The Rural Voice, 2006-06, Page 48Grain Markets
Ethanol plants changing U.S. markets
Dave Gordon
is a
commodities
specialist
with LAC,
Inc., Hyde
Park, 519-
473-9333.
By Dave Gordon
May 23, 2006
Markets in all sectors have been
quite volatile over the past month.
The Canadian dollar hit $.91 U.S.
gold went well over $700, silver got
well past $14 and grain prices
showed signs of much stronger
prices. Pretty much every commodity
has retraced part of their gains but
many analysts look for still higher
prices as we move into summer.
The one non -grain commodity that
we need to be wary of is the
Canadian dollar. At $.91, prices
equate to the levels of 1978 when our
dollar was coming down from the
highs of $1.03. The strength of the
dollar has certainly affected basis
levels in all grains and producers will
need to come to terms with this fact.
It appears that gold and oil prices
need to lose a lot of their gains if we
are to see much of a drop in the
Canadian dollar and I see these
commodities staying strong.
Corn:
The USDA released their first
supply/demand for the 2006/07 corn
crop. In the first report of the year,
they use the acres from the planting
intentions report and generally use a
trend -line yield. Acreage will not get
adjusted until late June and the
thought is that possibly an extra one
million acres got planted this spring.
The report as issued, showed a
carryover in 2007 of 1.14 billion
bushels or about half of this year
ending stocks.
The most striking thing to me is
the projected increase in corn demand
of more than 600 million bushels. For
the first time, corn use for ethanol is
equal to exports. And with the
number of ethanol plants that are still
44 THE RURAL VOICE
in the planning stages and yet to
come on stream, I can see that
demand will continue to increase.
Corn prices responded to this
supply/demand report with a move
higher of about $.20 to $2.87 on the
December futures. Just six months
ago, December corn was trading at
$2.37, so we have seen a good move
to this point.
In Ontario, basis levels have
continued to weaken in Canadian
funds. Currently. old crop basis is
zero while new crop ranges from $.15
to $.20 over December. I expect as
much or maybe even more corn will
be carried over in Ontario as last year
and storage will be at more of a
premium as well. The biggest wheat
crop in history will he harvested this
summer and with a lot of last year's
crop still around, storage may stay
full a little longer than intended.
Producers need to make plans right
now about getting grain moved this
summer and if shipping will be a
problem, contingency plans need to
be in place. Those plans may include
more bin space.
Soys:
The USDA actually left soybean
production unchanged from last year
even though acres were increased by
more than four million. The
difference came in yield, which was
estimated at 2.6 bu/acre less than in
2005. The main difference in demand
was the increase in exports of almost
200 million bushels. Even with
unchanged production and increased
demand, carryover in 2007 was
increased to 650 million bushels.
Soybean prices, however, have
actually gained a little since the first
of May because of striking farmers in
Brazil. Producers have actually been
able to stop soybean movement into
some major ports and as a result,
buyers have brought some of their
business to the U.S. As well, early
thoughts are that soybean plantings
will be down substantially in Brazil
this year because of low prices. The
fact that their currency, the real, is
very strong does not bode well for
higher local prices either.
In Ontario, cash prices remain flat,
as the strong dollar has put basis
levels into a negative. However, we
do think that soybean acreage in
Ontario at least, will be down this
year due to the large wheat crop and a
corn crop that may be unchanged
from last year. An early dry spring
usually puts more corn acres in the
ground than intended.
Last month, I wrote about the
potential impact of new ethanol
plants being built in Michigan.
Today. Indiana has one ethanol plant
in operation. But if 50 per cent of the
planned projects get into operation.
there will be 20 new plants by the end
of 2007 using at least 400 million
bushels of corn. Every day, a new
plant gets announced with great
fanfare and many are never heard
from again. However, ADM, which
currently produces one million
gallons of ethanol per year in the
U.S.. is planning to build two new
plants that will produce another
500 million gallons per year. We
can be sure that these plans will get
built.
I can see corn prices eventually
getting to the point that corn acreage
in Ontario will go back up to two
million acres. Of course, there will
still be price cycles to contend with
and corn will have to compete with
other crops to get that acreage, but I
think that soybean growers in
particular, are seeing the need for
more crop rotation and corn will fill
that requirement. The final figures are
not in for this spring but I think corn
acres held steady at 1.5 to 1.55
million in Ontario. Many growers are
finding that their yield ratios favour
corn over soybeans and think they
can at least make a buck growing
corn.
There is no doubt that cheap corn
and expensive oil along with
government legislation have
encouraged expansion in the ethanol
business. This growth in demand is
the key to higher corn prices in the
future and may also lead to massive
changes in cropping patterns around
the world.0