Ontario’s Bitter Harvest Spawns a High Corn Basis, But For How Long?

We’ve had a stretch of good weather in Ontario and many people are getting done their harvest.  It has been a tough one, one in which many people have described as the harvest from hell.  I can attest to my latest start ever in my career after a very late spring planting.  There are still many soybeans out in Ontario and in the last few days some elevators have been receiving more soybeans than they have corn.  1992 has always been the litmus test for a bad fall and 2014 will surely go down as second to that.

Amid the harvest chaos there has actually being what I would concede to be a considerable surprise in market prices for corn in Ontario.  We all know that the cold summer in Ontario and Québec is now causing us all kinds of angst with our late harvest.  However, that cold summer was a moderate summer in the US and it produced the biggest corn crop ever in the there.  Cash prices plummeted into the $2 range in many parts of the United States before prices rallied over the last 6 weeks.  It led many others to believe that harvest prices in Ontario would be some of the lowest in years.

Prices are the lowest in approximately 5 or 6 years, but the big change so far in harvest 2014 has been the Ontario corn basis.  Basis levels have been rising all fall currently up plus $.45 in southwestern Ontario all the way up to $.85 in parts of Eastern Ontario.  This is taking place when many people had thought that we would have a negative basis in Ontario this last fall.  It actually puts old crop prices at $4.35 Canadian, much higher than your loyal scribe suspected only 6 weeks ago.

The question is why is Ontario basis so high compared to historical fall harvest levels.  Sure, we have our Canadian loonie, which is down in the 87 and $.88 level over the last few weeks.  This always has a more direct effect on the price of wheat and soybeans versus corn, but is certainly helping this time.  Essentially what we had this year were import corn prices from the United States starting in July.  With the very late corn crop coming off in Ontario fields, this caused somewhat of a vacuum for end-users.  US corn continues to be imported into Ontario, but you would think as the crop finally gets to the finish line that these basis levels would be deflating.   It is what it is, and surely many producers have rewarded this much higher basis level.

It has certainly surprised me.  The corn futures price is still in the $3.88 range, which is very low compared to the last 5 years, but cash basis is much higher then they usually are.   Look across the American Corn Belt and Ontario almost seems an island of higher prices.

It is this way because it can be.  Farmers also have tight hands with their corn this year.  Basis levels can be the source of great angst among farmers and agribusiness people.  Simply put basis is the difference between the cash and futures price a farmer receives for their grain.  I like to think of basis as a value, which determines when grain is moved.  So if the basis level is -50 or +50 that simply means that end-users are willing to pay that and they are getting lots of corn at those particular levels.  We might have a lot of gnashing of teeth when things are bad, but at the end of the day it’s the same old thing.  Grain is moving at whatever basis levels are.

The US replacement price for corn on December 4th was listed at $5 a bushel.  That makes sense because cash prices to producers are less than that and they will continue to be less than that whatever it is.  With Michigan still having much of their corn in the field and having test weight issues as well, this surely must be affecting demand for corn coming across the border.  Remember, it is what it is.

Last week I actually had a friend make up a rhyme about the corn market.  Basically, he was musing about why the price of corn was going up both in cash and futures levels when there is a record corn crop sitting in US bins.   Statistics Canada actually came out with their November crop projections today pegging Ontario corn at 162 bushels per acre.  That’s not a record, but it’s very close so why is the price continuing to go up?

We shall see.  I have been one of those who’ve been expecting basis to crash, but it has not happened.  My good friends at DTN have told me that we are on the way back with the lows in the market behind us.  I agree with them.  It just goes to show that marketing your crop is an exercise in daily market intelligence.  The road is littered with price prognosticators who thought they knew what was going to happen.  In truth, if that were the case, we wouldn’t have to grow crops whatsoever.   We’ve simply be on a beach somewhere with a smart phone.

So as this frenetic harvest wraps up consider your marketing plan.  Risk management never gets old, but this harvest sure has.  A bigger basis we’ll take.  It’s a bonus, compared to the harvest we’ve just walked through.