By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph

U.S. & World
April’s USDA Supply & Demand report contained some encouraging news, but not in the widely followed U.S. crop estimations. Estimates for the U.S. corn crop were somewhat unfriendly. Feed usage was down 25 million bushels, which translated directly to a 25 million bushel increase in ending stocks.
Average cash price was reduced another nickel to US$1.90/bushel. Chicago markets responded by continuing the very long sickening grind lower that has dominated all price charts since early last August.

The encouraging items come from the world S&D data in the April report. At 450 million metric tonnes, world ending stocks for 2001/02 of all grains are down 14% from just 2 years ago. The same pattern of shrinking world stocks-to-use ratios over the last 4 years also holds for all other grains including rice and wheat. In fact, only oilseeds have not seen a significant drop with world ending stocks down only 3% in 2 years. However, even for oilseeds, world vegetable oil stocks have dropped 13% in the last two years, reflecting 8.8% growth in world demand. Even better, at 167 mmt, world coarse grains stocks are down 10% from last year, down 20% in 2 years, and down more than 22% from recent peaks in 1998/99. More importantly, as a percentage of usage, world coarse grain stocks are 18.68%, the lowest in 6 years and getting close to levels last seen in 1995/96 which were themselves near record-low levels. In fact, current production estimates suggest world coarse grain ending stocks will drop yet again in 2002/03 and stocks-to-use ratio will decline further to the lowest levels since the mid-1970s.

So why haven’t prices reacted higher? Well, it can’t be because of reduced demand; world demand for all grains – coarse grains, rice, oilseeds, oilmeals, etc. – has increased. Demand for vegetable oils is surging. Can’t be because of increasing surplus supply; world stocks of all coarse grains, rice, wheat, and even vegetable oils and oilmeals have declined, meaning supplies relative to demand have been getting tighter. In fact, the stocks-to-use ratio (which measures the relationship between supply and demand) for U.S. corn in 2000/01 was just over 19%, and actually the same as it was a decade earlier in 1990/91 and twenty years ago in 1980/81. But average U.S. price for corn in 2000/01 was only US$1.85/bu versus $2.28 in 1990/91 and $3.11 in 1980/81. Shrinking supply and expanding demand are not the explanation for abysmal prices. The only other answer lies in the negative impact of policy...U.S. ag policy in particular.

U.S. subsidies have tripled since 1997 with 95% of U.S. direct payments to producers going to one sector ... grains and oilseeds. So the negative impact of these subsidies is highly concentrated. But contrary to classic economic theory, the negative impact of U.S. policy on price does not come through expanded production. U.S. corn acreage has actually shrunk since 1998, production has remained static in the range 9.5-9.9 billion bushels, while stocks-to-use ratios have been creeping lower. Yet average price has been extremely flat in the narrow abysmal range $1.95-$1.82, far below the average price of the last 30 years of US$2.387/bu. Only one year in the last 30 fell below that range ($1.51 in 1986/87), and that year had a stocks-to-use ratio of 65.9%!

Therefore, the negative impact U.S. policy has on price comes not from stimulated production, but through the way in which subsidies are provided, in particular Loan Deficiency Payments (LDPs) and their close cousin, Marketing Loan Gains. A U.S. corn grower receives the difference between the County Loan Rate (national average $1.89/bu) and his local Posted County Price (essentially the USDA’s estimate of cash price in his county) on the day of his choosing for the corn he has under his title and control.

The lower prices go, the larger this LDP payment. However, once he has collected this LDP payment, a U.S. grower no longer has the protection against lower prices provided by the program. Many therefore sell cash corn upon collecting the LDP. This effectively pushes more corn onto weak markets, thus extending low prices. U.S. LDP program machinations work in contravention to the classic ‘Law of Supply’ which says less supply is available at lower prices. LDPs may not stimulate expanded production, but they do reward low prices and increase supplies available. And it is these low prices that spill over the border into Ontario. In other words, U.S. ag policy has a direct negative impact on price, including price in Ontario. Policy impacts price.

Ontario
A lot of talk in the trade wondering where all the Ontario corn is. Grain elevator ownership of Ontario corn is very low, with essentially all recent sales from elevator inventory. Little is reportedly moving from on-farm position. Producer sales of corn, as reported through the corn checkoff system, are the lowest in the last 4 years, both in terms of volume (58.3 m bushels as of end of February) and as a percentage of the crop (29.17% versus 18-year average for the date of 33.4%). Reasons? A) It is normal in a small-crop year for a higher percentage of corn to bypass the commercial elevator system and be used on-farm or sold farm-to-farm. B) With the growth in ‘producer loops’ and large-scale livestock feeding operations, more corn is bypassing the commercial system and moving directly. C) Perhaps more corn has been sold under basis contracts where the sale is not reported to the checkoff system until finally priced, but the corn has already moved because title has transferred. D) All of the above.

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