By Brian Doidge, Market Analyst, Ridgetown College/University
of Guelph
March 5, 1999
U.S. & World
Washington is a-buzz with debate about the production-distorting
impact of the USDA’s Loan Deficiency Payment (LDP) program. Under World Trade Organization agreements from the
Uruguay Round, subsidy programs that distort production decisions are discouraged.
The LDP program pays U.S. producers the difference between their Posted County Price (the USDA’s formulated price,
representing local cash prices) and their County Loan Rate (the county-specific version of the national loan rate:
corn $1.89/bushel; soybeans $5.26/bushel) for harvested grain on the day of the producer’s choosing. Producers
who trigger an LDP payment, cannot enter the grain into the 9-month storage program and borrow at the loan rate.
The LDP program has been available for corn, soybeans and wheat since the 1996 U.S. Farm Bill, for soybeans in
the guise of the marketing loan rate program since the 1990 U.S. Farm Bill, and for cotton and rice since the 1985
Farm Bill. However, pay outs under the programs were a minimum because prices never fell far enough to trigger
massive payments...until this year. As of March 1, LDP payments totaled $2.24 US billion since the start of the
1998/99 fiscal year starting October 1:
By the end of the year, total LDP payments are expected to rival or perhaps
exceed the $5 billion in payments made under the Agricultural Market Transition Agreement for 1998/99.
The LDP program distorts markets because it alters timing of cash marketing decisions. In effect, the LDP is equivalent
to a put option at the loan rate provided by the USDA at no cost. U.S. producers are protected against prices falling
below the loan rate because they can collect on the difference at any time. They can only collect once, but prior
to collecting, they are insulated against prices collapsing below the loan rate....unlike their competitors in
other countries such as Argentina, Brazil and Ontario. Once the LDP is triggered, the U.S. producer should sell
the cash soybeans to avoid the negative impact from further price collapse. This tends to move more soybeans onto
already – depressed cash markets than might otherwise be the case and, it can be argued – intensifies down moves
in pricing.
The distorting impact on production decisions arises from the ratio of LDP support prices, especially soybeans
at $5.26 versus corn at $1.89, a ratio of 2.78:1. This greatly exceeds the current old crop cash market price ratio
of 2.16:1 (i.e., Illinois board price March 4), the current MAY Chicago Board of Trade futures contract price ratio
of 2.15:1, the current Decatur, Illinois new crop cash market price ratio of 2.155:1, the new crop Chicago futures
NOV/DEC price ratio of 2.05:1, and even the old soybean/corn “rule of thumb” price ratio of 2.5:1. In effect, the
distorted ratio of Loan Rate prices is sending a very loud signal to U.S. growers to plant soybeans for the government
loan program, not the market. This is why current planted acreage projections estimate approximately a two-million
acre increase in soybean acreage and a two-million acre decrease for corn. The distortion is also sending a very
clear signal to foreign soybean producers – Ontario included – that if you are going to expand and grow more soybeans,
you had better be prepared to do it at $4/bushel US. Moreover, since the program is commodity specific, triggered
by price and distorts production decisions, the LDP program is most likely countervailable (however, I would think
you would have to prove material damage caused by dumping of low-priced U.S. soybeans, for example).
No wonder Washington is making a lot of noise about changing the LDP program. If changes are introduced before
planting this spring, changes that reduce soybean acreage will be price negative for corn. More probable is the
scenario in which changes would not apply before this September, in time for winter wheat planting (acreage for
which is down 15 per cent thanks partly to distorted LDP rates, as well).
Ontario
Basis is moving back up to the 65 to 70 over range after falling
to 55 over in the roll-over from the MARCH to the MAY contract. This gives a flat price for corn in store the elevator
of $2.87 (MAY 2.17 + .70) or $113/mt. FOB the farm is currently about $115/mt, but much of the corn moving farm-to-farm
or farm-to-feedlot has been fetching $120/mt for some time. The move up in basis is in response to increase in
demand, most likely associated with continued strong export movement into the U.S. and positioning for export overseas
when the Seaway opens March 31. There is about 265,000 mt of Canadian corn positioned in transfer elevators currently
– much of it down river – that logically will only move overseas and shortly. This compares to only 56,000 mt on
the same date year ago. The move up in basis also supports the theory that Ontario is gradually moving up from
an export basis to an import basis. The current spread between the two remains about 20 cents, but a basis of 70
over MAY would make that spread only 15 cents as Michigan corn would pencil into major users in the $3.02 - $3.05
range.
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