Back To The Future: $3.69 Corn Challenges Our Market Assumptions

Ontario Corn Mountain    New crop corn is $3.69 a bushel as I write this.   It’s been a long way down from $7.70 a bushel selling off the combine last fall.  That was a bit of an illusion but it was sure fun while it lasted.  Combine that with a record crop in many parts of Ontario in 2012 and we had the makings of the Disneyland agricultural economy.  So slap me if I think $3.69 is a bit of a wake-up call.

For those of you who read my grain market commentary you will know that much of this is not a surprise.  Our American friends have been producing the biggest crop ever this past summer and 14 billion bushels will eventually be on the ground in the United States.  In Ontario we are looking at above average yields for corn across the province except for the extreme Southwest.  This will put greater than 340 million bushels of corn on the ground this fall.  Corn buyers simply have to wait it out.  There will be corn everywhere.

I find it particularly interesting regarding corn demand in Ontario.  Historically, Ontario does not produce enough corn to meet its needs.  We have often exported corn at harvest time but have imported it back during the late spring and summer to fulfill the needs of end-users in Ontario.  The price pattern for our basis levels could almost be recorded on that seasonal pattern.  Many farmers built bins to store their corn into the New Year trying to capture some of the basis gains.  For many years this worked rather well.

Those times are quickly coming to an end.  Not only that, but the corn economy in Ontario will be changing greatly over the next 2 years and if things do not improve on the price front, radical change could be ahead.  In 2015, subsidies paid to ethanol plants under the Ontario Ethanol
Growth Fund will come to an end.  At that time those ethanol plants will be much more exposed to market forces.  Any wobbliness in their business plan will result in tough times, especially when ethanol grows less profitable.  The ethanol subsidy was provided to build this industry and that is something it was wildly successful at.  In my opinion, the Ontario Ethanol Growth Fund was the most successful Ontario agricultural policy ever.

Having said that, it did have some problems.  Initially, American corn choked some of the supply lines by passing Ontario corn.  At the time farmers were rallying across Ontario in 2005 and 2006.  All I had to do was mention American corn at some of these rallies and farmers would yell their approval.  At the time American corn was highly subsidized and many of us didn’t think American corn should be taking advantage of Canadian subsidies too.  I agreed, and at the time I let everybody know about it.

Despite some of the problems the Ontario ethanol growth fund enabled an Ontario ethanol industry.  Post 2015 they should be able to compete without the subsidy.

The kicker in the Ontario corn market is how successful Ontario farmers have been at producing corn.  The radical change that has taken place is that we now are producing more corn than we can use.  This is relatively new but it is our new reality.  If Ontario farmers continue to produce corn without regard for the new crop price, Ontario corn will get even cheaper, solidifying this province as the cheapest corn in North America.  What we need is less corn grown here or much more domestic demand fostered.  I vote for the latter, but I think eventually much less corn will be planted in Ontario.

Will it be back to the future?  Are we headed down the road where price will give us less than the cost of production?  Will the price of corn, which had such an instrumental effect in the higher prices for land, cause the opposite effect, land going down?   Will there be a renewed call for an agricultural safety net that works, something our Conservative government in Ottawa has conveniently ignored?  These are only some of the questions we need to look at as the price of feed grains retreat to more historical levels.

The truth is this is farming and the inherent nature of our own agricultural economics makes it so prices constantly look for the lowest denominator.  You can impact supply once in a while, but the levers of agricultural economics always bring it back and in 2013 it’s coming back in a big way.  For the Ontario corn economy looking ahead, rationalization is in the offing.  We got here with our eyes wide open.  It’s no time to shut them now.