Recalibrating The VOM Discount Grain Economy Into 2019
In 2019 we are hoping for good things. I think I say that all the time especially on Instagram. Farming is always a challenging profession, but some years are a little worse than others. I’m sure if you were a cattle producer, you never wanted to see 2003 again after mad cow disease crippled our industry. There have been other examples in different degrees through the years. This past year in Ontario cornfields we got some of that as VOM issues and the resulting discounts have taken a big swath of profit our of the Ontario farm sector.
I had known that VOM discounts were higher in Ontario than they were in Michigan, but now knowing that they were 9.5 times higher in Ontario made me pause. From an agricultural economic perspective it added up quite quickly. At some place within the oligopolistic Ontario corn market structure end users were able to charge that much. 9.5 times higher VOM discounts in Ontario vs. Michigan seems a bit much.
So maybe there are a few other villains in the Ontario agricultural VOM economy other than Mother Nature. I don’t know. Clearly, Mother Nature did us a disfavor by creating a perfect storm where the corn was infected. As we move on into 2019 we can hope for conditions that never warrant that again. We can also hope that there is some type of plan B to deal with a VOM outbreak, which was greater than anybody had expected. I’ll take more reasonable discounts as a start.
Keep in mind that we don’t make up grain prices from midair. In Ontario, we have some of the best price transparency in Canada. In other words, if the price of corn is $5/bushel or $200 per tonne, you can be confident that it is based on the appropriate futures price plus or minus a basis value, which reflects local supply and demand plus foreign exchange. For some of you reading this you must wonder is it any different anywhere else? The answer to that is yes in some parts of Quebec, the Maritimes and Western Canada, where price transparency has been more of a journey. Price discovery in some of those locales isn’t as automatic as it is in Ontario.
Some of you have read my sheep market story before. Many years ago I was visiting with an agricultural economist in Canberra Australia. The problem he was having at the time was sheep prices were making no sense of different local markets in the area. He said that they were too volatile and there were big differences between local markets. Immediately what came to my mind was the volumes of sheep sold might be erratic causing these price variations. However, at the end of the day I left Australia never did find out the answer. Needless to say, when a market is not truly liquid, sometimes it’s hard to produce consistent prices. That Australian sheep market example is the one I have experience with. However, the same principles can be applied to grain prices in some geographic areas.
In Ontario, grain moves in and out the province very seamlessly. This past year we actually had a unique situation where we were shipping out soybeans and replacing some of those supplies with cheaper American soybeans. It all had to do with the Chinese tariffs on American soybeans. On the corn front, we process about 35% of Ontario corn into ethanol, with the rest going to feed, food and industrial uses as well as the export market. Every year brings some unique challenges to that grain flow and 2018 certainly reflective that. However, I cannot remember ever in my career where the grain flowed out the back of the combine onto the ground or through a forage harvester being destroyed.
That crop destruction was all based on the agricultural economics of the reality of the situation. When you combined the VOM discounts involved with the crop insurance realities, that was your only option. Agricorp attempted to mitigate some of the pain with a 79 cent/bushel payment for some VOM bushels below the crop insurance guarantee. The Ontario Minister of Agriculture has stood by and watched all this happen. The Grain Farmers of Ontario have estimated the direct financial loss to farmers in the area of $200 million.
So yeah, I’m hoping for good things in 2019. Agricorp can do better. The Ontario Minister of Agriculture needs to take real responsibility to get the funding to do that. Taking pictures in VOM cornfields doesn’t cut it. End users can rescind those onerous discounts. Everyone needs to stop passing the risk down to farmers. Or maybe Michigan VOM discounts were a stretch.