The $5 price of wheat spawned discussions surrounding the negative basis levels for all grains in Ontario.  If you are one of my American readers, you would be very used to a negative basis but in Ontario, Quebec and other places across Canada producers until the last couple of years have been more used to high positive basis levels for grains.  So while many producers today at the elevator discussed their marketing plans, I asked the question what if the Canadian dollar goes back down to $.75 US?

The retort came to me this way.  Phil, it doesn’t seem the value of the Canadian dollar is having the effect it once did, what’s up with that?  Of course with the Canadian dollar hovering around the $.96 level I knew what he meant.  The Canadian dollar has been at this level for some time now and a movement within a four-cent range doesn’t seem to have much of an impact on basis levels.  I retorted back that the Canadian dollar in March 2009 closed at $.7749 US.  If it was to do that again, we’d gave huge positive basis levels for Ontario grains.  Of course at that point, price imaginations were going wild, and I said we just never know.

The simple truth is the value of the Canadian dollar lives in the psyche of most all Canadian farmers.  We are ingrained with the knowledge that the value of the loonie is significant in a major way on the price impact of almost every major agricultural commodity in Canada.  It is this way because most major agricultural commodities are priced in US dollars and about 80% of what Canada produces is exported to the United States.  Add in the fact that replacement value on Canadian grains especially in eastern Canada is always measured against importing it from the United States.  Any grain bought from the United States is paid in US dollars and so as the loonie goes, so goes our farm prices in Canada.

The loonie’s value gets mixed up into what basis really is when it comes to determining the value of Canadian grain.  For instance if you could imagine for a moment that we had a common currency between the United States and Canada, basis levels would be much easier for some to understand.  In that case basis levels would almost always be negative, taking into consideration the distance to the Chicago market or a warehouse deemed a delivery point by the CME.  At the end of the day, “basis values” reflect the true value represented in price which grain is moving at.  It just so happens that in Canada those values are in Canadian dollars.

Going further, “basis levels” are not only a value at which grain is moving, but also a true reflection of how acute grain is needed by ultimate end-users.  That’s what I was trying to emphasize to my farming colleagues today at the elevator roundtable.  For instance, as of today, Ontario corn end users can see an almost record crop in the fields.  They see no reason to raise basis levels; in fact, they probably see reasons to lower them.  Ditto for Ontario soybeans as well as Ontario wheat.   In the case of Ontario wheat, the question has to be asked are end-users willing to pay more than five dollars?  Why should they?  Wheat is everywhere at the moment!

It has almost led me to believe, that at least for some agricultural commodities, “basis” is a bit of a “state of mind.”  It’s almost like a game of chicken, end users constantly pulling down basis levels and only raising them when they absolutely have to.  It helps when you can fit end-users within a market in a minivan versus a motorcycle.

I was always maintained that it’s more important to “seize the day” and capture a cash price, which you are comfortable with.   Often, that puts the Canadian producer in a tough position as cash price movement always has a fickle basis.  The point is, “get over it”.  Negative basis levels are a true reflection of what our prices are.  Will they stay that way?  No, but it will take the Canadian dollar dropping precipitously to move it into positive territory.   In the meantime, our challenge is to plan accordingly and take advantage of those surprise-marketing opportunities like $5 Ontario wheat.  Surprises

So when Stephen Harper decided that we didn’t need the long form census to be mandatory anymore, I didn’t shudder in my boots.  Sure, you can make some very good arguments that’s a bad idea but as a burning political issue its zero.  I have been amazed over the past few weeks that some in our national media have made such a big deal of it.  People don’t care about the long form census; they care about their jobs, lives and personal well being.

There will still be a long form census; it now though will be voluntary.  The argument against making it voluntary has to do with all the good information that good statistics give us.  For instance as a student many many years ago, I could go to the basement of the University of Guelph and find out just about anything.  That information helped businesses and government manage trends, develop a policy and maybe even create a few jobs.  So making it voluntary will simply skew that information.  Critics will say the world will not be the same without the good statistical information garnered from a mandatory long form census.

