The month of June saw an enormous drop in cash corn values in the United States and American corn is now working its way into the Ontario end-use markets. Competing against cheap American corn, the width of a river away, is like running a small town department store when they open a Walmart down the road. It’s going to be impossible to ignore this summer’s situation, so the best course of action is to understand the marketplace and have a selling strategy.
Ontario enjoyed higher corn prices from mid-January until late May. In addition to Chicago futures prices rallying, the basis bids into Ontario’s export terminals firmed, especially after the ice melted and the St. Lawrence Seaway opened to exports. For April and May, the basis bids into export terminals led the Ontario market and got as high as $0.30 over Chicago in U.S. funds. However, at some point while the Ontario corn market was focused on the opportunities in corn demand on the other side of the Atlantic, U.S. corn sellers were less disciplined about price and values on the other side of Lake Erie are now substantially below the western Ontario market. We need to start being extremely vigilant in watching the American market.
At the core of the price drop in corn is the fact that the 2018 U.S. corn crop is in remarkably good condition. On June 10, 75 % of the U.S. corn crop was rated good or excellent. That is the highest crop condition rating on this date in the past five years. That means that only 25 % of the crop isn’t good, so things look good across the U.S. corn belt. All of us who have grown corn know that there are is a lot of weather between mid-June and harvest, so having high crop condition ratings on June 10 doesn’t guarantee that things will finish well, but it certainly doesn’t provide any reason for a price rally.
The 2017 U.S. corn carry-out is projected to be over 2.1 billion bushels. That’s not a surprise. It’s actually smaller than the previous year’s corn carry-out, and very much in line with USDA estimates earlier this year. Sellers are aware that inventory is in no way scarce and the clock is ticking towards another harvest in just a few short months. It feels as though the American corn market has come to the realization that there’s lots of crop to move. The market’s mindset appears to be that if end users are going to be flooded with corn, the best strategy is to ride the front of the supply wave. The toughest thing for Ontario farmers to rationalize is that the American farmer is currently selling corn.
There is always a certain amount of U.S. corn from border states flowing into the Canadian marketplace. There’s also a baseline flow of Ontario corn moving to nearby U.S. markets. Because of forward-contracted purchases and sales, the cross border flow never actually stops, but the speed and volume of flow ebbs and flows as market conditions change. During the summer of 2018, expect to see a lot more American corn coming north and Ontario corn going south, and that change in import/export flow has the capacity to significantly impact the total amount of corn left over in Ontario at the end of the crop year. We are not going to see U.S. corn trucked across Ontario to be put into Canadian export vessels, because export documentation makes that illegal. Ontario ethanol and feed manufacturers are likely destinations for U.S. cross-border corn.
There are a couple of simple strategies for Ontario corn producers who still have 2017 crop stocks to market. The most important is to dial back on old crop price expectations. Growers who didn’t sell in the May rally, because they believed that prices could go higher, are simply not going to see those price dreams come true. There will be some sort of weather rally in July, and a technical retracement of the June drop in futures. When those two market forces overlap, it’s sell time.
The second core principle is that the Canadian dollar exchange rate in some ways insulates us from the full impact of U.S. cash prices. Take advantage of any weakness in the Canadian dollar to catch up on old crop sales.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.