Under the Agridome

Too Few Firms Chasing Grain Really Impacting 2017 Cash Prices

Thursday, October 5th, 2017

Soybean harvest is off to quite a good start in my local area as beans planted in mid-May are coming into local elevators. Unfortunately for me I was still planting corn in mid-May and most of my beans are not ready. However, with the hottest weather of the year now ended in southwestern Ontario, crop ripening has been accelerated. I hope to get at my soybeans next week. That’s about 10 days behind normal.

Of course, it’s also the night before we learn how big the September 1st USDA corn and soybeans stocks figure were. I do not expect any surprises from tomorrow’s numbers, although many analysts are expecting a very big corn stocks number, something in the tune of 2.4 billion bushels. It would seem that the corn market has been range bound for so long with very little interest in doing anything. There is just so much corn piled in the United States already and most of the crop is still in the field.

The soybean number does not have the significance that it once did. We have all become used to the USDA underestimating soybean stocks. However, this year is not expected to be quite like that. There is a carry in the market with the commercial trade growing more bearish. Needless to say, we’ve been in this bearish grain environment for quite some time and nobody should expect that the stocks report being released tomorrow is going to change that in any big way.

It is no secret that I am always somewhat wary of the grain trade especially in Ontario. I have always felt that there are too few buyers for our grain reflective of an oligopolistic market environment where competition is limited. That is one reason why I have always been appreciative of government initiatives such as the now departed Ontario Ethanol Growth Fund, which helped build the Ontario ethanol economy to the infusion of $517 Million of government money. The new Ontario corn economy that emerged from that has given growers far more choices and better market prices.

If this had not happened it would mean that Ontario would be relying on the feed market to price our corn. That would essentially mean we would always be an export levels chasing the cheapest price on the high seas. That is essentially what we are already doing in the Ontario wheat and soybean market, where most of the grain is exported out catching the world price. Ontario corn has the advantage that at least a third of it goes to domestic ethanol.

In this Ontario grain market environment you have basis levels somewhat responsive in corn, but very predictable in soybeans and wheat. Foreign exchange defines basis for our soybeans and wheat, corn not so much because of its very large domestic demand base.

Of course basis is the price level, which determines when grain is moved. The textbook definition says it has much to do with localized supply and demand. We can easily see that in Ontario by looking at the Eastern Ontario corn basis versus Southwestern Ontario. The Eastern Ontario corn basis is historically higher than southwestern Ontario. This is because of a dynamic consistent demand coming from their livestock sector as well as proximity to Qu├ębec. However, increasingly in farm country we are seeing the lack of competition for grain showing up in moribund basis levels even in times of localized shortage.

This was brought home to me this week again by my DTN colleague Elaine Kub, the author of “Mastering the Grain Markets: How Profits Are Really Made.” In her piece, “Strange Year, Normal Basis” she talks about the lack of variability in basis bids in the United States. She wrote about the growing uniformity in basis bids even in counties where the crop is not very good. She relates that this may be because freight rates have become more stable, but also because of mergers in the grain business. In a place like Iowa, where there has been lots of drought this year, basis values have not moved much. It is like there is a silent hand out there.

Of course, I don’t believe in conspiracy theories. However, I do believe in oligopolistic market competition and that is exactly what we have in the grain business. There are too few firms chasing too much grain. I would also argue that our basis issues, Elaine eloquently writes about this week, has much to do with so much corn around. In fact, as one of my readers told me, we might have to put corn in swimming pools this fall! He exclaimed to me, “you have to put it somewhere!”

That we will. This is the fifth good US crop in a row. Someday Mother Nature will refuse to play nice again. However for the moment, to affect prices, that will have to start in South America. This 2017 US crop will be with us for a long while.