By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
February 7, 1999

Corn futures contract prices in Chicago have staged a valiant attempt to hold on over the last month, in the face of heavy downward pressure from wheat and especially soybeans. Since the last Ontario Corn Producer magazine issue January 8, the MARCH corn contract has lost three cents, the JULY contract is down six cents, and new crop DECEMBER is likewise down six cents. While disappointing, that’s pretty good compared to soybeans which suffered a 41-cent loss in the MARCH, a 45-cent drop in the JULY, and a 42-cent decline in the new crop NOVEMBER.

There is something significant – moreso for soybeans – at play here. During the same time period detailed above, open interest (the number of open or unfulfilled contracts) in the corn pit declined, which means players currently in the market were leaving. Since prices held basically the same, the number of buyers leaving equaled the number of sellers leaving. This suggests most major players (spec funds, commercials, export houses, processors) are comfortable with current corn prices in Chicago and are not expecting them to move too far one way or the other. However, in soybeans, open interest rose during the same time period, meaning new players were coming into the market. Since prices dropped sharply during the period, these new players were generally coming in selling. This means they expect soybean prices to move lower.

We are entering the time when Chicago plays the acreage guessing game with a vengeance. This year, most analysts are penciling in another substantial expansion in U.S. soybean acreage (i.e., SPARKS projects plantings up three per cent to 74.375 million acres, the reason for the negative bias to price illustrated above). Cheaper inputs are the one reason; but so are net returns per acre versus corn, and returns versus cotton in the south. There is another reason at work: this is not a one-year trend. Soybean acreage has risen steadily in the U.S. since 1990 (up 15 million acres or fully 25 per cent 1990 to 1998), but has expanded most dramatically since the advent of the 1995 U.S. Freedom to Farm legislation. Since introduction of the reforms (especially freedom to plant, contained in this legislation) soybean acreage has expanded 10 million acres or more than 16 per cent in just four years! The projected three per cent expansion in 1999 plantings would bring soybean acreage within about four million acres of U.S. corn acreage. I suggested in an analysis of the U.S. Freedom to Farm in 1996 that within five years, U.S. soybean acreage would exceed corn acreage for the first time and would exceed 80 million acres not long into the new millenium. At this rate, I might be right.

Why is this happening and what are the implications for you? Previous U.S. farm subsidy and support programs favoured corn production at the expense of soybeans. Some might suggest this reflected the interests (and lobbying clout) of major U.S. grain companies, exporters and feed companies interested in maximizing volume production of grain to handle, condition, store, move and export. When it comes to volume, soybeans don’t compare to corn. And besides, corn production for livestock feeding had been around much longer than soybean production for food use. Whatever the reason, U.S. programs fostered expanded corn acreage, which also increased corn production-related research efforts, demand for hybrid seed, fertilizers (especially nitrogen), corn herbicides, drying capacity, storage and handling facilities, rail, barge, and trucking capacity...the entire infrastructure that arose to supply and service 80- to 85-million acres of U.S. corn commonly grown from the mid-1970s through the late-1980s. Increased demand boosted pricing for these inputs and services.

Now, with changes in U.S. farm policy and programs fostering the dramatic and quick shift to soybeans, corn-related supplies and services are likely to become underutilized (because of the dramatic shrinkage in volume) and significantly cheaper over the longer term. If the trend in the U.S. is toward soybeans (think of it as a human food with a “health-consciously favourable” perception) and away from corn (think of it as traditionally a feed for meat which has developed a less “health-consciously favourable” perception versus soy-based foods), cost of production and handling of corn is likely to fall over time.

At the same time, corn prices are likely to improve relative to soybeans. That old rule about a 2.5:1 ratio of soybean prices versus corn is no longer valid. Little wonder that every single Chicago soybean contract is currently trading at a ratio less than 2.2:1 and heading lower. I suggest it is entirely possible for U.S. Chicago soybean contracts to drop below $5 when the large Brazilian and new record Argentine soybean crops are harvested this spring...and perhaps move for an extended period of time below the loan rate of $4.89, perhaps even to the $4.70 range. If the U.S. is planting soybeans, and it is, you might be well advised to plant corn.

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