Huge volume of wheat is in the bin and an above-average corn and soybean crop is coming
From now until the point in December when all of Ontario’s corn crop is harvested and tucked away in bins, this will be a movement market. What I mean is that the primary reason to sell grain is not because growers like the price and want to lock in on these values, but rather because storage space is limited, and a sizable portion of this year’s crop is going to need to move in order to create the silo space for the remainder of the crop to be harvested.
A clear example of this has been the way in which corn and wheat prices have behaved in the Ontario market since the wheat harvest began a month ago. It’s actually very normal for soft red wheat and corn prices to reach the same price level per tonne at some point as wheat harvest wraps up each year. When there is a bit of excess wheat in the grain handling pipeline, making wheat the same price as corn, creates additional demand for wheat in livestock feed, so the resulting surge in wheat utilization as feed helps get the last portion of the crop put away.
With Ontario’s 2023 winter wheat crop being a record large volume, wheat and corn values came into line with one another very early in wheat harvest, and they will remain that way right through into corn harvest going forward. The two most common carbohydrate sources for livestock feed are essentially locked in a Dutch auction to remain cheap enough to ensure demand.
The obvious solution to avoiding the need to make sales in a market which is experiencing at least a temporary supply glut is to store as much of the crop as possible, but is that the right solution?
There are two groups of people who store grain: hedgers and hoarders. The hedgers are almost entirely commercial elevators who are locking in the futures spreads in order to earn a return on storage. Coming out of harvest 2023, the opportunities for hedgers to lock down big returns from storing wheat are extremely good. At the end of harvest, there was a full $0.50/bu US that could be hedged in the September to March futures spread, ($24/mt in Canadian funds), plus the basis appreciation between harvest and February movement. Any amount of storage space that’s available in commercial hedgers’ elevators this fall is going to be tied up storing wheat because the returns make it a good use of space.
The hoarders are primarily wheat growers who have just the right combination of defiance or stubbornness to not sell wheat at cash prices which they believe are too low. While it’s not a tidy mathematical model such as hedging, hoarders can still take up an enormous amount of space in the market’s grain storage infrastructure. Conversations within the Ontario grain trade suggested that in the middle of August farmers still owned about 65 % of the wheat which was delivered to Ontario elevators during this year’s harvest and held it as storage receipts. The overwhelming majority of wheat stored on farm is also held by hoarders who have every intention of not selling it on the market until prices improve.
Ontario has actually done a very impressive job of moving wheat out during the 2023 harvest. Between truck and rail movement to nearby US mills, and a steady flow of vessels out of this provinces ‘ marine terminals, it is not inconceivable that Ontario has exported 1 million tonnes of wheat between mid-July and mid-September. Our domestic soft wheat mills grind at a pretty consistent 50,000 tonnes per month, which means that we’ve milled another 100,000 tonnes over the same period. If we’ve fed another 150,000 tonnes of Ontario’s wheat crop so far, it is entirely possible that about 1.25 million tonnes of Ontario’s 2023 wheat crop has already been consumed before the start of soybean harvest.
1.25 million tonnes of wheat usage in only 8 or 9 weeks certainly seems like an impressive statistic, but if we harvested 1.1 million acres of wheat in Ontario at an average yield of even 90 bushels per acre, the total crop size was about 2.75 million tonnes. Assuming that we’ve moved 1.25 million tonnes already, then the remaining 1.5 million tonnes of wheat which is still sitting in Ontario’s storage in early September is a bigger volume in storage than Ontario’s entire 2022 wheat crop. This does not mean that there won’t be a futures rally which could propel cash prices higher, but it does mean that there’s 1.5 million tonnes of wheat occupying grain storage space that now will not be available to absorb the pressure created by soybean and corn harvest.
The real question is not about whether storing wheat has been the right thing to do, but rather it’s about predicting the consequences of limiting storage capacity on soybeans and corn as we move into harvesting those two crops in the weeks and months ahead. Summertime rainfall has been generous enough across the region this year that yield potential for wheat, soybeans, and corn are all expected to be well above average for the 2023 crop. Those big crops which still remain to be harvested are going to put even more pressure on the limited amount of storage space which remains in the Ontario grain infrastructure.
When you combine the lack of space with the obvious reality that there are bills to be paid, and cash flow to be created, we know that grain is going to continue to flow onto the market almost in spite of the price.
As grain producers, what we need to focus on in order to make the best of the situation through the 2023 harvest is to plan out any grain sales which will need to be made well in advance, and then look for opportunities to forward contract the movement sales well in advance of actually shipping the crop.
Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.