I have a biased opinion too because I write the commodity commentary for the Ontario Corn Producers Association and I grow corn in Ontario. I plead guilty to all of that, however, remember I have a long paper and letter trail behind me plus several stops at farm rallies across the province earning my credibility card.
The economics behind corn pricing and basis in Ontario are very simple. It’s all related to US replacement price for corn and how Ontario end-users manage that. Sure the Ontario ethanol complex plays a role in that too. However keep in mind there is lots of room in this province and country for livestock, ethanol and corn. The hard part is to filter out the nonsense and get everybody to believe that.