$3.88 New Crop Corn Does Not Mean the Apocalypse is Nigh

Volatility1     The price of new crop corn in Ontario is approximately $3.88 a bushel as I write this.  That’s about half what it was a year ago.  It is certainly a head turner for many farmers who are wondering when $6 and $7 corn comes back.   As they say on twitter, LOL (Laugh Out Loud).  The only problem is it isn’t very funny.  Farmers have become so efficient we are continually driving the price of our agricultural commodities below the cost of production.

Of course nobody really knows where agricultural prices are going to go.  If we knew that we would be sitting on a beach with a cell phone.  It seems so long ago now (2006) that I was leading a 10,000 man protest on Parliament Hill when the price of corn was $2.11 a bushel.  At that time Canadian farmers wanted an agricultural safety net that worked.  We never got that, instead we had the ethanol revolution and many of us were saved by burgeoning grain demand.

So now we find ourselves in the uninhabitable position of becoming so efficient that we have not only covered the extra 5 billion bushel ethanol corn demand requirement, but we have exceeded that.  Not only that, the drought last year gave us prices many of us had never dreamt of.  This also encouraged the production of feed grains around the world.  With some areas of the world like the Black Sea region as well as South America offering cheaper corn and soybeans to world end-users, it’s like back to the future.  Does anybody want to go back to Parliament Hill asking for that Canadian agricultural safety?

$3.88 a bushel for corn is far different than $7.50 a bushel off the combine, which you could get for corn last fall.  It just so happens that Ontario has a unique market structure for corn, which generally makes it some of the cheapest corn in North America.  The question is how long is it going to take to get prices back to a level where Ontario producers feel comfortable again.  With supply overwhelming the marketplace at these price levels, how can we build demand back into the grain complex.

The simple truth is it’s all about lower prices.  Once supply has been built, like the 14 billion bushel corn crop that is at hand in the United States, it takes lower prices to build demand.   We got this way with our eyes wide open.  Where at one time the United States fed 5.5 billion bushels of corn to livestock, that’s now at about 4.9 billion bushels.   With these corn prices being higher over the last 3 years, the United States is feeding less cattle than it did 21 years ago.  Ethanol usage is plateauing.  The road to build demand back up will certainly be through lower prices

Skeptics might say this crop is not into the bin yet and they are right.  There are still things that could go very wrong for the 2013 crop, but every day those chances get less and less.  Yes, much of this crop is very late but in my experience I have yet to see a major impact on US crop production from a late frost.  I have seen it in Ontario like in 1992, but I’ve never seen it on a wide scale in the United States.  With benign weather predicted into September and with combines rolling in Georgia, Louisiana and Texas, the September corn contract is telling a collapsing story.  It is a new day, if you hadn’t noticed.

In Canada, our futures prices are the same as our American friends but our cash prices are not.  With the Canadian loonie at .9586 as I write this, it may represent hope for a cash price boost.  In fact, you could make an argument, with the December corn and November soybeans futures prices receding, the lower Canadian loonie might bail us out in the end.  An 90 cent Canadian dollar versus the US dollar would go a long way to healing the price pain especially when it comes to Canadian cash soybean and wheat prices.  Ontario corn on the other hand, will likely remain some of the cheapest in North America.

Is the apocalypse near?  Is this the classic cost price squeeze that we had in the 1980s?  Well, let me tell you.  This is nowhere near that yet.  As long as our interest rates stay super low, lower Ontario cash prices for grain can sustain the industry.  There will be a period of adjustment and we will move on to a new day called 2014.

It is more of the same.  Agriculture has always been cyclical.  Agricultural prices have always been up and down.  Agricultural price psychology has always been different on the back concessions versus the brokerage houses.  Who’ll end up being right?  Sometimes it’s a matter of perspective and sometimes it is not.  Nobody knows where prices will go.