Coming to Grips With Corn Prices: Ugly Basis Levels Loom This Fall

Corn Flex    Today in Woodstock Ontario I finished my last speaking engagement for the winter season.  I did a presentation on farmland values and grain prices for the Royal Bank of Canada.  It was my 19th speaking engagement since last summer.  Mixing farmland values and the grain markets together in a presentation tends to have a responsive audience.  Farmland values are generally the highest item on our farm balance sheet and grain markets are anybody’s guess.  Put them together and at least you should be able to hold farmer’s attention.

Today’s presentation had a little bit more meaning to it from a grain standpoint.  I had to explain what I thought happened last Thursday and Monday when the May 2013 old crop corn contract lost over $1 a bushel, the largest two day trading drop since records began being capped back in 1959.  Meanwhile, large parts of the United States do not have any physical corn and many people are left looking at how all this happens.  The proverbial “it doesn’t make sense argument” is heard almost everywhere.

It just so happens that I am a disciple of DTN Senior analyst Darin Newsom.  I think that Darin has few peers in the industry and as a colleague at DTN; I value his opinion very much.  His analysis has been instrumental in me learning much more about how our grain markets work.  His work on the investment noncommercial speculator side of the grain market has always made real sense for me.  We have grain fundamentals and then we have this rather large noncommercial speculator demand which seems to comes out of nowhere and changes everything.  Market action of last Thursday and Monday certainly were reflecting our noncommercial speculator friends couldn’t get out of the market fast enough.

The key number in last Thursday’s report was the extra 360 million bushels of old crop corn the USDA seemingly pulled out of nowhere.  I heard Darin’s explanation of how the USDA has done this many times before and maybe we should come to expect it.  Needless to say, with all the prospective planting projections we had in the report, it hardly meant anything at the end of the day.  It had everything to do with the much larger quarterly stock inventory of corn than we ever thought possible.  Grains went into a death spiral and who knows when we’ll ever see green again.

If that wasn’t a commercial for how the investment side of the market works, I don’t know what is.  You had the computer’s feeding on headlines about how bearish the USDA old crop numbers were and the rest as they say is history.  Our noncommercial friends could not get out of the market fast enough.  Getting them back in will surely be a big challenge.

From an Ontario perspective, the cheapest corn in North America just got a lot cheaper.  Yes, we had $7.50 plus corn off the combine this past fall and much of it was sold at that.  We have been exporting corn ever since last fall and you can bet we are probably exporting even more now.  It makes me wonder what the future is.  Is Ontario becoming so successful at growing corn that we might be our own worst enemy?

What do I mean by that?  I’m wondering if Ontario farmers are so successful at growing corn that we may be going to a permanent export basis.  For instance, this past year we yielded 160 bushels per acre on a provincial basis for corn.  We have been exporting corn all fall and all winter with no end in sight unless it comes in mid-summer.  This is happening at a time when our American friends don’t have very much old crop corn because of last year’s drought.  So my question is if we have a repeat performance in Ontario this year and a normal crop in the United States, what does that mean for corn pricing this fall and next year?  Something tells me it means a very ugly basis this fall, which may surely have a long tail into 2014.

Of course the big wild card is the weather, which we have no idea, which way it will go.  If we get normal weather, I think that ugly basis is a very big scenario comes this fall and winter.  If we get a repeat of last year in the United States, ditto for the status quo from this year.  However, I’m betting on more normal weather and a much uglier corn basis come this fall.  In many ways, we are victims of our own productive success.

So what does that mean looking ahead?  It likely means lower prices for corn, which eventually will mean increased demand across the board.   Combine that with the record crop of soybeans coming out of Brazil and it will surely add to the bearish tone upon our grain markets.  But let’s not put the cart before the horse.  There is hardly a seed in the ground yet.  There is so much distance to travel, so much risk to assess.  Remember, 2013 is just another year; we’ve just got to let it play out.