By Brian Doidge, Market Analyst, Ridgetown College/University
of Guelph
June 4, 1999
U.S. & World
The U.S. crop was planted in good time, and so far supports predictions
of better-than-average yields. Weather conditions have been near ideal across much of the mid-west, although the
western corn belt could use some dryness while the eastern corn belt could use some rain. Regardless, there is
nothing in forecasts through the end of June with which to build major “drought premiums” into Chicago markets.
Without significant production problems this summer, stocks will build and prices remain depressed well into 2000.
This less-than-buoyant outlook makes impending USDA policy moves on support programs even more important for U.S.
cash market price and basis trends, grain movement, and cash pricing and basis in Ontario. When the U.S. Market
Transition Payment (MTP) scheduled for 1999 was moved ahead into 1998 as part of last fall’s farm income crisis
response, a “hole” in the schedule of fixed payments (created under the 1996 U.S. Farm Bill) was opened up, with
none now scheduled for 1999. Neither politicians nor bureaucratic munchkins would stand idly by while there was
a hole to fill with money. There would be moves made to adjust U.S. farm programs and flow new money to U.S. producers.
This is in addition to the $2.8 billion in new money paid out last fall to 1.4 million producers in “supplemental”
MTP’s equivalent to half of the scheduled 1998 MTP (i.e., 18 cents/bu for corn which was half of the 36 cents/bu
1998 MTP for corn).
And that’s exactly what’s happening this week. U.S. Agriculture Secretary Dan Glickman has been making noises about
altering the Loan Deficiency Payment (LDP) program to “correct” what the USDA views as some problems with the existing
program, but also to get some additional money into producers’ hands. There are two problems in particular: payments
are not all equal across regions, and payments vary by crop, which distorts planting decisions.
Currently, a U.S. corn producer who puts corn under the nine-month loan program receives a loan at the County Loan
Rate (CLR). The program’s national average is $1.89/bu. Producers can either forfeit the grain to the government
as payment in full or they can keep the grain, have the interest forgiven, and pay that loan back at the Posted
Country Price (PCP) if it’s lower than the CLR. This Marketing Loan Gain (MLG) program – where producers pay back
less than they borrowed – was designed to avoid forfeitures of grain to the USDA. These MLG’s have averaged 8 cents/bu
on 1.6 billion bushels of 1998 corn, totalling $13 million thus far. However, that is not the real figure. Producers
who keep corn out of the nine-month loan program can still collect the difference between the CLR and the PCP whenever
the PCP is lower than the CLR. These Loan Deficiency Payments (LDP’s) have averaged 18 cents/bu totalling $967
million on 5.4 billion bushels of 1998 corn so far. It is interesting to note that for soybeans, just the opposite
situation exists. MLG’s have averaged 82 cents/bushel ($97 million) versus 40 cents/bushel for the LDP ($828 million).
Because loan rates favour soybeans versus corn (i.e., 1999 soybean loan rate of $5.26/bu versus 1999 corn loan
rate of $1.89/bu...a ratio of 2.78:1 versus current Nov/Dec Chicago futures ratio of 2.02:1) there has been a marked
tendency in the U.S.– ever since the introduction of the 1996 U.S. Farm Bill – to plant soybeans for the LDP payment
instead of corn for the market. This has been most noticeable this spring as soybean prices have been sharply below
loan rate (soybean LDP’s are running $1.10/bu) whereas corn prices have mostly been above loan rate (i.e., zero
LDP). This has resulted in the two million-acre jump in 1999 soybean acreage and similar cut in corn acreage despite
soybean prices having dropped by more than $1/bushel since January 1 (while corn edged only 10 cents/bu lower).
Since the LDP program effectively is a “free put option at the loan rate” paid for by the USDA, the LDP program
protects U.S. producers from the effects of prices lower than the loan rate. The USDA stands accused (and guilty,
perhaps) of running a production-distorting program in an attempt to foster more U.S. soybean production, to drive
world soybean prices lower and stem the tremendous expansion of soybean production in South America. The signal
to Brazil and Argentina soybean producers (and anybody outside the Land of the Free-Marketers) is if you are going
to grow soybeans, you had better be prepared to do it at $4/bu. Whatever changes or modifications are announced
shortly, it is unlikely this loan rate differential will be altered.
Ontario
Exports continue very strong with another 750,000 bushels shipped overseas late in May. The total movement overseas
has been 18 million bushels to date with another 12 million into the U.S. The drought in the Middle East – and
the distaste for anything American in that region – has certainly been a boon to Canadian corn exports. Jordan
and Iran have been the big buyers, but you have to believe that at least some of this corn is finding its way into
Iraq, which is suffering through the worst drought in recorded memory with crop yields down by more than two-thirds.
That was the good news. The bad news is that the Chatham ethanol plant will be operating at about one-third capacity
well into September, which has dropped old crop basis 15 cents since the end of April and sliced a dime off new
crop forward contract offers. This decline comes despite a 1.25-cent slide in the value of the loonie, which ordinarily
would support basis. In other words, there is only limited prospects for any significant recovery in old crop basis,
so why continue to hold it if you still have any? New crop is a different matter. If you are not growing any Roundup
Ready corn this year, and can prove it, you stand a chance of an improved basis this fall...especially because
U.S. corn will not be a supply option for provincial processors insisting on purchasing only EU-approved hybrids.
If you are growing Roundup Ready, or some of both types on your farm, you need to contact buyers and arrange for
a market.
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