American LDP’s Versus Canadian Supports: Who Has the Upper Hand?

A reader from Eastern Ontario contacted me last week regarding the American Loan Deficiency Payments.  Long the scourge of Canadian corn growers, the LDP is a major part of how the American corn farmer can thrive at times when prices go south.

Consider this.  According to an AP report published July 19th in DTN News, one 72-year-old Roger L. Richardson grew and stored 190,000 bushels of corn in 2005.  He applied for a LDP on the corn, which amounted to 48 cents/bushel.  He ended up selling this corn for $2.60 bushel. (The price rose after he took the LDP)  In the end he got over $3 US for all those bushels.  He grossed half a million for the corn, $75,000 from the LDP alone.

For Canadian grain producers this is only a dream.  Unless I have it all wrong and I hope my American readers will tell me.  I’ve talked to some American farmers before who’ve said LDP’s are a bit like playing the futures market.  The value of a loan deficiency payment (LDP) changes on a daily basis.  American farmers need to be pro-active to take advantage of it.

How does this compare to the Canadian corn farmer?  From afar it looks like all our American friends were playing “hide and go seek” and everybody is home free.  However, everything is not necessarily what it seems.

In Canada corn farmers get the CAIS program, which hasn’t paid anything.  However, after federal agriculture minister Chuck Strahl changed the CAIS rules, corn farmers might end up with something.  Currently agricultural bureaucrats are re-doing 2003 and 2004 CAIS forms while sifting through 2005 CAIS forms.  This represents corn crops, which most Canadian farmers can’t even remember.

Let’s do some quick math.  190,000 bushels at $3.08 is $585,200.  That’s about $655,424 loonies.  The LDP is about 48 cents so doing the math I get $91,200 just on the LDP alone.  So it looks like the AP report might have been conservative in their estimate.  The American farmer in this case, Mr. Richardson farms 1500 acres of land.  So the LDP represents about a $60/acre subsidy from government.  In Canadian terms it’s about $67 loonies/acre.

Does injustice surge up within your collective corn producer soul?  Of course from a Canadian perspective you’d have to include whatever CAIS or any other “special grains and oilseed” payment might add up to.  Cutting to the chase let’s say some of those payments are at the maximum $25/acre.  It’s pretty clear our American friends have at least a $40/acre advantage over Canadian corn producers before we even blow the dust off the planter.

So “what sup” with all this?  It’s pretty clear any thorough technical analysis would only substantiate these differences although a recent OMAFRA report dismissed it.  The question is would the proposed RMP or Risk Management Program being proposed by Ontario farm groups breach this gap?  Or would it put Mr. Richardson of the eastern shore in a position where he’d want to switch his farm to Canada?

Quoting from the Farmers Feed Cities website, the RMP as proposed is a commodity specific support program that potentially triggers payments twice a year whenever “opportunity” prices for a six-month period drop below the selected support price per commodity.  A producer must enroll annually and pay the premium associated with the support price.  Simply put RMP has some traction.  I have my quibbles, but it’s worth fighting for.

Back to Mr. Richardson.  He’s getting $3.08 U.S. for corn.  In loonies, that’s $3.44.  If you read the above file on RMP support levels can be locked in $3.50, $3.75, $4.00, $4.25, $4.50 etc, with increasing premium costs for higher trigger prices.  It’s much more complicated than that.  In simple terms Mr. Richardson is making out like a bandit compared to us now.  Under RMP we might have a fighting chance.  Parity with the US seems a long way off.

So at the end of the day where are we?  In Ontario, the 2006 corn crop is growing like a weed out of control.  A few August rains in Ontario and Quebec this year will probably redefine the Eastern Canadian yield curve.  However, what will it be worth?  Without an RMP will it be all for not?  Does Mr. Richardson of American LDP fame have us by the tail?  The bottom line is this stabilization and support paradigm is a long and complicated road on both sides of the border.  Reaching out for the magic formula seems to have never been so elusive.