November '99 Market Trends

By Brian Doidge, Market Analyst, Ridgetown College/University of Guelph
October 12, 1999

U.S. & World
USDA’s October 8 Supply & Demand report increased the average yield projection to 133.5 bu/ac which increased production to 9.467 billion bushels, up from the September report (9.381 billion bushels), but not as much of an increase as had been expected. Offsetting a 75-million bushel reduction in feed use and increase in exports meant that carryout stocks for August 31, 2000 jumped to 1.967 billion bushels, again a little less than had been expected, but still right around the burdensome two-billion bushel mark and up 172 million from August of this year. The report was somewhat bearish for corn price prospects this winter.

Depressed prices, with minimal prospects for significant improvement, focuses attention on assistance to be expected from government support programs. The House and Senate each passed their own version of a farm aid package (contained in the annual bill appropriating funding for USDA programs in the fiscal year, commencing October 1) in September; the joint House/Senate conference committee worked out differences in these two ag appropriations bills by September 30; the House passed the reworked ag appropriations bill October 1; but the Senate is still debating details, but is likely to pass the bill with only minor changes (if any).

The package calls for additional spending of $8.7 billion of which:

$5.5 billion consists of a new market transition payment to replace the previous payment originally scheduled for 1999 but pulled ahead into 1998. This effectively doubles the fixed payment per bushel to producers that is paid regardless of actual yield or acreage for designated crops.
$400 million is earmarked to reduce the cost of crop insurance premiums (the U.S. government portion of premium will now range from 31 per cent to 67 per cent depending on coverage selected). This will prove interesting because crop insurance participation jumped sharply in 1999 when government subsidies reduced premium costs; so much so that the actual cost to the USDA was higher than anticipated, and allocated funding for 2000 had to be brought forward to cover the 1999 shortfall.

One contentious item in the Senate is a doubling of limits on farm subsidies individuals can receive. Technically, individual U.S. farmers are currently allowed to receive no more than $75,000 in crop subsidies through Loan Deficiency Payments (LDP), or Marketing Loan Gains (MLG) and $40,000 a year in market transition payments. Many farmers claim twice those limits by having both husband and wife claim separate payments on the same farm (e.g., 75,000 + 75,000 + 40,000 + 40,000 = $230,000). The ag appropriations bill would double those payment caps meaning that farms could get up to $460,000 ($300,000 in crop subsidies and $160,000 in market transition payments) in 1999/2000.

This larger limit on payments under the LDP/MLG program is important because depressed cash market prices mean these payments are very large. For example, LDPs on October 8 were as follows: Michigan and Ohio both averaged 32 cents/bushel for corn and 85 cents/bushel for soybeans. Such large LDP payments are likely to push 1999/2000 USDA spending into the $24 – 26 billion range rivaling record spending from 1986. LDPs act like free “put” options establishing a floor price for commodities and U.S. producers are best advised to sell cash grain and oilseeds when they collect the LDP. It is suggested that this program modifies marketing patterns by pushing additional supplies onto markets at or near low points in price, exaggerating price movements.

The marketing of genetically enhanced (GE) grains and oilseeds is also altering marketing patterns. The USDA released a report on October 8 stating that 30 per cent of the 1999 corn crop was planted with GE seed, as was 57 per cent of the soybean crop (including Bt and herbicide resistance). Premiums for non-GE corn are running about 10 cents/bushel and 15 cents/bushel for soybeans. However, several U.S. commodity and general farm organizations are suggesting that acreages planted to GE crops in the spring of 2000 will be reduced, as producers shy away from GE crops requiring segregated handling and storage and which do not attract marketplace premiums.

Ontario
Harvesting is not yet into full swing as producers are concentrating on completing the soybean harvest. Early results vary greatly. Northern Huron county, Bruce and Grey counties are reportedly enjoying excellent yields, as is eastern Ontario. Areas harder hit by droughty conditions such as Haldimand, Norfolk, Kent and Essex are reporting disappointing yields. Statistics Canada released its October crop production estimate which projected an average yield for the province of 115.6 bu/ac producing a crop of 211 million bushels versus 238.3 million bushels last year. It is interesting to note that while Ontario’s corn crop is smaller than last year, Quebec’s (112 million bushels) is larger than the 1998 crop of 104.3 million.

The variability in yield suggests that basis in the east and north will be weaker while basis might be a bit stronger than usual in the south. There are reports that northern feed mills, which traditionally sell corn to area livestock producers who normally can’t grow enough to meet their own needs, are reverting to a grain merchandising function and being asked to sell surplus corn for these same livestock producers this year. The logical market for surplus corn in both the north and east is into the processing marketplace centered in southern Ontario. However, larger freight costs will detract from basis offers in the north and east to move corn to this market. This assumes, of course, that this corn is suitable for sale to industrial and food processors (e.g., hybrids suitable for sale into European markets).

A clear picture of discounts or additional freight charges, if any, applied in Ontario this fall against non-European approved hybrids (essentially Roundup Ready corn) has not emerged yet. However, there have been two worriesome developments – and one that’s hopeful – on the genetically enhanced front:

Casco appears to have accepted the segregation protocol for U.S. corn shipped through Anderson’s in Toledo (which is a receiving location for both approved and non-approved hybrids), and has already received two boatloads of U.S. corn (totaling 839,000 bushels) in September alone. Unfortunately, Casco has not extended this same dual receiving privilege to either Ontario grain elevators or individual producers.
GE soybeans are being segregated at some grain elevators, even though crushers do not have an exclusionary acceptance policy similar to corn processors. Also, any stray corn kernels in non-GE food use soybeans are now grounds for rejection on the premise that any corn might be GE corn. Actions such as these, although soybean related, send a less than positive signal to growers and may explain comments from some that they will not be growing Roundup Ready corn next spring.
On a positive note, there is a report out now that a European regulatory commission is about to approve a tolerance of one per cent for “GE-free” food labeling. Even though the method for measuring and detecting has yet to be specified, at least processors now have a target.