The problem I see is not necessarily the end result of that policy change but more on why it was changed.  There have been many in the media over the last few weeks that have said that Stephen Harper is going back to his reform, libertarian roots looking at the census as an intrusion on personal liberty.  I don’t really think that is true and I have a hard time believing he did that to satisfy his political base.  So the question at the end of the day is why did he do it anyway?

It confounds me because just as there will not be much of a political cost to the decision to end the long-form census, what is the political upside?  I don’t see a thing.  It’s like the Prime Minister has taken a cup of water out of the Sydenham River and at the end of the day, what difference does it make?   None.  The question is, why make that decision when all you’re going to get is criticized?

I don’t know the answer to that question but what I do question is why the Prime Minister and the Conservative party sometimes step out in front of the bus and make unnecessary, almost bizarre decisions they don’t need to.  The long form census decision is one there have been others.   Sometimes I think the Conservatives are so bored with Michael Ignatieff and his Liberals, they have meetings to decide who’s going to throw the pop bottle through the greenhouse.

I don’t know Stephen Harper, although I did have an opportunity to chat with him once for almost half an hour.  I consider him to be a very smart guy and a politician who has learned much about his game, mostly from the great Liberal political master, Jean Chretien.  He operates in a political environment where it is almost impossible to garner a majority government but is also almost impossible for him to lose his own government.  So politically he acts like a master of what he wants to do, and then suddenly we get somebody throwing paint against a white piano in the form of the voluntary long form census.  What’s the upside to that?

Prime Minister Harper and his cabinet members would surely have their reasons.  The long form census decision is one thing but in my opinion if these things continue, eventually it’s going to catch up with them.  You might remember the 2004 election campaign.  Opposition leader Stephen Harper was doing pretty well in the race against Paul Martin.  Then, for whatever reason opposition leader Stephen Harper said on national TV that Prime Minister Paul Martin was soft on child pornography!  You could almost hear the air leaving the Conservative’s election balloon.  Is one of the most bizarre things I had ever heard a Canadian politician accusing a sitting Prime Minister of.

The census form is not in the same league as that.  However to me there is a consistent pattern.  One of these days if it continues Stephen Harper and his Conservatives will go too far and makes some unexpected bizarre statement or policy change burying them when all they had to do was remain silent.  The clock is ticking.  Michael Ignatieff, all you have to do is wait.

Waiting for my wheat to get ready took an interesting turn this year because of the wheat price explosion.  Over a three-week period we have seen an increase of $1.36 in SRW wheat futures with cash prices in Ontario reaching about five dollars.  It was only a few short weeks ago when the new crop cash price for wheat was $3.77 a bushel.  For Ontario producers this has been a very welcome surprise.

I say for Ontario producers because wheat pricing doesn’t necessarily work on the free market in Canada.  For instance my Western readers will be gnashing their teeth because they are required to sell their wheat to the Canadian wheat Board.  Ditto for our DTN subscribers in Quebec who have a single desk agency for wheat.  It is in Ontario where producers have a choice, hard fought for, to either sell their wheat to the Grain Farmers of Ontario or make a contract with whoever they want to.  Wheat pricing in Canada is controversial and filled with a bit of mystery.

When I am in Western Canada, I often bring up the subject of the Canadian wheat Board.  I do that because I want to know the feelings behind the people that I’m dealing with.  I also ask because it is such a foreign notion to Ontario producers that Western wheat producers don’t have the same rights and privileges to market their week as we do.  It’s almost totally political and a little bit cultural, and from my Ontario perspective I don’t see Western farmers getting the right to sell wheat like I do at any point in the near future.  The only way it will happen is if Stephen Harper and his Conservative party get a majority government.  If that happens at some point in the future, the Canadian Wheat Board will be history, as we know it.

