Is The Train Wreck Coming? The Ontario Corn Basis Will Tell The Story
On my farm things continue to burn up. It would seem I have small rains all around me. Got an email from an editor who told me he had just received 4/10ths of an inch, but he was still dry. I told him that would be a flood in my neigbourhood. Rain makes grain. Our commodity markets are currently trying to answer that question.
Corn futures have settled approximately 29 cents since I wrote a major corn commentary only two days ago. It’s a volatile market; one, which will surely heat up, again if the big dry gets bigger. For Ontario producers this summer’s market is key. With 2.2 million acres of corn in the ground, fall basis could get real ugly. With hardly any wheat in the ground compared to past years, the 2007 corn year will surely become a benchmark into the future.
I bring this up partly because I had quite a banter this past week with DTN editors Pat Hill and Grain Analyst Elaine Kub. I’m sure many of you read both of their comments on a daily basis. I’ve asked Elaine several questions over the last few months on the American crop in the field. Both Pat and Elaine commented on the difference between the relatively “high” basis over the nearby July month and the abysmal basis in December for the crop now growing in the field.
If you followed that debate you saw that I wrote the July basis has everything to do with the old crop from last year, which is getting in less and less supply as time goes on. On the other hand I explained that the December is under this huge bear of 2.2 million acres. Everybody and their dog is growing corn. Buyers don’t have to bid much because they know if Ontario has trend line yields there will be corn stored on the 401. (That’s the major four-lane highway that goes through Ontario from Windsor to the Quebec border)
The situation is further complicated by US replacement cost. In Ontario corn basis has a ceiling. That ceiling is when US corn is imported into Ontario when the local price is deemed too high. So when the local price gets close to replacement cost, corn is trucked into Ontario or shipped in to Great Lakes ports. The attempt by Canadian Corn Producers to get a countervailing duty on US was partly aimed at this. Now that the fight has been denied in court, US corn will surely find friendly ground in Ontario.
This has always been a sore point for Ontario farmers. However, in 2006 corn was actually exported out of Ontario and into the United States. It’s a bit bizarre to think about it. I told Elaine and Pat it would be like the US exporting snow to Canada in January. However I don’t think we’ll see American farmers lining the shores of Lake Erie trying to block it. The War of 1812 thankfully ended 193 years ago.
If we have a weather year like last year in Ontario we’ll have to export corn again but this time around we might have to buy ourselves into that market. What you say? Simply put if Mother Nature smiles on Ontario corn this summer there will be so much of it, Ontario basis will have to go down to meet its buyers on the export market. Sitting here a two weeks before the July 4th grain benchmark, I can almost see the corn buyers lining up.
Of course the real world doesn’t work this way, or does it? The point being if I don’t get rain soon, there will be no way I’ll get my 200 bushel average which I’ve lucked into on a few of my southwestern Ontario fields. I’ll be lucky to get 100 bu/acre. Ditto for the rest of Ontario. Surely our production luck will grow fickle. It’ll affect basis big time. In late September I’ll be able to tell you exactly what is happening.
My agricultural economist background also wants to scream “ologopolistic competition.” You never hear that from anybody else. What it means is competition between very few firms who control a major part of a market. Right now in Ontario that’s the Ontario corn market. The Ontario Ethanol Grow Fund will help but these ethanol plants will mostly come on stream in 2009, a long time ahead for the 2.2 million acres of corn currently burning up in the sun to say nothing about 2008.
What’s it all mean? IT MEANS I NEED RAIN, A WHOLE HONKING FLOOD OF RAIN! Sorry for that. I digress. What it means is Ontario corn basis is very complicated but at the same time very (forgive me) basic when it comes to US replacement cost. Spurring demand through ethanol in Ontario will help. Michigan ethanol plants will help too. However, in 2007 it would seem the corn train is heading down the tracks. Will there be a train wreck within the next 8 weeks? At the end of the day the Ontario basis will tell that story.