The USDA surprised Chicago corn markets October 9 with a 211 million bushel reduction in carryover estimate for new crop corn and a 91-million bushel reduction in the old crop corn. A reduction in the old crop had been expected because of a lower than anticipated Grain Stocks report September 30 which implied that U.S. feed usage had been better than projected. during the fourth quarter of the 1997/98 crop year. The mild surprise was a 100-million bushel increase in feed use for the 1998/99 crop and another 25-million bushel increase in exports. The feed use jump meant feed has suddenly become a source of strength for new crop corn with usage having surged a combined 350-million bushels in the last two reports. Additionally, new crop export estimates have grown the last four monthly reports. However, the real surprise to many spec funds was the lower than anticipated increase in 1998/99 crop size – up only five million bushels to 9.743 billion bushels – versus many pre-report guesses in the range of 9.8- to 9.9-billion bushels. What this report signals is not that prices will rocket higher from here, but that the bottom is in and prices are likely to trend sideways for some time to come.

The report spawned a rash of bottom picking (the latest U.S. ag policy generated marketing game) on the part of U.S.corn farmers, many of whom cashed in on their Loan Deficiency Payments (LDP) on Friday. A LDP is a payment a U.S. grower can trigger (the difference between the county loan rate of $1.89/bu and the Posted County Price...for example, $1.71/bu in Michigan yielding an average LDP in Michigan Friday October 9 of $0.18/bushel) whenever the grower thinks prices have dropped to their lowest point, thus maximizing the difference. Since the October USDA report suggests that prices do not have a lot of downside in the immediate future, U.S. growers are collecting these payments in droves. Something else: Monday October 12 is Columbus Day in the U.S. and USDA offices are closed even though Chicago markets are open. This means U.S. growers can collect on LDPs from pricing that existed Thursday as late as Tuesday morning If Chicago moves higher on Monday, USDA Farm Service Agency office fax machines might run out of paper before the opening of business Tuesday morning!

There are three ways that LDPs affect Ontario grain and oilseed producers. First, contrary to World Trade Organization agreements signed by the U.S., Canada, and most other countries discouraging subsidies that are commodity specific, LDPs are triggered by specific commodity prices and are tied directly to specific commodity production (i.e., you must have the corn in order to collect the corn LDP). The U.S. is fond of ensuring that everyone else complies with the rules, but apparently these same rules don’t apply to farmers there. Secondly, this subsidy is pouring millions of extra dollars into U.S. producer pockets...those same pockets that you must compete against in provincial and export markets. For example, by Thursday October 8, U.S. growers had redeemed $480 million in wheat, corn, and soybean LDPs alone...and that includes relatively very little corn and beans! There are many millions in LDPs yet to be redeemed. Third, there seems to be a tendency for U.S. growers to collect their LDP and then sell the cash commodity. This puts additional pressure on U.S. cash markets and therefore nearby Chicago futures prices. If it were not for the floundering loonie, a great deal of this cheap U.S. corn would flow into Ontario and weaken basis in the province as well as Chicago futures.

In Ontario, the harvest is moving quickly with the fine weather of late. Yields are variable but running close to average for the province as a whole (i.e. average for the decade of the 1990’s is 111 bushels/acre). Statistics Canada released its Supply and Disposition estimate October 8 and projected a crop in Ontario of 205-million bushels or 111 bu/acre on 1.85 million acres. Quebec’s corn crop was projected at 93.7-million bushels establishing another new production record for that province.

There is something amiss in Statistics Canada’s usage estimates for corn in Ontario. The estimate of 73.62 million bushels for 1997/98 industrial and food use is too high by about seven- to eight-million bushels. After all, the Chatham ethanol plant only recently came up to full capacity and was actually out of the market for a period late May to early July. However, the real problem involves the department’s export and feed usage estimates. Statistics Canada attributes all corn exports from Canada as being Ontario corn despite the fact that Quebec has displaced Ontario corn into the northeast U.S. over the last several years. In order to align with their stocks estimates, Statistics Canada reduces its feed usage estimate in Ontario to compensate for it’s over-reporting of corn exports from the province. Likewise, for Quebec, to compensate for its under-reporting of corn exports from that province, feed usage is increased. This is most noticeable in 1996/97 data. In that crop year, Statistics Canada did not collect a stocks- in-commercial-position estimate for Ontario and simply reduced its stocks projection to match its on-farm stocks survey estimate (i.e. 11.4-million bushels versus 22.9-million bushels the year prior and 30.2-million bushels the year after). To compensate, Statistics Canada dropped feed usage significantly (121-million bushels versus 138-million bushels the year prior and 138.4-million bushels the year after) in order for final carryout stocks to match with its next stocks in position survey for 1997/98, which once again had a commercial stocks estimate. These kind of statistical gyrations hamper efforts to attract investment dollars into either industrial (i.e., more ethanol production or food grade corn production) or feed use (i.e., high oil corn usage projections currently are being made by seed companies using feed usage estimates in preparation of business cases to justify the research investment required to move such hybrids north).