Despite the many different ways of selling wheat in Canada, I think we all are all interested in the wheat price explosion these past three weeks.  At a certain point these price gains will filter down into Western Canada and Québec, or at least we hope so.  Clues to the price explosion certainly lie in fund buying but also in the production problems in Western Canada, Europe and Asia.

This is significant because wheat unlike corn and to some extent like soybeans is grown almost everywhere.  For instance the former states of the Soviet Union like the Ukraine and Kazakhstan grow and export wheat, where once they did not.  There is all kinds of wheat grown under intense management in Europe.  I have walked through the wheat fields of Australia.  Wheat is simply almost everywhere and usually these wheat-growing regions don’t have problems at the same time.  This time around many of them did starting with Western Canada and that is a pretty good reason why we’ve had so much upward price volatility in wheat.

DTN’s John Sanow in his Market Sense column, “I Think I Can”, called wheat the “cockroach of grains” as it is nearly impossible to kill.  He said this in the context that the death of wheat is often exaggerated.  For instance, the TASS news agency recently reported that the ongoing drought in Russia has killed over 52% of the grain seedlings in the Ulyanovsk region of Russia.  So maybe that is true or not true.  On top of this, Informa economics recently cut Kazakhstan wheat production to just 11 MMT.   What’s the truth? I dunno, those places are so far away from the Chicago SRW exchange.  However, they are just examples of the bad wheat production news which is simply adding up day-to-day.

Of course it is never that simple. Wheat pricing fundamentals remain “pretty terrible”.   The United States has over 1 billion bushels ending stocks for this crop year the highest since 1986/87.   In Ontario you can bet that basis levels will only get worse at these higher futures prices.  We learned in 2007 that end-users would not pay historical basis off high futures prices.   Of course, in Western Canada and in Quebec, producers will just have to wait and see if any of these price spikes get into their pocket.

It’s all been a big surprise and you can bet that the wheat bulls will come back down to earth someday.  The lesson to be learned from the wheat rally is despite our best analytical and technical analysis, sometimes we never know.  Or maybe that’s most of the time.  Keeping that in the back of our mind as we make our marketing decisions should always be job one.

I bring this up today because some of you faithful readers are thinking about using chocolate to that ultimate end and there is somebody in Britain by the name of “chocolate finger” who is thinking of making that a lot more expensive.  Still don’t get it?  It just so happens that last week the fund manager for Amagario, a hedge fund which buys chocolate for a large Swiss manufacturer purchased 240,000 tonnes of cocoa beans and actually took delivery against the July cocoa contract.    Cocoa prices spiked on the news and then retreated later after it became known that a hedge fund manager bought the cocoa beans.  Needless to say, “chocolate finger” is actually taking delivery of the cocoa beans, which represent about 7% of annual global production.  That’s enough cocoa beans to produce 5.3 billion quarter pound chocolate bars.  I just hope he has a wife and she enjoys chocolate.

For some of you this must seem mundane.  I know myself I rarely eat chocolate and chocolate bars aren’t part of my life.  However, I have known quite a few females in my life who love that late-night run for a chocolate bar.  You would think after all that time that I might get the connection.  I digress.  It would seem that the hedge fund manager, Anthony Ward dubbed the “chocolate finger” is making an attempt to corner the cocoa market.  By taking delivery of all those cocoa beans, he’ll be able to exert market pressure and make some money on the anticipation of rising cocoa prices.  I’m sure that still doesn’t get any of you shaking in your boots, when considering buying that proverbial chocolate treat.

It just so happens that I picked up on this when I watched CNBC’s “Power Lunch” program last Monday.  A friend of mine, Darin Newsom is a senior grain analyst with Telvent DTN and is often asked to appear on the big American business channels like CNBC. It just so happens that he tweets about this before it happens and I often catch his analysis on CNBC.  So when I rolled through the digital images on my DVR, I caught Darin’s interview and to my surprise he was asked about cocoa and wheat.  What followed was a two-way back-and-forth on the intricacies of the cocoa market and what in the world “chocolate finger” was doing.  The CNBC commentators were obviously enthralled with this offbeat, delicious topic.

