Market Trends

By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
December 4, 1998

U.S. & World
Since the November 10 USDA report, the March contract is a dime lower, July is down about eight cents, and DECEMBER ‘99 is off about seven cents. While not impressive, this is not too bad considering that this encompassed the last half of harvest for the second largest U.S. corn crop ever grown. Dire forecasts by some trade participants that the mid-west storage and transportation system would be overwhelmed proved overblown. The system was stressed, but lack of farmer selling interest kept a larger than usual portion of the crop off the market.

This may be because 1999 was the first marketing year that dealt with subsidies in the form of Loan Deficiency Payments (LDPs). LDPs are collected by U.S. producers whenever the Posted County Price falls below the County Loan Rate. Don’t worry about the mechanics, but appreciate that the USDA pays farmers whenever prices fall below a set level per commodity. U.S. producers of corn, wheat, and soybeans collected more than $1.6 billion this fall through LDPs. LDPs put cash in farmers pockets and reduced the urgency to sell. However, with the recent run-up in Chicago prices, LDPs disappeared and now U.S. farmers have started to put corn under the nine-month loan program to collect the loan available against stored crop. In the last week of November alone, more than 103 million bushels of corn entered loan storage. Providing short-term support to nearby Chicago contracts, this is likely to burden pricing when the corn moves back out of storage in the summer. One gets the impression that U.S. farmers are doing all that they can to avoid currently dismal prices which last week saw the Commodity Research Bureau (CRB) index of commodities reach it lowest point since August 1992. Chicago can, and likely will, simply wait farmers out.

U.S. corn export sales and shipments have been firm with sales 13 per cent ahead of year ago pace and shipments 15 per cent ahead. Exports have kept Chicago corn markets reasonably firm in the face of the large crop...up until now. The CRB commodity index indicates a broad-based situation where commodities exceed diminished worldwide demand. Export markets are nervous again. U.S. Gulf basis has been softening over the last two weeks as the pace of export sales has started to drift lower. European Union export subsidies reached their highest level this crop year last week (although on reduced volume). The USDA is considering using the Export Enhancement Program to move wheat flour. It is not so much that supplies of agricultural commodities are dramatically larger, but more that demand has shrunk...especially demand from Asia.

Now more financial uncertainty seems about to erupt. The International Monetary Fund left Russia last week without releasing approved loans because that nation seems incapable of carrying out IMF-prescribed financial and monetary reforms. Russia seems certain to “print more rubles” which will devalue the currency, invite rampant inflation, and destabilize Eastern Europe. Brazil likewise backed away from IMF-prescribed reforms. Financial markets dropped nine per cent in one day as a result. Brazil seems certain to devalue the real, which is worrisome because Chicago soybean complex prices to move lower to compete with suddenly cheaper Brazilian soybeans, meal, and oil. Same for wheat, wheat flour, and corn. The biggest wild card by far is the prospect of Chinese devaluation of the ruan in the near future. Devaluation makes it much easier to pay back recent purchases of large volumes of soymeal, soy oil, palm oil, wheat, etc. Chinese devaluation would torpedo recent signs of stabilization in Japan, Taiwan, Singapore and other Asian economies...economies that are critical to U.S. agricultural exports. If you get the impression that we are currently standing on a none-too-stable bubble, we are.

Ontario
Exports of Ontario corn have been firm with one shipment overseas already and multiple train and truck loads heading into the U.S. The anaemic loonie makes our corn very attractive to foreign buyers, especially south of the border. This movement has helped those yellow mountains of corn that were outside most country elevators only two or three weeks ago all but disappear by early December. Rail and truck markets to the U.S. are currently the main price determinant for Ontario corn and were behind the nickel pop higher in basis offers last week. Actually, basis at the elevator has moved up about 15 cents (from 40 over March on November 2 to the current 55 over March) in a little over a month. Not too bad; and a weakening of the loonie isn’t the reason, because the loonie is exactly the same now as then. Reward this higher basis with some sales of corn, but don’t sell everything. Keep in mind that when adjusted for currency exchange, the current “track” basis is 40 cents under Chicago futures prices expressed in Canadian dollars. We have not seen basis this low since 1980/81 and it compares with the five-year average of one cent under and the 23-year average of 10 cents under. Why would anyone store on-farm with basis this weak and Chicago futures prospects not so hot as outlined here? As we ship out a lot of our corn now, industrial users in the province (and they will use about 33 per cent of this year’s crop) will start to want to price out further to ensure supply. They will also edge basis higher to keep supplies at home. Eventually, we will near import competitive basis levels and they will bring in U.S. corn. Importing U.S. corn when we have the largest Ontario crop ever grown sounds ridiculous, but it is likely to happen if we ship a lot out early. The key is that import competitive pricing is currently about 30 cents higher than current basis offers. The only reason to store is if you think basis will improve.

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