August/September 1998
Market Trends
By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
July 10, 1998

U.S. & World
The July 10 USDA report made adjustments in old crop usage and carryover to reflect stocks on hand as reported in the June 30 stocks report. For wheat, this meant an increase in wheat feeding as we have been suggesting the last three issues. U.S. wheat feed usage increased 43 million bushels from the June report which dropped carryout stocks from the 1997/98 crop by the same amount to 723 m. bus. Expected soybean carryout from the 1997/98 crop was reduced 25 m. bus. to 215 m. with most of the adjustment due to a 28 m. bu. jump in seed requirements thanks to a larger than expected expansion in soybean acreage reported in the June 30 USDA Acreage report. Crush was increased 10 m., but exports were lowered 15 m. Old crop corn saw the largest adjustment (stocks up 175 m. bus.) thanks to the larger than expected stocks report with feed use cut by 150 m. and industrial usage sliced by 25 m. The July USDA S&D report was bearish for old crop corn, and supportive for old crop soybeans and wheat; but all of these adjustments were within trade guesses and already worked into old crop pricing.

However, the surprises were contained in adjustments made to new crop. The 1998/99 U.S. all-wheat crop of 2.522 billion bus. is above all pre-report guesses and almost 100 m. bus. larger than the June report. Less spring wheat was overshadowed by a huge winter wheat crop (156 m. bus. more than in the June report!). As a result, total wheat supply is 273 m. bus. larger than a year ago and ending stocks projected for June 1, 1999 are a burdensome 868 m. bus., up over 100 m. from last or this year. No wonder U.S. new crop average wheat price was reduced 20 cents to US$2.90! Two things have emerged in wheat markets: a) U.S. wheat is definitely a feed grain this year, especially in the southern Great Plains; and b) the spread between the spring wheat Minneapolis Grain Exchange (MGE) market and the Kansas City Board of Trade (KCBOT) winter wheat market will widen (premium MGE) with CBOT soft red winter wheat (production less than expected) caught in between and likely dragged lower by KCBOT hard red winter wheat.

While only minimal changes were made to new crop soybeans (slight increase in crop size and crush, slight decrease in exports resulting in 10 m. bus. increase in ending stocks), a surprise was a dime increase in average new crop cash price to $5.35.

While the report was neutral for new crop soybeans, it blasted new crop corn. Pressure from increased wheat feeding and a jump in carryover from old crop corn resulted in a 235 m. bus. increase in expected new crop corn carryout stocks to a burdensome 1.844 billion bus. Average cash price for new crop was reduced a dime to $2.15. The USDA reduced its estimate of new crop corn production only slightly (to 9.625 b. bus. versus 9.640 in the June report). New crop production estimate is the only area of the report that offers the least solace for bulls, and only in a backhanded fashion. The July report is the last report of the annual series that uses trendline yield projections and intended acreages to estimate production. The August report is the first of the annual series that uses actual crop condition ratings to adjust yield projections and incorporates actual planted acreage. This year, actual planted acreage at 80.8 m. acres is less than intended; and crop condition ratings have been declining for the last four weeks which has caused most analysts to lower yield projections significantly below the USDA’s trendline yield of 129.6 bu./acre. For these reasons, desperate bulls are already saying that the July new crop corn production estimate will be the largest number for many months to come. If that sounds like the bellowing of a wounded bull, it is.

The overall message from the July USDA S&D report is that the jig is up for old crop. Move anything you have left (if you have been following this report for the last several months, hopefully you don’t have much left). Time to forward contract some more new crop as well. The only hope for a rally hinges on hot and dry conditions during pollination and flowering. With the early start to both the corn and soybean crops in the U.S., that time is rapidly drawing near and, for corn, is within the forecasting window of the six- to 10-day forecasts. These do not look threatening. The prospects for both corn and soybeans are lower.

Ontario
Only three of the 10 years 1975 - 1985 provided a return above accumulating storage costs for corn in Ontario and two of those were drought years. The 10 years 1985 - 1995 were about the same with only major drought in 1988 and flooding problems in 1993 in the U.S. rewarding the decision to carry corn. Accumulating costs can be minimized through on-farm storage, but storage at the elevator, especially short-term storage (i.e. December through March) did not pay. Throughout those years, and in particular the 15 years prior to 1990, seasonal price patterns in Ontario saw a short-term peak around the U.S. Thanksgiving, followed by flattening through December, a fall-back in early January after the turn of the new tax year, another spot of flat pricing through February, then another set-back in March. Eventually there was a seasonal spring rally commencing in April which usually peaked out mid-June through the July 4 weekend before drifting lower into the next harvest.

However, ever since changes in U.S. agricultural policy unveiled with the 1990 Farm Bill – and more particularly with the 1995 Farm Bill – seasonal patterns may well have changed. Both of these Farm Bills had to reduce U.S. governmental spending and to do so they cut subsidies to U.S. corn producers. The commodity loan program, which had established a floor and a ceiling for corn prices, developed a “leaky” floor when marketing loans were introduced. The U.S. Treasury was no longer supporting pricing. Set-aside payments and acreage requirements disappeared replaced with freedom to plant fence-row to fence-row and a guaranteed subsidy per bushel which declines to zero by the year 2002. But the major change was that the U.S.D.A. no longer subsidized long-term storage by permitting defaulting of grain under the loan program, and discontinued subsidized long-term storage under the Farmer-Owned Reserve program. Essentially, processors and end-users could no longer play the grain in government storage against grain available on cash markets. If they wanted grain now, they had to pay up.

What this has meant since 1995 is that prices have been much more volatile, responding much more quickly and sharply to perceptions about availability of supply and strength of demand. Seasonality seems to have changed. Now, when harvest is complete and available stocks known, users project purchasing plans with the certainty that there are no other stocks to be had. In years of relative abundance, that is bad for pricing because there now is no floor in the U.S. under prices. Competition tends to be sharper earlier in the marketing season to ensure supply, which has resulted in relatively stronger prices September through mid-November. Competition then eases on the knowledge that farmer selling will pick up prior to the ending of free storage periods by December 1 (if there are any such deals still around) and again after the turn of the new tax year. Depending on how aggressive farmer selling has been, prices now seem to rally a little through March as users attempt to entice corn out of storage and book supplies for the spring/early summer. However, the big change in corn price seasonals in Ontario since the middle of the 1990’s has been that prices have eroded from early spring through July 4. What seems to have happened on both sides of the border is that supplies are known, with demand also a known and booked ahead, leaving farmer sellers interested in moving grain prior to new crop planting facing weak demand. Prices wither. Moreover, on both sides of the border, the percentage of grain corn moving into industrial processing is steadily increasing (at about a 10 per cent annual rate of growth and currently absorbing 20 per cent of the entire corn crop in the U.S. and 34 per cent in Ontario). That brings stability to demand, but in Ontario where industrial usage is concentrated in a small number of buyers, any processing down-time (scheduled or unscheduled) has a larger and larger impact on overall price. Most process shut-downs, including for soybean crushers, seem to appear in the summer. The result is that traditional late spring/summer rallies have been much weaker. In fact, 1996 and perhaps 1997 both exhibit lowest prices around the July 4 period!

Have seasonals changed? Most likely. Will storage pay? That will depend on growing conditions in the year following harvest. However, what seems to be the message is that you have to adopt an 18-month marketing plan for each crop – nine months prior to harvest and nine months after – and you have to be willing to pull the trigger much more frequently and much more quickly. The old seasonal patterns are not to be trusted.