From my perspective what Darin said about wheat was far more interesting.  Needless to say when you compare wheat against chocolate, or do you think wins out?  Bad weather in Europe, Russia and Kazakhstan plus speculative money coming into the wheat market aren’t very sexy.  However, what Darren intimated to me later was that both markets were broken and not necessarily working as you might expect.

That made me wonder what a “broken market” was?   I think from a purely analytical view it means that there are big differences between futures values in the commodity markets and their cash equivalents at the time of delivery.  In other words futures values may not have any relation to cash prices and or specific market players might be trying to impinge an unusual pressure on the market by cornering its supply, like “chocolate finger”.    The wheat and cocoa market may be candidates for that.

My own experience with “broken markets” usually has to do with very unusual price movements.  For instance in 1991 I was called to testify before the House of Commons standing committee on agriculture regarding an Italian company, Feruzzi which was forced to liquidate its holdings in the soybean market.  At the time this caused a tremendous decrease in the price of soybeans.  I also had an experience in Australia in another life where a friend of mine was working on a problem in a specific sheep market where prices just weren’t adding up.

My friend was a classmate who was working as an agricultural economist in Australia.  He told me this one particular sheep market generated prices that didn’t make any sense.  So I asked him the standard questions about volume of sheep, frequency of delivery and a host of other questions that should have added up to a problem.  However, I left Australia before he knew the answer, I just knew that that particular market was broken and wasn’t working.

It is a rare event, but broken markets do happen and usually they happen with great fanfare.  Free markets are great things but with the right set of circumstances they can be broken and abused.  So watch those chocolate prices over the next few weeks.  And if you have to make one of those late-night chocolate runs, be prepared to pay the price, whatever that may be.

In Canada we have the tail of two stories.  On Wednesday of this past week we had Prime Minister Harper touring flooded farmland in Saskatchewan.   That was followed by agriculture Minister Ritz announcing that $450 million would be on its way to help producers affected by excessive rainfall.  It doesn’t matter how you cut it in Western Canada this year has been difficult.  The money flowing to Western farmers will boil down to about $30 an acre and will be delivered through the Agri-Recovery program.

Of course it is not all bad in Western Canada.  For those who do have a crop like those in the Peace River District of Alberta one man’s misfortune is another’s benefit.  Ditto for others across Western Canada.  Increased prices for canola will surely benefit those who dodged the rainfall bullet.

The other story for crop production is in Eastern Canada where the Ontario and Quebec crops look good going into tomorrow’s USDA report.  Yes, you could argue that much of southern Ontario crops are dry or even parched.  If that continues for several more weeks it will change the equation entirely.  If we get timely rainfall soon it will mean that crops in eastern Canada will be very good this fall.  Yes, that is a big if and you can bet if it remains dry, eastern Canadian farmers will be looking for some type of commitment from Ritz to satisfy them.  Needless to say his press conference last week in Saskatoon was bereft of any policy initiative such as Agriflex advanced by Ontario and Quebec.

At the same time as the USDA releases their stocks report there is some consternation in production areas around the world.  There are drought problems in Europe and Russia as well as Australia.  It seems there are drought problems almost everywhere except the US Corn Belt.  This had added nervousness to grain markets over the last week.  The futures spreads for row crops still do not reflect bullish sentiment.  However if the USDA comes out with stocks figures on the low side tomorrow all bets are off.  Of course, the problem is the numbers are the problem.   More specifically, the way the USDA handled the 2009 crop numbers has been the real puzzler.

The problem is if you have something bad going in you have something bad coming out.  I think somebody who invented computers made up that statement, but it also has to do with ending stocks.  One years ending stocks is another years beginning stocks so when that changes unexpectedly, the fundamentals of grain gets skewed.  In July 2010, that is exactly where we are.

