Challenging market conditions

FACTORS AFFECTING CORN PRICES

FOR ONTARIO CORN farmers, a changing world is always our challenge. In 2015, we grew 2.035 million acres of corn, an increase from 1.9 million acres the year before. It was a much different growing season in 2015 versus 2014. For instance, the corn crop was planted early across the province and a record yield is expected as benign weather and good harvest conditions have been to the benefit of farmers.

Change came in many forms, especially on the production front as producers continually tweak management to boost yields. New technology helps. However, there are always the swirling vagaries within the corn market to make that change so much more challenging. Looking into 2016, market forces will surely regroup and corn producers need to keep abreast of these changes.

THE CANADIAN DOLLAR
The one dominant market factor which is affecting corn prices in Ontario is the value of the Canadian dollar. It is the elephant in the room, which must be talked about in any discussion about agricultural prices in Canada. Over the last three years, the value of the Canadian dollar has fallen from par to 0.7501 cents as of mid-November 2015. At the same time, corn futures prices have fallen to the lower five per cent of the last five-year price distribution range. However, partly because of the low value of the Canadian dollar, much of the price drop has been mitigated. Ontario cash market prices for corn are actually higher in 2015 than they were in 2014 (as of mid-November 2015) even though futures prices are much lower.

As we look into 2016, that will surely be the challenge for corn producers. How do we trade-off the value of the Canadian dollar, which fosters positive basis values at a time when futures prices are low? How do we hedge our risk on prices, where a possible corn futures increase will exponentially increase our basis levels if the Canadian dollar stays in the 0.75 cent range? How do we hedge risk if the Canadian dollar appreciates greatly in isolation versus any grain futures price move? It is true that foreign exchange fluctuation with the Canadian dollar adds an extra layer of crop marketing management to our selling decision. In 2016, this needs to be a continual focus.

INTERNATIONAL COMPETITION
This is happening in a market environment which has such a bearish tone. On November 10, 2015, the United States Department of Agriculture (USDA) raised their corn estimate to 13.65 billion bushels based on 169.3 bushels per acre. This will result in the second highest average yield and the third largest production in U.S. history. The huge crop has effectively added to the bearish tone with nearby futures prices of approximately $3.55 as of mid-November 2015. 

December 2016 futures prices are in the $3.80 range, which is a far cry from the all-time highs of August 2012 of $8.49 a bushel. The U.S. feels increased competition from places such as Ukraine and Brazil in the world corn market. 

As we move into 2016, it will take some type of production calamity to raise these futures prices significantly over time. It is not a question of if, but when? Corn demand in November 2015 is pegged at 13.655 billion bushels in the U.S. — that is a huge number that must be continually satisfied. At some point, production shortfalls do happen and price will have to rise to ration the demand.

CASH MARKET
Ontario farmers will surely have to be poised to take advantage of that in 2016. Of course, cash market conditions will also weigh on that selling decision. Cash market prices are highly dependent on the Canadian dollar, but also regionally specific to local market conditions — for instance, in eastern Ontario versus southwestern Ontario and points in between. Basis values can be highly regionalized and as you move east into Ontario they tend to increase. However, this will depend on local market conditions and the Ontario corn crop conditions in 2016.

The crop mix in Ontario in 2016 will be somewhat critical to basis values. Going into 2016 there are approximately 400,000 more Ontario wheat acres than in 2015, which will likely decrease either corn or soybean acres in 2016. The low value of the Canadian dollar will make fertilizer, fuel, and chemicals more expensive. The challenge for Ontario corn farmers is to weigh all of these market factors as we move into 2016. Daily market intelligence will remain key as change is our only constant. In 2016 there should be many marketing opportunities ahead.

Philip Shaw farms near Dresden, Ontario. He is the author of the Grain Farmers of Ontario Market Trends Report published 14 times per year. He speaks on grain prices across Canada and his commodity commentary can be read regularly in several publications. •