If the market were to behave perfectly, the only reason that producers would have to sell their production would be that they were pleased with the price. Simply put, if nobody ever needed to sell below their expectation, the price would never get there. Unfortunately, the grain market does not have a great history of such discipline.
The two big culprits that force producers to make sales and unfortunately accept low values are the need for either cash or space. The typical reason for the market to reach a traditional “harvest low” is because growers either run out of space in the bins or cash in the bank and they make some sales in order to keep things rolling. The curious thing about the harvest market of 2013 is that neither of these market-breaking factors has occurred.
The U.S. Federal Reserve’s most recent company performance reports showed a significant drop in the amount of lending to American agriculture. Over the 12-month period between June 30, 2012 and June 30, 2013, Wells Fargo & Company’s agricultural loans dropped from $5.803 billion to $5.074 billion, a drop of 12.56% of their portfolio in agriculture. In the same fashion Bank of America Corporation’s dropped from $1.063 billion to $1.038 billion over the same period. This represents a drop of 2.44%. Bank of America’s total agricultural loan portfolio has shrunk by 22.37% over the past five years. The logical extension of these statistics is that farmers have used the higher grain prices of the past few years to pay down debt and reduce their operating lines. Well-financed producers are far more capable of being disciplined about the way in which they choose to make their sales. (Or at the very least defiant enough to not make sales when the value offends them).
The second factor which has historically caused producers to make sales at prices below their expectations has been a shortage of available storage space in order to harvest the crop and put it away. Based on equipment orders, it would appear that Ontario has constructed about 200,000 tonnes of grain storage per year over the past three consecutive years. (An estimate of 600,000 tonnes between 2011 and 2013). The unique combination of a significant increase in grain storage and a weather-extended 2013 harvest season (which has stretched combining out over eight weeks), has meant that as an industry we have completely avoided harvest pressure on space in a year with large acreages and reasonably high yields. In fact, the opposite has occurred. Rather than seeing sales be made in order to create space to continue receiving harvest deliveries, we’ve seen the trade pay premiums in order to fill the storage space which they have available.
The proof of these two factors is in the prices. Since October 15th, soybean basis values in Ontario have rallied $0.50 per bushel, and corn basis values have increased $0.35 per bushel. Even the premiums paid for food grade soybeans have risen to near record levels in recent weeks, simply because producers have not offered up their traditional volume of sales.
This is not entirely a good news story about how the powerful sellers can control a marketplace. Ultimately, if we do not move enough grain out of the marketplace, it will never get scarce, and we could end up with sloppy values at the end of the crop year because people held too much inventory for too long. If we carry 50% of the corn into the last 25% of the marketing year, it will not end well for prices. The great news for farmers is that in spite of North America’s record-sized 2013 grain harvest, prices have rallied rather than slumping into a seasonal low. The tougher step is where do we go from here? Preventing the harvest low is great, but it means that we will not get a sharp rise rallying out of the low period either. Expect values to take a flatter posture with disciplined sellers preventing a slide, and buyers confident of the large supply exercising patience.
If South American growing conditions are uneventful over our winter, and 2014 planting intentions are similar to the trade’s expectations, by spring we are apt to see the North American farmer’s patience and cash flow growing thin. As producers we need to spend the next month both finishing up harvest and finishing up our marketing plans. There are some commodities in the eastern Canadian marketplace, (like crusher soybeans), which are legitimately scarce, but others, (like corn), where the domestic supply is more than adequate to meet demand. Protecting the value of the grain which is being stored away by making deferred time period sales now is going to be a critical next step in the 2013 crop marketing plan, and the time to make those sales will be in the short term.