This crop year could well be the best crop year in more than a generation

It has been quite a winter in the grain markets and now there seems to be a pause.

In review, wheat led the price parade thanks to repeat droughts in Australia and then a poor crop in the US plains last summer.

Buyers around the world panicked because both Australia and the USA are major wheat exporters. India tried to play cute by cancelling tenders and ended up chasing ever higher prices. Argentina, another big exporter, cancelled export permits. The index funds started buying Chicago futures and prices blew up.

Corn is not a "world" crop like wheat which is grown almost everywhere. Wheat supplies can rebound quickly. By far, the big corn grower is the USA followed by China, Argentina and Thailand.

China has been an export force in recent years and Argentina is a big supplier to Europe. Some of the corn from Thailand ends up in the little jars of pickled baby corn that we import from them. Certainly a labour thing. I know from experience!

The corn price run-up started with ethanol in the US. Finally, an alternative market to break out of subsidy dependence. With promise of a 9$/t. premium from the ethanol plants, US farmers planted a huge acreage of corn last year. The extra acres came from soybeans and, yes, wheat.

The government mandated ethanol inclusion in gasoline and that was a green light for a building boom in ethanol plants. The spark that ignited the corn market was the realization that the big acreage of 2007 was not going to repeat. Crude oil exploded in price and that further supported the ethanol industry. It also created a market for bio-diesel so the price of soybean oil took off.

The cost to grow corn is relative to petroleum prices so growing corn in 2008 began to look less attractive than growing lower cost soybeans. The market began to bid up the price of corn to hold the acres but soybean prices went up as well. The long term price ratio of soy to corn is around 2.5:1 but this slipped to below 2:1 and is now stabilizing just above that.

What might happen next? The most dangerous words in the markets are "this time it’s different" but I think we have reached a new plateau because of a real increase in demand from the newly affluent economies of China and India.

For many years the world has run with a "just in time" food supply and gotten away with it. The little supply cushion soon evaporated with the wheat droughts and now a drought in Thailand, a major rice exporter. Rice prices have doubled since last fall. What’s the substitute? Wheat? Corn? Everything connects.

How is this affecting the consumer? In Canada, food price inflation was just reported as zero! In the USA, it is four per cent. These are lagging statistics and are aggregates so the items some individuals buy may have increased while others have dropped.

I believe flour is up 25 per cent or so but that doesn’t represent the real increase. This has a bigger effect on home bakers because retail baked goods include costs for packaging, transportation and labour.

The US Federal Reserve says that labour makes up 39 per cent of retail food costs. The late Earl Butz, former US secretary of Agriculture in the Nixon cabinet said "there isn’t enough food in food to affect the price"!

Ethanol is shouldering the blame for the world’s food shortage. Probably because it is a man-made demand rather that a natural drought induced supply problem.

Academic studies in the US say that ethanol production has had only a small effect on food prices. Texas A & M University says it is negligible! Would food prices be higher without ethanol? Fuel prices would be much higher and transportation works its way into the price of food in the stores.

New crop December corn is priced higher than old crop. The market is expecting a tighter supply next year. The market also assumes perfect weather. The US is already behind in corn planting progress and that delays pollination into the hottest part of summer. The result can be blank cobs because the silks fry in the heat. The market will be volatile until the end of July when the crop is more secure.

Ontario’s corn acreage is expected to be smaller this year and that should help the basis. Basis is the difference between the local cash price and the nearby month Chicago futures price. This past winter the basis discount was $32 to $35 a tonne.

Ontario has been in an export position this last year because of our big crop. Basis really improves when the price reflects the transportation cost added to bring corn in instead of subtracted to ship it out.

These are good times but stressful times for cash croppers because there is so much money on the table. This is the year to really "sweat the details" because there is the potential for it to be the best in a generation.