Things are not good, but on the other hand, not everything is about the Covid19 pandemic that continues to wage its brutal truth across the land. I talked to one of my machinery guys the other day and he assured me that the mood in the countryside among farmers is pretty good this fall. He told me no VOM and no mud has cheered farmers up and he expected good machinery sales come this winter. $13-dollar plus soybeans can do that.
What happens to the agricultural economy in Quebec and Ontario when you have $5 plus corn and $13 plus soybeans? Well, it does get a bit loopy. With good yields, that helps too. If I’ve heard it a five times, I’ve heard it a thousand. Nobody expected us to get here this year on the price front. You know my line. Nobody knows where prices will go and that stands now and into the future.
That’s my retort when I get asked about market price direction. I then quickly follow with, well, I know, but I like to keep it secret. Of course, I’m just kidding, but I’ve often thought I should stop that too, because some people might actually believe it.
The price of grain is an economy in itself. In Ontario and Quebec cash prices for grain are derived using a futures market basked out of Chicago and the corresponding basis that goes along with that. Add in the foreign exchange and you have several moving parts to price. We didn’t just magically get to $5 corn and $13 soybeans. It happened for a reason when a series of markets factors come together. As of Mid-October, here we are.
I find price discovery fascinating. As you all know, I write about it continually for the Ontario, but also the Grain Farmers of Ontario, DTN and a few others. The hard part is trying to gain cash market intelligence on what is going on in the countryside, which for me stretches from Windsor Ontario to Quebec City and beyond into the Maritime provinces. Within that geographic area there are a multitude of factors which affect cash prices for grain. Anticipating what those factors are is a continuing challenge.
Case in point are basis levels for grain reflected in Ontario and Quebec. In fact, you could also include the Maritime provinces in this discussion. In Ontario, the cash price of corn is partly determined by the nearby delivery futures month with an associated basis level. In other words, if the December futures price is $4.00, that means that’s the value of a bushel of corn delivered into Chicago. However, I can’t haul it that far, like so many others, so the grain typically has a negative basis values (in US terms) as you get away from Chicago. A look at any cash basis grain map of North America and you can see somewhat of a pattern. Needless to say, it doesn’t make for good scrumptious consumption like a good movie. I’ve found most farmers aren’t all that interested in the nuances of marketing. They’d rather talk about farm machinery or even cover crops.
Transportation between end users, localized supply and demand, foreign exchange and oligopolistic market structure are other factors which affect basis values for grain. Are your eyes glazed over yet? A lot of guys don’t want to hear about it. Needless to say, let me give you an example. I produce corn in the deep SW of Ontario, where I can look out the window and literally see quite a few grain buyers and quite a bit of grain to boot. The price of corn is based on a December futures value and a basis value determined by big end users and the US replacement price for corn. Meanwhile, some of my Quebec friends near Drummondville Quebec, have a much higher price. It’s mainly because their market structure is so different and their opportunities so much more, based on a different agricultural economy. Being closer to export markets in Europe helps too.
Multiply this diverse market environment by 100 times as you move east in Canada. As you all know, I’ve been schooled in the nuances of cash grain prices in the Maritime provinces, having spoken there at least 5 times, the last of which was March 2020. Simply put, cash markets there outside of PEI are so thin, cash prices are usually much higher than anywhere else. However, it’s all related to the transportation cost of trucking grain in or out. Needless to say, when an end user for grain can be a fish farm on the Bay of Fundy, there are many unusual market factors to consider.
In many ways, it means the true price of grain can be an enigma depending where you farm in Eastern Canada. It certainly isn’t where I farm. However, it can be as you travel East in Ontario, Quebec and the Maritimes.
The difficult part is nothing is written down on how all of this works. Futures markets are easy to understand. Cash markets can be much more of a challenge. There can be a huge vacuum of cash market information, partly because the players themselves operate in secrecy. There is nothing illegal about that, it’s just the way oligopolists work. It can lead to sloppy cash grain pricing in some parts of Eastern Canadian farm country.
There is so much more to this. I could go on and on. Needless to say, ask yourself why the $5 corn and $13 soybeans are real? Ask yourself about the price discovery mechanics that got us here? Can you make sense of it? I can make sense of most of it, but it’s taken a career to get here with an academic background in agricultural economics.
Key is to try and understand. I find most farmers aren’t that interested because its complicated. However, never stop trying. The price of grain is what it is. Behind $5 corn and $13 soybeans, there is a story to be told about the road to that price discovery. It never ends, but usually just gets more complicated.