Into this mix you need to add the China card.  Despite predictions of increased corn imports in the next several years to almost exponential levels, we really don’t know if that’s true or not.   If it is true, it will tighten our grain situation substantially.  That, along with any production shortfall in North America will certainly change the price equation.  The question is are there any end-users for corn and soybeans that might be worried about it?  My experience in the industry tells me they are not.

At times like these I often think of one analyst who asks the question, “What is the price of the last bushel?”  In other words if there was only one bushel left in the world, how much would it bring.  At the present time in Ontario that is about $3.60/bushel for corn and buyers seem to be getting lots of it.   So despite what some people may deem to be a bullish surprise last June 30th and maybe a bullish nudge tomorrow, it seems to me the market is not worried.   What you need to do is hope for rain and then let the chips fall as they may.

Letting those chips fall may surely be in a new marketing environment next week.  Combine that with production figures that usually drop during the summer and we’ve got the setup for something big.  The key will be to see if production can keep up with disappearing ending stocks and end user hubris.   10 days ago the conventional wisdom was caught leaning the wrong way in the market.  Maybe tomorrow we’ll see by how much.  I only hope the USDA doesn’t have another head fake in its arsenal.

For those of you who don’t know, Lebron James is a 6′8″ professional basketball player who grew up in Akron Ohio and was drafted by the hometown Cleveland Cavaliers in 2003.  He was drafted 1st, right out of high school and it just so happened his hometown team was lucky enough to get him.  His basketball skills are a combination of power, strength and speed that is unmatched in NBA history.  I really like Lebron James as a player.  In my mind he has a special combination of skills that make him a great, great player.

He has never won a championship even though he has led Cleveland to some very good regular-season records over the last three years.  Local Piston fans will remember that he literally pushed the Pistons out the back door three years ago by scoring 29 out of the last 30 points Cleveland scored in Game 6 of the Eastern Conference final.  So when he went into free agency after last season, the hype was unprecedented.

All the major American news media centers were focused on what Lebron thinks, feels, what his friends feel, what his grandmother said, and all the different cars that were going into his driveway.  It was bizarre at best as this rich American athlete could command such attention from the American media.  The Canadian media was the same way, albeit if he had been a hockey star it probably would have been worse.  At the end of the day he even put together an hour-long special on ESPN, the American sports network to let the world know his decision.  Yes, I tuned in and after about 45 minutes of talking about Lebron James, he was finally asked where he was going and he said Miami.  That was the team that already had two special basketball megastars on it with the names of Dwayne Wade and a personal favorite of mine former Raptors Chris Bosh.

It was pretty shocking from a basketball perspective as all three stars took $15 million less to play together under the NBA salary cap rules.  It certainly will be a compelling story next year when the NBA opens the season.  Needless to say, it will be different for me because I think that whole “Lebron episode” has cheapened the sport and made many of us think what’s up with all this?  What has our society transformed into to put so much credence on what a star athlete twitches about when the world has so many more acute needs?

When Lebron James left Cleveland Cavaliers according to Forbes magazine their value decreased by about $100 million and the Miami franchise value increased by $40 million.  The average price of a basketball season ticket in Miami increased to $8250 from $3239 according to a popular website which monitors ticket prices.  So despite how repugnant you might have found this Lebron spectacle, they were big dollars involved and lots of jobs on the line.

The NBA certainly has some thinking to do regarding so much talent ending up on one team.  It has to do with the NBA’s soft salary cap but in this case it also has to do with the three players wanting to play together.  As a fan I think it really cheapens the league, because why buy a ticket in Toronto, Cleveland or even Detroit next year.  It seems like a foregone conclusion who is going to reach the NBA finals.  Spreading a little parity or mandating a little parity over this league needs to be done.

