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Corn prices drop 50 per cent, ethanol production still high

For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at www.manitobacooperator.ca

Grain and oilseed futures at ICE Futures Canada win Winnipeg closed the week ended October 31 mixed, with canola down. Canola declined despite the firm tone in the U. S. soy complex. The lack of fresh demand and a large rebound in the Canadian dollar weighed on prices in fairly light activity. Feed barley rallied on strength in U. S. corn and slow farmer selling. There was little fresh news across the Winnipeg market, with the economic turmoil creating a cautious tone.

Chicago futures were mainly higher as the markets bounced back. Increased stability in the financial situation allowed the fairly friendly grain news to lift prices for the first time since September. A softening in the U. S. dollar gave some support. Soybeans rallied on continued strong export demand and talk that soybean yields in the delayed U. S. harvest were coming in poorer than expected. Corn futures advanced on tight cash market supplies and the delays in the harvest, with only about half the crop harvested.

U. S. wheat futures in the three U. S. futures markets rallied back on continued strong export demand and ideas that prices are undervalued. A weakening in the U. S. dollar contributed support as well. Smaller Australian and Argentine wheat crops also helped to boost values.

USDA corrections

Several interesting reports came out this past week, of which the most significant came from the U. S. Department of Agriculture as it issued a revision to its Oct. 10 production and supply-demand reports. The revisions, while friendly to the market, left analysts scratching their heads as to why USDA didn’t simply wait until the November production and balance sheet updates.

The revisions indicated there were 1.2 per cent fewer corn acres and 1.4 per cent fewer soybean acres planted. USDA said it felt obligated to release these numbers in order to correct some faulty data maintained by its Farm Service Agency.

The trade is a bit more cynical about the release, feeling it was part of a co-ordinated effort by the U. S. government to rally equity and commodity markets. The move came as all markets were plunging and the U. S. government was spending trillions of dollars to attempt to stabilize the economy. Several analysts also questioned where the “lost” acres went.

Regardless, the reports are friendly for the markets and suggest that once the current financial instability is history, we will see a reasonably strong price recovery in both corn and soybeans.

For corn, USDA lowered the 2008 corn production estimate to 12.033 billion bushels from 12.2 billion in the Oct. 10 report. It also reduced feed use by a modest 50 million bushels to 5.3 billion bushels. The result was a lowering of the 2008-09 corn ending stocks forecast to 1.088 billion bushels from 1.154 billion in the Oct. 10 report.

With U. S. corn supplies this tight, look for a nice postharvest rally, certainly back to the $5/bu. level, and then a robust struggle between corn and soybeans for planted area in the spring. It also suggests an improved outlook

for domestic barley prices in Western Canada.

USDA lowered the U. S. 2008 soybean crop estimate to 2.938 billion bushels from Oct. 10’s 2.983 billion bushels. It also dropped the export estimate to 1.02 billion bushels from 1.05 billion bushels. As a result, USDA estimated 2008-09 soybean ending stocks at 205 million bushels, down from the previous forecast of 220 million. This is a tight supply and suggests soybean futures will also see a significant rally after the financial problems are resolved. The expectation is that prices will climb back to the $10 level quite quickly.

This also suggests we will see a rally back in the canola market as well. We have probably put in the lows at $380 on the futures. However, with the large canola supplies in Western Canada, look for the basis to be very poor.

IGC on wheat

The other report of note this week was the International Grains Council’s balance sheet. It raised its wheat production estimate and ending stocks estimates to reflect better crops. It also brought its numbers in line with USDA forecasts.

It did note that 2009 winter wheat seeded area is down globally, but gave no estimate for the drop. Private analysts feel global acres will be down between five and 10 per cent. With lower fertilizer use, analysts are looking for average yields to be down. This could set wheat up for a strong rally in 2008-09.

Ethanol not dead

Another question of note is the “food versus fuel” debate that was kept so hot in the spring and summer by the U. S. Grocery Manufacturers Association’s daily barrage of anti-ethanol reports and stories claiming that expanded ethanol production was the reason for higher food prices.

It is interesting to note that corn prices have dropped almost in half despite the fact that use of corn for ethanol production has not abated and the U. S. ethanol industry continues to expand. It’s also interesting to note that food prices have also not dropped. Could the grocery wholesalers be the true “robber barons” in this scenario?

So, has the ethanol industry in the U. S. died or is it mortally wounded? The answer is no. Most plants, depending on their debt load, are profitable. There are 178 plants producing ethanol in the U. S. with another 25 in construction. Ethanol production will likely hit 13 billion U. S. gallons by 2009.

The U. S. government has mandated ethanol consumption by 2009 at 10.9 billion gallons and it looks like the U. S. will make it. The need to get away from oil imports will drive this and it does seem that ethanol is even environmentally friendly.

A recent study at the University of Illinois, albeit funded by the Illinois Corn Growers Association, found that the global warming impact of an ethanol plant is 40 per cent less than gasoline production. The study looked at both the actual production plants involved in producing the two as well as the land use impact.

Canada’s biofuel production is also climbing and within a few years we are likely to see two million tonnes of feed wheat and two million tonnes of canola moving into biofuel production. The increased use domestically will be good news for farmers, who will not be at the vagaries of the export market.

The larger domestic consumption of feed wheat and canola for biofuel will come at the expense of the export market as less grain is diverted offshore. Prices to farmers for their supplies to be used for biofuel will likely also be higher than in the export market.

Currently, ethanol-producing plants in Canada are paying $4.63 a bushel in Alberta and $4.66/bu. in Manitoba for feed wheat, well above what elevators are paying.

– Don Bousquet is a well-known market analyst

and president of Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.

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