Long-term Income Strategies for Corn Farmers
Commentary by Terry Daynard, OCPA Executive Vice-President

The graph accompanying this story shows both actual and inflation-adjusted average Ontario corn prices since 1950. Although corn prices may seem higher in recent years, in reality the real price of corn has trended downward for many decades.

The same trend line could be shown for almost all other farm commodities – indeed, for all commodities. The National Post recently published a graph showing how average real commodity prices have trended down for 200 years in Canada (current real prices being less than one-third of those which existed in the early 1800s).

Safety nets are important in protecting farm income whenever prices fall below the trend line – as occurred for most crop years between 1986/87 and 1992/93 – and as has begun again in 1998/99. But they provide no long-term income protection against the down trend itself.

There are many things individual producers can do – and which OCPA and others in the corn industry are attempting to do collectively through research, extension and other related activities – to maintain real income in the face of this trend line. These strategies include lower costs of production by means such as reduced tillage, increased efficiency of energy and input usage for pest control, fertilization, drying, storage, and improved per-acre yields. The accompanying graph does not show the effect of improved crop yields; however, the rate of yield increase (about 1.5 per cent per year) is not as great as the rate of real price decline (about 3.7 per cent/year). More acres per farmer is another means of maintaining net income even as per-bushel and per-acre margins continue to shrink.

So much for reduced costs per bushel and more bushels per farmer. Can anything be done about prices?

There is nothing any farmer or farm organization can do about Chicago Board of Trade futures prices which are fundamentally linked to the long-term downward price trend. Skilled use of futures hedges, options, basis contracts and timely contract marketing can help in taking out the short-term market lows. Nevertheless, the long-term direction for commodity futures, in real dollars, is still down.

But there are things that can be done about the price basis (cash prices received by Ontario farmers, compared to Chicago futures). One of these – which has been a focus of OCPA activities since its founding – is to expand value-added market opportunities for Ontario corn close to home so the price basis is more often related to import-replacement price than export-clearance price. This is why wet and dry milling plants, fuel ethanol production, and livestock and poultry feeding – both in Ontario and in adjacent provinces and Eastern U.S. states to which transportation costs are low – are so important. It’s also why the association continues to look at even newer markets, such as bioplastics and other wet-milled industrial corn products. The difference between export-clearance and import-replacement price can easily exceed 20 cents/bu.

In my view, the biggest opportunities for price basis improvement in the future will go to those who are willing to think beyond corn as a commodity which simply meets minimal Canada grade standards. Top-end market opportunities (and prices) can be expected to grow for ultra high quality corn which meets (and, preferably, exceeds) industry specific grade standards for the production of high-value consumer products. The production of Mexican and snack foods, for which North American demand continues to grow at about 15 per cent per year, is one area already well-targeted in OCPA research and development, and market development endeavours. High-oil corn may also represent good long-term opportunity. In the future, much bigger basis premiums can be expected from the production of biotech-enhanced “nutraceuticals” for which acreage needs may be small, but per-bushel value will be very high.

To capture these high-value opportunities, however, more will be needed than wishful thinking and the occasional year of exceptional quality (such as 1998). Individual farmers, groups of farmers or commercial companies having contracts with farmers will need to be able to supply corn meeting or exceeding consistently high (market-specific) quality specs on a continuing basis. Deliveries will need to be scheduled all year round, at the convenience of the buyer/processor. This is a far cry from the common present practice where the goal is often just to scrape above minimal grade requirements, with delivery contracts specifying delivery over an extended time period (eg., October or November, at harvest).

This will put much larger management and marketing strains on farmers. And it will mean much tighter linkages between farmers and processors, both logistically, and in long-term pricing arrangements. It’s more like the arrangements which now exist between Magna International and General Motors, or between Linamar and Toyota, for suppling quality components for automobile manufacturing with just-in-time delivery scheduling – than it is to traditional farm-elevator contractual arrangements.

But as those who follow Linamar and Magna earnings reports know, it can also be very profitable.

In my view, golden market opportunities (and good profit potentials) await those corn farmers willing to go after them, and who will be willing to make the marketing and production changes needed to exploit these future high-quality market niches – for on a global basis, these will be corn market niches, even if they do come to represent a high percentage of Ontario’s corn output.

For those who want to continue to grow corn as they have done in the past – even as real prices continue their decline – it will be tough.

One final thought: Although this commentary features corn, it could well have been written for just about almost any other Ontario farm commodity. Welcome to the twenty-first century.

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