Steve Kell is an Ontario crop farmer and grain merchant for Parrish & Heimbecker
As harvest wraps up and the final bushels of the 2015 grain crop come in the from the field, many of Ontario’s grain producers are putting the final touches on their 2015 crop marketing plan, and sorting out which crops to store and for how long.
One of the most interesting (and for sellers, most encouraging) dynamic of the eastern Canadian corn market this past year is that by early fall we had essentially run out of corn. By mid-September 2015, cash corn values in Ontario had risen to full U.S. replacement cost, and corn in the feed trade was in line with the price of soft red wheat. With corn over $230 per tonne, it was a clear signal that we had essentially used up our entire domestic supply and are either drawing corn in from other origins or substituting it with alternatives in feeding programs. The question that corn producers need to contemplate as they put corn into storage this fall is this: “How likely are we to run short on corn again in the summer and fall of 2016?”
2014 did not supply Ontario with an especially big corn crop. Over the past five years, (2011 through 2015), Ontario’s average corn area has been 2.082 million acres. At 1.875 million acres of grain corn in 2014, we had started off with a crop which was 10 % below average. Then the cooler summer resulted in some test weight and crop maturity issues which reduced yield. Last year’s corn production was clearly smaller than normal. Ontario’s 2015 corn crop is much bigger at 2.055 million acres but is still below average and the amount of 2014 ending stocks brought forward into this crop year is negligible.
At press time, the provincial corn harvest was only about 20 % complete, and yield reports varied widely from region-to-region from exceptionally high to solemnly discouraging. But if we project Ontario’s corn production with average yields; when you add the 2013 ending stocks into the 2014 crop year’s total supply, and the 2014 crop’s ending stocks into the 2015 crop year’s total supply, it would appear that the Ontario market is only dealing with a corn supply which is 4 % or 5 % bigger than our supply was 12 months ago. That’s only about three weeks of additional corn supply.
There are regional differences in the Ontario corn market. Eastern Ontario has two ethanol plants, a wet miller, easier access to the Quebec feed market, and a significant geographical barrier to U.S. replacement corn flowing north into a demand market. Basis values in the Ottawa Valley are amongst the highest in North America and there is no cause to believe that this will change. It’s easier for Michigan and Ohio, with substantial corn surpluses, to export to western Ontario users.
The “flex” in the corn market is our senility to export corn out of Ontario. Historically this province was not much of a source region for corn exports. As recently as 10 years ago, Ontario’s 2006 total corn shipments to other provinces and other countries was only 115,000 tonnes. By 2013 it had grown to 10 times that figure, reaching 1.15 million tonnes of corn exports. With a little over 10 % of our marketplace’s total corn demand dependent on exports, it’s imperative that sellers know that our prices will stay in line with values in the broader market and that unless we are able to make a significant volume of sales into other regions and countries, there is no chance that we will ever run inventories tight. Ontario is a grain exporting region.
If we didn’t export soybeans, we would only need to plant a crop every second year. And we export 10 per cent of our corn, so Ontario’s demand is massively over-supplied. Although we are now in a good position to run tight corn inventories, I do not want to create the impression that if we all simply hoard grain, the price will go to $7 per bushel. Due to Ontario’s relatively tight supply, within the limitations of the continental market, Ontario’s corn values will remain consistently firm.
One marketing strategy in this type of market is to lock down sales in the forward delivery slots. Buyers who are aware of the fact that inventory could get tight, and have a vivid recollection of what happened to prices this past season, will be inclined to pay more for contracted tonnes for future delivery in order to have the assurance that they won’t get caught short again.
Forward contracting July corn sales in January on a portion of your stored stocks is a nice way to convert the marketplace’s shared anxiety over potential scarcity into revenue for your business, while limiting the risk that slower export movement, a rising Canadian dollar, or excellent planting in the United States, eliminates the summertime’s ally potential. Holding some “Las Vegas grain” for a late summer rally is a solid strategy. Holding it all is gambling.
