It has been a smoking hot summer in southwestern Ontario. The last few days have been so oppressive that I have taken the afternoon off. Those heat warnings that are often issued by Environment Canada I no longer ignore. It’s hard to believe back in the day I would spend most of my summers pulling weeds. Heat was noise than, but of course I was a lot younger.
The good thing now is I can jump into a swimming pool or get into some air-conditioning, but my crops aren’t so lucky. From Windsor Ontario in the West to the Québec border crops are sizzling, getting worse every day as many areas haven’t had any precipitation. This is really changing our cash price horizon for Ontario corn. I mentioned it a week or two ago when I wrote about the drought. However, with little rain since then, our cash price anomalies in Ontario this coming year will probably be accentuated.
It means Ontario corn basis will have a life of its own. I mentioned that the night before what should be a fairly important USDA report. All summer we have heard about how good this US crop is in the field. Some analysts have warned us that the crop is not in the bin yet, but they’ve been drowned out by market bears who think the USDA may announce a 175-bushel per acre corn crop tomorrow. As it is now, trade estimates are ranging from 168.6 to 175 bushels per acre in corn. For soybeans the trade estimate is from 46.7 to 48.8 bushels per acre. Cash prices for our American friends are very low. It is not quite like that here in Ontario.
We’ve got the Ontario basis. Defining basis never gets old either. Some might think of it as a difference between the cash price and the futures price for grain. That’s one definition. However, I like to think about basis as the value, which determines when crops are moved (bought or sold). So if the basis is $1.10 over September futures like it is now for Ontario corn, that’s what it is. Corn is moving at those values.
To me, that is the easiest way for farmers to understand basis. However, I do have an appreciation that not everybody sees it that way. In fact, I used to get caught up with trying to understand why basis is a distinct particular value on any particular day. I no longer feel that way. I try to anticipate basis changes but at the end of the day basis is basis, it is what it is. It’s the value which grain is moving.
This was entirely enhanced in Ontario when the Ontario government decided they wanted ethanol blended into our gasoline. The $517 million Ontario Ethanol Growth Fund was instrumental in building five ethanol plants in Ontario. Not all the plants got funding. This program ends on December 31, 2016. At that time all of our domestic ethanol plants will be without subsidy. They will have to find their own way and I don’t see any reason why they wouldn’t be successful.
Where once all of our Ontario corn was exported or fed, now about 35% of it goes toward ethanol, a huge component of corn demand in Ontario. This has had the effect of increasing basis levels to Ontario farmers. This year with drought stalking our province, these plants are actually bidding for corn in the United States putting us on an import basis. It is also elevated the old crop price of corn by $.30 in the last four weeks and $.15 in new crop corn over the same time. In other words, at the previous lower levels enough corn wasn’t being moved. The basis has risen and suddenly corn is either coming across the US border or slipped out of some locked bin doors.
Looking ahead it is likely to continue. The corn crop in Michigan and Ohio has been compromised. That means any import of corn into Ontario will have to be chased further afield. That should be positive for basis moving ahead. Depending how the Canadian dollar moves, basis might become a saving grace in a very dry year.
That’s a little bit of positive in a negative year for Ontario production and in a tough year for grain futures prices. The weather can be cruel. However, in a bit of a warped way its opening up cash price marketing opportunities for both 2016 and 2017. Ontario corn demand is outstripping supply. It’s a total 360 degree turnaround from the last few years. Now, if we could get a surprise in USDA, we’d take that too. 2016 has been a tough one for Ontario farmers, but we’ll take what we’re given. Now, let’s hope for an Ontario wide 2 inch soaker this weekend.