Pro Farmer Extra
- From the Editors of Pro Farmer newsletter -
Senate farm bill; Corn spreads go crazy
April 27, 2012
No, Senate passage of its version of the farm bill didn't have anything to do with spreads going crazy in the corn pit today, but these are a couple of topics I want to cover in this week's update.
There is something bothering me about basing the farm program safety net on actual planted acres (eligible acres under this version of the bill). One of the reason Direct Payments were part of past farm policy is because those payments had absolutely nothing to do with current actual plantings or current actual prices. That's because, according to the World Trade Organization, farms can be subsidized as long as it doesn't "disrupt trade." Direct payments did nothing to influence farmers' planting decision, therefore did nothing to distort trade.
The new farm bill, with its revenue-assurance style safety net, will be very reliant on current actual prices and planted acres to determine payments. That means some growers could make planting decisions based on the safety net program... which makes the program potentially trade distorting.
If passed as it stands, the Senate version of the farm bill will very likely land the U.S. in the "court of the WTO" several times in the years ahead. (Yuck!)
Regarding the action in corn spreads, Pro Farmer editor Chip Flory continued his newsletter coverage on the topic in his blog to Pro Farmer Members titled "From the Editor" on www.profarmer.com. In that continuing coverage, Chip explained, "May corn futures go into delivery next week and the May-December spread went absolutely nuts today. May corn futures had a last tick on the day session that was up 30 1/2 cents; December corn futures were up 2 3/4 cents on the last tick of the day. That's a 27 3/4 cent move in the old-new corn spread in one day. Moves like this don't happen very often...
"But the wacky spread action doesn't end there. May corn 11 1/2 cents on July corn futures today and the old-old corn spread ended at a record 28 cents. That's the kind of price action that can only happen in a tight-supply, strong-demand market. Which is exactly what the corn market is dealing with right now.
"China bought more old-crop corn this morning... 120,000 MT for delivery in the current marketing year. That pushes China's total old-crop corn bookings well past USDA's current estimate of 4 MMT. That certainly suggests USDA will have to increase the corn export estimate in the May 10 Supply & Demand Report. That should drag 2011-12 corn carryover below the Feb.-Mar.-April carryover estimate of 801 million bushels.
"BUT... USDA could raise the export forecast and offset a bigger export number with a cut to another usage category. Specifically, USDA could cut feed & residual use. Specifically, USDA could cut the residual component of the feed & residual category.
"I've argued several times USDA is already working with a negative residual use estimate for corn. Maybe as much as a negative 200 million to 250 million bu. negative residual. That means feed use is actually 200 million to 250 million bu. bigger than the 4.6 billion bu. estimated in the April S&D Report. It's not much of a stress to imagine USDA's May 10 S&D Report including an even bigger negative residual use component, which would allow 2011-12 corn carryover to hold steady at 801 million bushels.
"In reality, supplies of 2011-crop corn are tighter than that. But, because of the negative residual and expectations that more than 900 million bu. of 2012-crop corn could find their way into the Sept. 1, 2012, corn stocks estimate, don't look for USDA's corn carryover to dip much more than it already has.
"We're not exactly sure how much more the old-old or old-new corn spreads will continue to widen. But combined with very tight exportable corn supplies at the Gulf (see News page 3 of this week's newsletter), stronger-than-expected demand for old-crop corn and talk that Argentina's corn crop estimate is headed someplace south of 20 MMT, odds are the bull spreads will continue to widen in next week's trade."
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