The Rural Voice, 2006-07, Page 48Grain Markets
Seeing the forest through the trees
Dave Gordon
is a
commodities
specialist
with LAC,
Inc., Hyde
Park, 519-
473-9333.
By Dave Gordon
June 23, 2006.
We have all heard the phrase
"Can't see the forest for the trees"
and this certainly describes many
producers today. There are those who
cannot see beyond today's low prices
and who think that prices will never
get any better. On the other hand,
there are producers who are so bullisli
on commodities, that they cannot
accept the low prices of today.
I believe that even advisors and
traders are blinded sometimes by this
phenomenon and get caught staring at
the headlights when they should be
pulling the trigger. At times, we think
that we are smarter than the market
only to be proven wrong. The grain
business has changed dramatically
over the past 15 years and the stage is
being set for more changes that will
have a huge impact at the farm level.
CORN:
The U.S. crop is knee to waist
height as we await the USDA's
acreage report on June 30. Most think
that corn acreage will be 1 to 1.5
million acres higher than the March
31 planting intentions report. Rainfall
in the eastern corn belt has been
widespread but there are some areas
west of Chicago that are very dry and
need relief soon.
At this time of year, markets seem
to focus on supply and forget about
the demand side. We tend to look at
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44 THE RURAL VOICE
the weather and the condition of the
crop until at least mid-July and then
question how good pollination is and
when the next rainfall can be
expected. In other words, we try to
micro -manage everything that can
affect production, but shove the
demand part of the equation to the
back burner. Generally, we come to
expect usage to increase from year to
year, but this time around, USDA has
projected a huge increase in demand
from the ethanol industry for the crop
year 2006 - 2007. If we look at the
new ethanol capacity that is planned,
there should be big increases in
demand in each of the next two or
three years. This demand will be the
driving force that gives producers
better prices in the future but today
all it does is keep prices from
collapsing any further.
In Ontario, basis levels continue to
slip as the Canadian dollar hovers
around the $.90 U.S. mark. Demand
for old crop has been weak for the
past two months with most end-users
being offered more corn than they
could utilize. Producer selling
though, has slowed with the lower
prices even as storage space needs to
be freed up prior to wheat harvest.
Who will give in first — the producer
or the processor? If the processor has
to move first, basis levels will
strengthen somewhat, but if the
producer jumps first, basis will stay
under a lot of pressure.
SOYBEANS:
The USDA will post final soybean
acreage on June 30 and thoughts are
that acreage will he down by 1 to 1.5
million acres, which will have been
added to corn. In the last
supply/demand report, this year's
carryover was raised by five million
bushels due to lower crush. The
projections for this year's crop will
likely show lower production using a
trend line yield of 40.7 bu/acre. If
nothing else changes, total use may
also match production but there is
still a lot of water to go under the
bridge before this crop is made.
If the U.S. matches the yield of last
year, total production could reach 3.2
billion bushels thus increasing
carryover to about 800 million.
In Ontario, basis levels remain
weak with big stocks still in storage
around the province. Crush is well
behind last year's pace and exports
will not be able to make up the
difference before this crop year ends.
If exports can reach 22 million
bushels, carryover from last year's
crop may reach 23 million which
would be an unprecedented number
for Ontario. The size of this carryover
will certainly have a negative impact
on new crop basis at harvest.
I started out talking about
perceptions and how people draw
different conclusions from the same
information. Actually, this difference
in thinking is what makes a market.
I think that it is very important that
producers be well read and informed.
I have met very few people who have
studied the ethanol industry in depth,
but those who have, realize the
potential that exists in the next few
years. However, that does not mean
that producers can or should hold
physical grain from one crop year to
another in hopes that prices will
improve. Marketing needs to be kept
current and for most producers spread
evenly throughout the year.
Unfortunately, many growers will
be selling into very weak markets this
summer either to make room for the
2006 crops or for cash needs and
neither is a good reason to sell. In
fact, probably the first rule of market-
ing is never have to sell to raise cash.
It is essential to plan well ahead and I
know of producers who are now
looking three to five years down the
road when commodity prices should
be much stronger than today. But
before we get to 2007, 2008 and
2009, we have a huge wheat crop to
market, a lot of old and new crop
soybeans to sell and the possibility of
another large corn crop.
So, I do not think you should reach
for the moon when marketing the
remainder of the 2005 crop unless
you have storage space to get through
wheat harvest as well as deep pockets.
Start thinking about it right now and
while you are at it, begin to lay out a
plan for the next one to three years.0