Market Analysis

GRAIN INDUSTRY INSIGHTS

IT IS SHAPING up to be the year of the big surplus in the corn market. With the potential of a record US corn crop harvested in 2013, market analysts and insiders say exports and grain production in other countries are now the key market drivers.

In its November crop reports, the United States Department of Agriculture (USDA) forecasted US corn production at 14 billion bushels, up 30 percent from the drought-ravaged crop of 2012. Meanwhile, US corn reserves were pegged at a healthy 1.887 billion bushels — the highest since 2005.

“The hard truth is we’re back in business,” says Victor Aideyan, President of HISGRAIN Commodities in London, Ontario, of the resurgence in corn production. “If you look at grain and oilseed production in North America and the world, in general, we’re back at trend lines that are very comparable, if not better than what we have seen over the last eight years.”

For Philip Shaw, a market analyst and farmer near Dresden, the large carryout could have been a lot worse as some pre-report guesses were as high as 2.3 billion bushels. “The 1.887-billion was a back-ended blessing,” says Shaw. On another positive note, he says the lower prices have sparked what he describes as “a corn-demand renaissance” that helped to reduce the carryout number.

SOYBEANS
As for soybeans, the USDA forecast US  production at 3.26 billion bushels, up seven percent from last year. Ending stocks were estimated at 170 million.

Cal Whewell, Regional Director of INTL FC Stone in Bowling Green, Ohio, says the carryout is snug but not as tight as in previous years. “The carryout has grown some but it has allowed demand to grow also,” says Whewell. “It’s not nearly as intriguing as last year. The market is going to turn to the new story that is going to be South American production and their weather.”

While cautioning there is still a long way to go before the crop is in the bin, he says there were expectations for a large increase in planted acres in South America. “That’s where the struggle is. North American bean price opportunities may well lie in their growing season,” adds Whewell.

Don Kabbes, Market Development Manager for Great Lakes Grain, agrees the global appetite for soybeans continues to be strong. “If South America has some perceived production problems, you’re going to see beans rally and corn will follow in sympathy,” says Kabbes.

In addition, he says the market for Identity Preserved (IP) soybeans is buoyant with premiums running 50 cents higher compared to the previous year. Japanese customers have said stockpiles are being reduced as the lower Chicago prices have increased demand.

“They don’t like the higher premiums, but I think demand is going to be good on IP soybeans,” says Kabbes, who thinks IP soybean acreage in Ontario will move higher. “The farmer is really looking at them as premiums have swelled, and as they may have issues with weed resistance or glyphosate-tolerant weeds.”

CORN USAGE
Besides the weather in South America, Aideyan says corn usage and export sales will be watched closely. According to US projections, corn for livestock feed is set to grow to 5.2 billion bushels from 4.3 billion.

“That’s phenomenal growth and I think that is credible, especially when we’re seeing the chicken egg sets going up by as much as eight percent,” says Aideyan, adding that corn exports are estimated to rise to 1.4 billion bushels, nearly double the guess for the previous year.

According to Kabbes, that export estimate makes it a different market than it was seven or eight years ago when the carryout number was this high. “This year, it is going to depend on exports on where that carryout number ends up,” says Kabbes.

The USDA also boosted corn usage for ethanol by 300 million to 4.9 billion bushels. Whewell is cautious about the estimate for the coming year because the number could be affected by government policy.

The industry will be closely watching a proposal by the Environmental Protection Agency (EPA) to reduce renewable fuel volumes for 2014. The EPA is proposing a recommendation of 15.21 billion gallons. The result would be a reduction of three billion gallons if the proposal is approved. Of that, the requirement for ethanol from corn would drop by 1.4 billion gallons to 13 billion.

As for the implications of the large corn carryout, Whewell is expecting the market to trade sideways until planting in the spring. “It will be an interesting marketplace. One of the things we believe is that the producer of the largest corn crop we’ve ever grown in the United States has not really done a good job of marketing that,” says Whewell. As a result, he expects any rallies will be muted by the prospect of heavy farmer selling.

ONTARIO
Looking beyond Chicago, Philip Shaw is bearish when it comes to the Ontario corn market. As long as Ontario’s corn acreage is more than two million, with average yields of 155 to 160 bushels per acre, Shaw thinks Ontario will not shake its status as the cheapest place to source corn in North America.

With projections of winter wheat plantings at 780 million acres, Shaw is not optimistic about a reduction. “It’s unlikely we’ll go below two million acres on corn even though someone like me is going to cut back 30 percent,” notes Shaw. “It doesn’t make as much sense as it used to, especially with an Ontario corn market structure where you’re constantly producing at a discount to everyone in North America.”

Aideyan is also expecting decent harvest numbers in Ontario to weigh on the basis over the next few months. Echoing Whewell’s expectations of short-lived rallies, he
urges farmers to be vigilant and look for opportunities that make sense.

“Always go back to your planning,” says Aideyan, noting the key issue is to identify the price that hits the economic targets. “What should drive the prices you’re looking for should be your medium to long-term financial goals.”

EPA PROPOSES 2014 RENEWABLE FUEL STANDARDS
On November 15, the US Environmental Protection Agency (EPA) proposed for public comment the levels of renewable fuels to be blended into gasoline and diesel as required by Congress under the Energy Independence and Security Act of 2007.

According to the EPA’s announcement, the proposal seeks to put the Renewable Fuels program on a steady path, ensuring the continued growth of renewable fuels while recognizing limits on ethanol blending, called the ethanol “blend wall.” 

While production of renewable fuels has been growing, the EPA also noted that advances in vehicle fuel economy and other economic factors have pushed gasoline consumption far lower than what was expected when Congress passed the Renewable Fuel Standard in 2007.

“As a result, we are now at the ‘E10 blend wall,’ the point at which the E10 fuel pool is saturated with ethanol,” said the EPA in a news release.

To address that issue the EPA is proposing to reduce the renewable fuel standards for 2014. This includes lowering the amount of ethanol produced from corn to 13 billion gallons, a reduction of 1.4 billion gallons.

Once the proposal is published in the Federal Register, it will be open to a 60-day comment period. •