FEATURE STORY
Grain Corn Marketplace in the New Millennium
By Brian Doidge
To improve marketing, you must understand several things: the marketing environment for the crops you want to produce;
your financial and cash flow needs; your costs of production and marketing; the various marketing tools and alternatives;
and how and when to use those tools. Perhaps most importantly you must spend as much time marketing as you do producing.
This article deals with the first requirement...improved understanding of the corn marketplace. Three major trends
will determine the marketing environment past the year 2000: increased price volatility; increased competition
in world markets and subsequent producer reliance on government support; and increased consolidation of ag market
players.
U.S.
agricultural futures markets, anxious to remain price-maker for the world, have
attracted large managed trading accounts by offering new products (options on
ag futures, serial options, futures on fertilizers, yields, etc.) and by expanding
limits on the number of contracts individual accounts can hold. Expanded position
limits result in greater swings in price on the Chicago Board of Trade as these
large blocks of managed money move quickly in and out of contracts. Because of
the size of spec funds, spec trading activity now dictates price direction for
most commodities. But spec funds do not react only to ag fundamentals, and markets
now sometimes move more in response to financial market signals than to ag fundamentals.
Because of increased spec trading activity – not all related to the agricultural
situation – markets are now more volatile with higher highs and lower lows than
experienced in the past and that would seem justified purely by ag fundamentals
such as planted acreage, crop condition, etc. Ag producer price risk is greater
than in the past. Growers are left scratching their heads wondering what happened,
long after the chance to lock in a reasonable price has vanished.
The trade war between Europe, U.S., and South America over stagnant world ag markets and trade is escalating. To
recapture market domination, a more market-oriented 1996 U.S. Farm Bill freed U.S. growers to produce. The plan
was to recapture world export market share for the U.S. by expanding supply (especially of soybeans) to drop world
prices. Lower world prices make it expensive for South America to continue expanding soybean acreage, and for Europe
to continue heavy subsidization of production and exports of the surpluses (mostly of other grains) that subsidized
production generates. To protect U.S. producers in this new marketing environment of low prices (due to over-supply)
and sudden moves (due to spec trading activity) the 1996 U.S. Farm Bill introduced fixed subsidy payments scheduled
through 2002 which give a reliable, known income stream divorced from production. The Farm Bill also introduced
Loan Deficiency Payments and Marketing Loan Gains. These offer a price floor to U.S. growers (i.e., at the Loan
Rate) but allow prices for the rest of the world to continue to drop when supply exceeds demand, which unfettered
production made a virtual certainty. Foreign producers are exposed to lower prices while U.S producers are protected.
All producers rely more heavily on income and price support programs when supply exceeds demand.
Food production and processing are moving away from a cottage industry of independent components, toward an integrated
process from plant to plate. Concentration of processing and production is the signature of this industrialization.
As we leave the 20th century, in the U.S.:
Production under contract to specification is the dominant feature
of industrialized production and processing. Producers concentrate on producing, but surrender marketing decision-making.
However, as Professor C. Robert Taylor stated January 26, 1999 before the U.S. Senate Ag Committee, “since 1984,
the real price of a market basket of food has increased by 2.8 per cent, while the farm value of that food has
fallen by 35.7 per cent. Why? Recent studies show that 37 out of 40 subsectors of the U.S. food industry exercised
statistically significant market power in setting output prices and that all of the 47 subsectors of the U.S. food
industry had some degree of market power in both the input and output markets. In other words, the farmgate-to-dinner
plate market power of the ag giants is so concentrated today that these dominating corporations can take their
profit from the farmer side of the food equation, not the consumer side.”
It is interesting to note that the Justice Department – as a consequence of its July 1999 review of Cargill’s acquisition
of Continental Grain’s Commodity Marketing Group – forced changes stating that “the original deal would have reduced
competition to buy grain and soybeans from farmers in Midwestern states, including Illinois, Iowa, Kansas, Missouri,
and Ohio.” Moreover, “the consolidation along the Illinois River and the port of Chicago would have concentrated
ownership of delivery points authorized by the Chicago Board of Trade for settlement of corn and soybean futures
contracts under the control of Cargill and one other firm. This would have increased the risk that prices for Board
of Trade futures contracts could be manipulated.”
The marketing environment is characterized by: concentration of food processing; production to specification under
contract (including use of genetic enhancement of input and output traits of value in an integrated food processing
system); greater price volatility for non-contract commodities; larger and less predictable swings in production;
extended periods of over-supply; intensified trade and subsidy wars; extended periods of lower world prices punctuated
by short periods of dramatically higher prices only when production shortfalls occur; U.S. and European producers
sheltered behind a network of subsidies and supports; and other producers fully exposed to the havoc in world markets
fostered by these same E.U. and U.S. ag programs.
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