By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
July 7, 2000
U.S. and WORLD:
What has happened since last report? Another month of excellent growing weather in the U.S. mid-west, despite forecasts of a turn toward hot, dry conditions. The result? The only area in the central U.S. still suffering anything approaching droughty conditions is western Iowa and eastern Nebraska. The rest of the corn belt actually needs a spell of warm dry weather, just to dry out soils and spur plant growth. The Southeast is in the midst of a worsening drought, but this has little impact on grain corn production for the U.S. as a whole.
The USDA bombed Chicago markets with the release of its June 30 Planted Acreage report. Corn acreage was 79.6 million acres, up three per cent from a year ago (observers were expecting something slightly under the 78-million acre mark). Even SPARKS was projecting a reduction in planted acreage as recently as June 16. Harvested acreage was projected at 73.1 million acres, fully two million acres higher than expectations.
Compounding the furor following the report was release of the Grain Stocks report showing June 1 stocks of 3.586 billion bushels, down one per cent from 1999, but 100 million bushels more than expected. The combined impact was dramatic. In the week following release, Chicago surrendered 15 cents and flirted with life-of-contract lows before a technically generated spec fund profit-taking rally late the first week of July (soybeans lost 32 cents). The combination of higher-than-expected acreage amid better-than-predicted growing conditions has traders expecting a 10.3-billion bushel crop and carryover exceeding 2.1 billion bushels.
These are huge numbers and hard on pricing. As we said last report, expect prices to move lower later in the summer and early harvest period. Now that a big crop is progressing very well with little sign of serious problems, the only salvation will be increased usage, and that will require a period of low prices. Again, as we said last report, there will likely be modest rallies before harvest, mostly fueled by spec fund profit-taking and short
covering. But these rallies must be used to sell any remaining old crop and to price more new crop.
These suggestions are distinctly different than market advisory services in the U.S. There, because both old and new crop cash prices are sharply under loan rates (e.g., in Michigan, current old crop corn prices are at least 20 cents under the $1.89 loan rate while new crop corn is about 15 cents under), there is no incentive for growers to sell cash corn. The Loan Deficiency Payment (LDP) program is, in effect, a “put” option at the loan rate provided free by the USDA. Since U.S. growers are essentially guaranteed to receive 100 per cent of the difference between their local cash price and the loan rate at any time of their choosing (i.e., “bottom picking”) on 100 per cent of their actual corn anyway no matter how low prices sink, why not hang on to the grain and see if prices happen to rally higher? They have nothing to lose. And that is exactly what advisory services are suggesting. In fact, producers could “pick” the bottom, collect their LDP, and then hope prices rally and sell their corn at a higher cash price at a later date.
Unlike them, you risk losing. Your price support program, Market Revenue, as currently constructed, will eventually pay 66 per cent of the difference between the eventual provincial average cash price for the crop year (which isn’t determined until November 2001) and 85 per cent of the 15-year average price factored by input price inflation, but only pays on 85 per cent of your historic production (not actual). This support is not tied to your actual crop this year, nor to your local cash prices. If cash prices move lower, or your local cash price is weaker than other parts of the province, you lose on the actual grain you have to sell. Therefore, at these low prices, you need to pay closer attention to marketing this year’s crop than your neighbour across the border.
Ontario:
Outside
of Essex, Kent, and parts of Lambton, Middlesex, and Elgin, the crop is very discouraging
and may charitably be described as uneven, spotty, late, yellowish or missing
entirely. June 1 provincial planted corn acreage was projected by Statistics Canada
on June 29 as up three per cent from last year at 1.84 million acres. We did not
plant more acreage than a year ago. We couldn’t. It was too wet, too late, and
some that was planted washed away or now looks like soybeans or white beans or
nothing at all. My guess is that acreage, allowing for spotty stands and washouts,
is in the 1.75 million-acre range – down five per cent from 1999 for the province
as a whole, and eight per cent less than Statistics Canada’s June 1 estimate.
We had been using last year’s acreage and the average yield of the last 5 years
(119.1 bu/ac) to project a crop of 220 million bushels. That is now beyond reach.
I think the southwest should have a good to excellent crop, weather permitting,
but the rest of the province will not achieve an average yield overall. If we
drop average yields by 5-6 per cent for the province to 112 bu/ac (1997 was 112.4),
the provincial corn crop drops below 200 million bushels to 196 million bushels
and approaches 1997’s 190 million bushels. Since domestic feed and industrial
usage require about 230 m bushels and carrying stocks are only about 32 million
bushels, we will need to import more corn from Michigan and Toledo. This is good
news for local basis because local pricing can move up to an import-competitive
pricing level compared to our current export-competitive pricing. That is why
I expect new crop basis offers FOB the farm to increase from the current 65 -
75 cent range into the 85 cent - $1 range assuming the loonie remains in the 67
- 68 cent range.