“There are big differences going forward between the cash and futures market.”  Those were my words last week to York Region farmers as I tried to explain my way in a commodity market seeing new highs.  For the gathered farmers I’m sure it’s not really what they wanted to hear.  With our fixation on the value of the loonie, most Canadian farmers default into a mindset about our dollar’s effect on grain prices.  Thinking of it “the other way” with large negative basis values getting even more negative, that wasn’t what people wanted to hear.

You could say its an interesting time out there when it comes to pricing grain or you could say the pinstriped thieves are starting to steal from each other.  With the Andersons elevators announcing that they are increasing fees for hedge to arrive (HTA) contracts up until August 2008 and will not accept them afterwards its pretty obvious things are changing.  Even in Canada “basis” is becoming an aberration as margin calls are sending shudders throughout the grain industry.

Some of you must be shaking your heads.  Like, what’s up with this?  Why do high futures prices cause such nervousness within the mechanics of the grain complex?  How is this playing out in farm gate cash prices for corn, wheat, soybeans and canola?  And of course the proverbial question where are grain prices going to go next?

Let me illustrate what’s going on with a couple of stories from my past.  One you’ve heard before, one you haven’t.  Remember the sheep story?  That’s the one where I visited another agricultural economist friend of mine in rural Australia circa 1984.  He was working for the Australian government regarding the infrastructure within sheep markets in rural Australia.  One problem he was having was auction prices showed no short and long-term consistency over time within certain auction markets.  I went through the whole gamut with him regarding volume of sheep, distribution channels, etc.  At the end of the day I left Australia and never ever did figure it out.

Illustration two was a sojourn of mine into Essex County Ontario, home to a major part of Canada’s processing tomato industry.  One tomato grower was selling out and he was selling 20 tomato wagons at auction.  Your loyal scribe needed a wagon to hold water tanks.  What could be better than a good “tomato tub?”  On my arrival at the auction I couldn’t believe my eyes, with 20 tubs lined up I was sure to get a wagon at a bargain price.

When bidding started the first 24-foot tomato wagon sold for $200.  Well, I thought, this is like stealing candy.  I’ll just wait; maybe I’ll get the next one cheaper.  Little did I know the price would rise as the wagons disappeared?  I bid when there were three out of 20 wagons left.  However, it went for $1000, I didn’t get it.  The second to last wagon I ended up with for $975.  The next wagon went for $1100.  Unbelievable, a lesson learned for this smarty pants agricultural economist.

Fast forward to January 2008 and let’s look where we are.  March 2008 soybeans are $12.71 with negative basis levels at approximately $1.00.   Nearby March 2008 corn futures are at $5.02 with an approximate –75 cent basis.  There is a big difference between what the futures market is determining and what the basis on the ground is seeing.  For instance in Ontario end users have bought corn deep into 2008 and increasingly don’t have bids in outward months.  We’ve got “corn everywhere” because we’ve got the largest crop in Ontario history.  However, with futures over $5, the fight into the future for acres going forward is skewing the farm gate view of where price should go.  The gulf between futures price and on the ground reality has never been so wide.

In other words corn buyers are looking at all those tomato wagons lined up and they are laughing their tales off, knowing they’ve got supply deep into 2008.  With such a dichotomy between “cash” and “futures” it’s starting to look like that sheep market in rural Australia.  Are there really sheep out there or is it just a promise of future sheep droppings?  In other words, is the futures market doing its job at a time when there is such a disconnect between delivery into the future versus the pile of corn all over the greater Corn Belt?  Ditto for soybeans and really ditto for wheat.

This situation in Canada is exasperated by our loonie.  Don’t look twice but we’ve lost 13 cents of the loonie since November 7th when it finished at $1.1009.  That should mean a huge rise in basis.  However, since then the corn basis has lost an additional 35 cents despite the loonie losing its drawers!  In other words, the number of sheep out there isn’t quite adding up and the tomato wagons are almost gone.

Am I pointing fingers?  No, I’m only pointing out at these price levels, determining basis becomes less scientific and much more psychological.  At the end of the day, basis levels reflect the price grain is moving at.  However, at the same time margin calls are spooking some of the players in our industry.  The question is what happens next and is there potential for some real market structural surprises?

Of course nobody knows but it’s my job to bring it up.  It was only 18 months ago when I stood at a farm rally and told the world corn prices at $2.15/bushel were unsustainable.  Little did I know I was standing at the base of a monster grain rally, which would redefine the road ahead?  Riding those waves up has been a pleasure.  However, remaining here is proving tenuous.  Figuring out what happens next is just a flat out guess.