USDA Prospective Plantings: How About the Basis?

By the time you read this, we’ll all know what the long awaited March 30th USDA Prospective Planting report will say.  There are two reasons for this.  One, the report comes out today.  Secondly, DTN has decided to edit my column another way, which means even though it is written on Thursday night as usual, it’ll show up after additional editing some time Friday.  Change is always good; let’s all adjust to it.

Adjusting to the report is another thing.  On March 29th the May corn contract finished at $3.94/bushel.  It’s a far cry from the $2.29 the nearby month finished last September.  However it’s a good 54 cents below where the May corn finished on Feb 22nd.  However, everything you read talks about how high corn prices have gone.  The hype on corn has simply turned over whelming.

I suppose in some ways here in Ontario I’ve added to it.  However when you break it down its not rocket science.  I’ve mused about it all year.  Planted acreage last year was 78.33 million acres in the US.  The average trade guess is 88 million with 91 million being the top end.  I have a hard time believing we’ll get all that corn in.  However, I know the American farmer.  They love to grow corn and this year they’ll try to grow as much as they can.

Last year at this time, I was making my way to Ottawa to help lead the Ottawa Farm Solidarity Rally.  Leaving the stage I was full of hope.  However a few weeks later I was called crazy for planting corn.  So when corn futures surged to over $4 I had suddenly become a visionary.  In the end it’s all a matter of perspective.

Soybeans are another matter.  Right now in 2007 there are “beans everywhere.”  Beans, beans and more beans.  However the soybean market has tried to defend itself.  Futures prices have moved significantly higher since the farm rally of last April.  With corn stealing acres from soybeans is setting up to reduce those onerous stocks.  Soybeans acreage below 70 million will reduce the US crop to the smallest in 10 years.

All this crop talk will surely be coffee shop talk into the late spring and summer.  However, we can’t do much about futures other than watch and wait.  We know rain makes grain; still it is a long way until harvest.  Much risk remains both out of the skies and in the soil.  Pricing opportunities will abound.  Being cynical about USDA projections will surely grow to epic levels.

But how about basis?  What you say.  Yes, basis.  In many ways it makes a lot more sense for us to talk about basis than the futures.  Everybody can be an expert about futures.  Figuring out basis in your local area is the real trial.  In Ontario this past year, basis has been an enigma.  Vitriol about basis in farm circles has risen to epic levels.

In Ontario on the eve of the big USDA report corn producers have an extremely weak basis.  Elevator corn prices are at an unadjusted basis of about -.15 cents under May.  This means prices are about $3.80 Can/bushel.  Ontario ethanol plants, which help set price in Ontario, don’t even have bids for three months out.  Is there corn everywhere?  It would seem so.  Last year Ontario had a record corn yield, averaging near 165 bushels/acre.

That was about 20 bushels more than the 145 bushels/acre record crop Ontario had last year.  Add in the vomitoxins which hit last year in Ontario and it made it that much worse.  Still, basis in Ontario is always related to US replacement cost.  For the last two months that’s been over $5 Canadian per bushel of corn.  Prices in Ontario are an eternity away from that.  Getting that changed might take just as long.

You would think at a certain point things would tighten up.  As one corn grower told me last year after corn prices had surged, “Phil, price is what it is, but we really don’t have a shortage do we?”  I had to laugh.  Maybe there was something to that.  However, basis is a reflection of local supply and demand.  In Ontario there is too much local corn chasing too few places.  Ditto in many other places in the Corn Belt.

What’s it all mean.  Simply put even with a weak basis combined with elevated futures levels, guys need the money.  Corn is moving rapidly into the feed and industrial market even with its accelerated consumption due to bio-fuel.  At some point it’s going to burp.  Knowing when that will be in 2007 is the million-dollar question.