It has been a tough spring for farmers in the soggy fields of southern Ontario watching as the cash price of corn stumbles lower even though our progress in crop production has been poor. In order to have a better understanding of the factors influencing price, we need to take a look at the entire production region, and then make marketing plans which are in keeping with the bigger picture.
The map below shows U.S. corn planting progress as of June 2, 2014. The lighter-shaded states – Ohio, Pennsylvania, Michigan, and Wisconsin – form the region where planting progress was significantly delayed, and Ontario would certainly fit into this group if only the USDA could be bothered reporting on us. The problem for corn prices is that the key production states in the U.S. Corn Belt – Illinois, Iowa, Indiana, Missouri and Kansas – are in very good shape, and their production dwarfs the small amount of corn grown in the North East. The value of the CBOT corn futures is most tightly connected with corn production in those heartland states.
Because the core region of U.S. corn production looks to be on good condition, we can reasonably expect futures values to remain soft. The area of price where we have seen improvement this spring and summer, and where we should expect to see continued strength, is in the basis portion of the price. In spite of everything that is happening on the production side of the corn business, the Ontario market needs to stay liquid, and the way that it will achieve that is by adjusting basis.
If you have old crop corn on a basis contract and you’ve been waiting for a futures rally, you are going to need to develop a really modest expectation of what a “rally” looks like. There is some potential to salvage the situation by rolling basis forward into the inverse, (in order to increase the basis value), and try to ride it out, but realistically, we are not going to revisit $5 CBOT corn futures this summer, so pricing targets are going to need to be below that level.
In order to keep corn flowing into the market, basis will have to rally in order to off-set the decline in the Chicago futures. This works for two reasons, the first is that growers of corn are all flat price sellers. Our earnings come from the total price of the crop, not just from the futures or basis portion of price. For the most part, the buyers of corn think that same way. The export market does not care very much about the futures and basis, just the total price of the commodity, and the feed market values corn as a flat price ingredient as compared to other ingredient choices. Because demand is stable at the current cash prices, look for basis to compensate for any further decline in future’s levels in the old crop corn market.
New crop corn prices are going to have to deal with the reality of what is currently growing in the field. While the Great Lakes region has some potential issues, most of the U.S. Corn Belt still has the potential to produce near record yields. This doesn’t mean that mid-June will be the time to book new crop because anxiety always kills the crop at least twice, but we need to adjust our price targets to a level which respects that the production issues are essentially a local phenomenon and set our sights on sales which reside in the $5/bu country, and be prepared to use the wide carries in order to achieve those targets.