Cash prices for grains and oilseeds are typically expressed as the sum of two contributing factors: “Futures” and “basis.” What’s really interesting about corn prices through the winter of 2020 is that those price components are doing entirely different things.
“Futures” are the cash price of corn delivered to Chicago, at the various delivery months named in each of the contracts. The general behaviour of the futures market is that it tends to be very forward looking and focuses most of its attention on the upcoming year’s crop. Last spring and summer when wet field conditions delayed planting of the 2019 crop, futures prices shot up and the resulting futures rally created an opportunity to sell 2018 crop in storage at much higher prices even though the wet spring really had no effect on old-crop supplies.
This winter has seen the exact opposite. Early indications show that U.S. farmers intend to plant a lot more corn this year. Leading up to the March 31 Planting Intentions Report, consensus view is that U.S. farmers plan to seed 94.1 million acres of corn, very close to the seeded acres in 2016 that saw a record 15 billion-bushel corn crop. Even though the 2019 corn crop was not particularly large and we have seven more months before new crop will enter the supply pipeline, futures values are firmly fixed on the 2020 crop size and yield potential. Chicago corn futures prices are lower than you might expect to see in consideration of the size of the crop being marketed out of storage.
There are several good theoretical definitions of “basis,” but ultimately it’s the number that it takes to make a grain transaction happen in the local market. If you ran a feed mill in “Somewhere, Ontario,” your board basis for corn would be whatever number you needed to add to the Chicago futures price to ensure enough corn delivered to your mill.
2019 corn yields throughout the entire Great Lakes basin were lower than in previous years, so regardless of how big this coming crop year’s corn supply might turn out to be, corn processors are going to need to be aggressive about securing their required supply and basis is the pricing tool which they have in order to accomplish that.
There is potential for the futures market to rally and create an opportunity to make corn sales of both 2019 and 2020 crop. Since December, the market has been talking about the potential for 94 million acres of corn in 2020, and there have been no weather conditions yet which could damage the yet unplanted crop’s hypothetical yield potential. As the crop becomes real, and the environmental conditions have the potential to have a real impact on both seeded acreage and yield, futures prices will react. Traditionally, we see a seasonal rally in corn futures at some point in April, May, or June, and there’s no reason to believe that 2020 won’t experience some sort of weather event that will induce anxiety in the corn futures for at least a few weeks. If using “pricing orders,” or “trigger orders,” is part of your farm’s marketing strategy, be certain that you have those orders placed before April. And pull them out and rethink your price expectations if they don’t fill by the end of June.
The potential for basis to do all of the dirty work in terms of raising cash corn bids is mostly tied to old crop sales out of storage. As 2019 crop corn stocks in storage dwindle over time, and as the remaining inventory ends up in tighter hands, the only mechanism buyers have to keep corn flowing is to increase their basis bids.
There is, of course, a top end to the levels which basis might reach, and that is the replacement price of importing U.S. corn into Ontario and Quebec’s end users. Since the conclusion of the 2019 harvest, we’ve already experienced a railway strike and a rail blockade, both of which suspended railway shipping. Due to logistics issues, there’s a difference between the theoretical U.S. replacement value of corn, and reliable consistent supply to a processor’s facility. There is a premium value for Ontario corn growers who can load a truck and ensure that it arrives on time.
Although we all know that old crop corn supplies are smaller than normal in the Great Lakes basin, do not wait for the Chicago futures to rally higher in response. The direction of the futures market is almost entirely driven by the new year’s crop potential. If you’re looking for an opportunity to sell remaining 2019 corn inventory, monitor basis. That’s where the end users will express their demand.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