Having said all this who am I to judge the world and collectively how we judge our sports heroes.  For instance we shower them with so much money and they are so privileged while the vast majority of people in this world don’t have enough for their basic needs.  For instance last week in South Africa, Spain beat the Netherlands for the World Cup.  It didn’t matter where you were in this world outside of North America, that World Cup is all that mattered.

So it is, what it is.  I will tune in next fall when there is frost on the pumpkin to see Lebron play.  I even might enjoy it.  However, the spectacle of a rich American basketball player holding the world’s attention at ransom over the last few weeks changed my sports paradigm.  I’m not as interested anymore.  For Lebron and everybody else out there in professional sports, that might be something to worry about.

The USDA shocked the corn market on June 30th by putting the planted corn acreage number at 87.872 million acres.  This was below the lowest trade estimate of 88.10 million acres.  That was quite a shock to the market but when the USDA came out and said there was 4.310 billion bushels in ending stocks well below the lowest estimate of 4.459 it was like a slap in the face to market bears.  The bulls blew through the barn door and corn rocketed up almost $.40 in two days.  It was almost surreal.

Looking back, maybe we should have known.  Maybe we should have known that the test weight issues in the 2009 corn crop were real.  However, it seemed like the USDA didn’t believe that and when they came out with their huge yield figure on January 12th, the market was caught the wrong way and corn prices have never recovered from that day.  In many ways the USDA gave a “head fake” to the market sending it one way when they did not necessarily know if the corn was there.  They don’t measure test weights.  Needless to say, if you have read this column since then you will know that I’ve always said that the USDA sets the goal posts and they do whatever they want with them.  In this case it looks like on January 12th they moved them, in the meantime told everybody that’s the way it is and now on June 30th for whatever reason they decided to move them back.  So what for all that old crop corn that was sold in between those dates.  In many ways it’s unbelievable.

I am quite a believer in the DTN six factors for marketing our crops.  I watch the market daily and hourly in the wintertime to simply get a tangible taste of what is going on.  With that I always check the futures spreads and follow USDA reports like a fox.  So on June 30th I was sitting in front of my computer waiting to see the results just because it was a major market mover.  I was looking for a big Corn number especially with our early spring weather and good pricing opportunities.  I had read all the pre-report estimates and bought into what the USDA had said.  What happened next was quite a slap in the face.

The USDA numbers came across my Twitter feed first.  When I read them I found it hard to believe US farmers had planted 1.1 million less corn acres in the March 30th USDA report.  Being on Twitter, I knew I could react immediately so I tweeted the statistics and said the corn number seemed low.  I was a bit nervous publicly tweeting that, because I’m a farmer and agricultural economist first and a market analyst down the list somewhere.  Then in fact I realized it was really low and I began checking my numbers on the paper in front of me.  I started to realize this was a bullish slap in the face to the corn market and everything I had been led to believe since January 12th must not be totally right.  Soon after, all our trusted analysts chimed in with the same thing.  USDA had changed the game and now we were in an extremely tight situation in the corn complex.

But still, with future spreads strong aren’t we in a bearish market situation?  That is the question I asked DTN senior analyst Darin Newsom immediately after the report in his online webinar.  To me, things just don’t change that fast where one day it is bearish and the next day it is extremely bullish.  Doesn’t that show up gradually in future spreads?  The answer of course is yes, but in this case is not so clear.  Futures spreads are changing as I write, but that question needs to be answered.  It almost looked as if the people who were buying the futures got duped too.

USDA’s Chief economist Joe Glauber exclaimed after the report, “I think we have been in a very tight corn supply frankly.”  Oh yeah?  Since January 12th we have all been led to believe that was not the case because USDA numbers said it wasn’t.  I told all my readers and listeners that the USDA sets the goalposts and they can do anything they want.  The unfortunate part is, in this case, I was right.   In the corn market on January 12th we were led to believe one thing by USDA and in the June 30th report they essentially canceled the January 12 report out.  In the meantime millions of bushels of old crop corn was sold at lower prices.  It all doesn’t quite add up, and that’s a big problem.