The Classic Canadian Grain Marketing Conundrum: Futures and Basis

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It is been a slow start to the planting season in southwestern Ontario.  After a February and March that wouldn’t stop pounding us with frigid temperatures, April has been quite wet.  Yes, April showers make May flowers and hopefully that will apply to corn and soybeans too.  Nobody wants to see a repeat of 2014 in these parts.  I’m hoping for a little bit of hot and dry this year and as far as I’m concerned that can start next week.

It will be the week after, anytime after April 20th that will see corn planters starting to roll in Ontario.  At the present time I still see snow in ditches and of course water everywhere.  It’s still early, but I hope this weather is not a harbinger for a wet spring ahead.  At least we have another USDA report to decipher amid these raindrops.  Today, the USDA released its latest WASDE report. (World Agricultural Supply and Demand Estimates)

The mid-April report is usually not a big smoke when it comes to USDA reports.  In fact usually the smoke is still settling from the March 31st report on the prospective plantings in the United States.  That is true this time around but it is always good to look and see what the USDA is saying.  In the report the USDA actually increased corn-ending stocks to 1.827 billion bushels, which was up 50 million bushels from last month.  This came about because as expected feed and residual use was cut 50 million bushels.

In the soybean market the USDA actually lowered its ending stocks by 15 million bushels down to 370 million bushels.  The ending stocks to use ratio in the United States dropped to 9.9%.  The USDA also maintained Brazilian production of 94.5 MMT and Argentina at 57.0 MMT.  The stocks to use ratio on wheat declined to 32.9%.  It always seems to be the same drill with wheat, it’s planted and harvested everywhere except for February and March.

Market reaction was somewhat muted except for soybeans declining precipitously because of some lower-than-expected export figures.  Keep in mind that there is very little of the crop in the ground in the United States and none in Canada.  There is so much production risk in front of us.  The market doesn’t have much fresh news to act on.  We could be in the sideways to down pattern for the market for some weeks to come.

What is particularly different this spring versus others in Ontario and Québec is new crop basis values.  For instance in southwestern Ontario there is a +40- $.45 basis for new crop corn in southwestern Ontario and $.90 to $1.00 for new crop corn in Eastern Ontario.  My assumption is it is similar in Québec, but I do not have specific information there.  These values are healthier than the past several years at this time.  Yes, it is because of the Canadian dollar and it is something Eastern Canadian farmers might consider to bite into.

Soybeans are the same way in Ontario.  For instance the old crop basis ranges from approximately $1.65 a bushel to a$1.85 a bushel across Ontario.  New crop bids for soybeans range from approximately a $1.45 a bushel to a $1.87 a bushel.  We all know the drill that the Canadian dollar goes down to $.71 by the fall.  However, these very high positive basis values for both corn and soybeans are much higher than the last five years.  Any spring rally in futures will send these basis values higher.  However, if futures retreat it will have a negative effect on the basis values too.  It is our classic Canadian grain-marketing conundrum.

Our grains basis can be a mystery to many people.  However, think of it this way.  The basis values for grain are the difference between the futures price and the cash price in your local area.  Specifically, the basis value for grain is the value which grain is bought and sold in your area.  It’s simply a price level at a point in time that is, what it is.  So maybe in April 2015 these very positive basis values are very good thing.  It certainly looks that way compared to the last five years.

Keep in mind though it is such a fluid situation.  In fact, on the farm change is our only constant and that holds true for grain marketing too.  Yes, in Canada we have specific foreign exchange factors that affect our grain marketing and they must be kept at the fore at all times.  Daily market intelligence is key.  The challenge will be to wrestle successfully with all of these market factors as we move ahead.  The rain will finally stop and the corn planters will roll.  Basis values will stretch and retreat like an elastic band.  Finding that place where we are comfortable and profitable will always remain our challenge.