The Ontario Corn Basis: There is Much to Consider

Philip Shaw B.Sc. (Agr.) M.Sc.

What’s the price of corn? It is surely one of the most common questions many corn producers like myself have hard wired into our brains. That usually means a quick look at the nearby corn futures month and maybe a quick look toward futures months into harvest. After that’s done, a quick look at “the basis” gives me my price for corn.

We do it quickly. That is adding the “basis” to the futures price. “Corn futures” represent the price of grain delivered to Chicago during a particular futures month. However, what is basis? How is it determined? What affects it? Does basis have a life of its own? What seasonal variations are common to corn basis in Ontario? What regional variations within Ontario affect basis? Does basis represent something, which
should be followed as closely as futures? How is that done?

Typically, farmers like myself think of the spot basis, which is in Canadian funds. This is the unadjusted basis. However adjusting Canadian currency rates out gives us the adjusted basis, which on January 9th was –.69 cents US. It is calculated by taking the Local Cash Price and subtracting the nearby Chicago futures price multiplied by the Bank of Canada exchange rate with the US dollar. This represents the difference
between the values of corn in southwestern Ontario versus delivery into Chicago. As this number seasonally changes and grows stronger it means the demand for Ontario corn is growing. It’s a very important distinction, however, it can be confusing. For the balance of this article “basis” will be treated as the spot basis.

In theory “basis” is the amount of money per bushel a specified local corn cash price is above or below a certain futures price for a specified delivery period. It reflects only the supply and demand conditions in your local area. For instance the new crop basis bid for corn at the local elevator in Chatham on January 9th, 2007 was plus 15 over the December 2007 futures price. At the same time, the old crop basis bid at the
same elevator was negative .05 cents under the nearby March 2007 futures price.

Right off the top you might ask, “Why aren’t those two basis values the same?” Simply put, the basis values for old and new crop represent two very different supply and demand situations. The old crop at –05 represents corn, which is part of a very large Ontario crop, which had its struggles with vomitoxins. The new crop value of +15 represents corn, which hasn’t been planted yet with all production and market risks ahead of it. On January 9th buyers were willing to pledge a 15 cent positive value on top of the December 2007 futures as a hedge against any
production problems that corn in the Chatham area might face in the long road to harvest.

However, as with most things, the devil is in the details. The story of basis is much more than a simple plus or minus over any particular futures month. In Ontario, corn is grown from Essex County in the southwest to the Quebec border in the east, to Timiskaming and the district of Thunder Bay in the north. Basis is like a rubber band in this province, stretched in some areas and slack in others. It’s constantly pressured and as it is, basis levels rise and fall. The challenge for corn producers is to learn what affects basis and manage their way ahead.

Factors that affect basis for Ontario corn are local supply and demand, transportation costs, storage availability and storage costs, the seasonality of harvest and regional differences. However, since Ontario typically uses more corn than it produces, foreign exchange and US replacement cost of corn are two of the biggest factors affecting basis values.

Corn producers might feel at times like they are gnashing their teeth over basis. “Why isn’t basis moving up? Basis doesn’t seem to be reflecting what’s happening around me.” These phrases may fill the coffee shop talk. When an unexpected, once-in-20-year event like
the vomitoxin outbreak in the 2006 raised its ugly head, the “basis vitriol” was raised to even higher levels. It is at times like this that understanding the foundations of the Ontario corn basis becomes even more important.

In Ontario the major buyers of corn are the feed trade, Casco at London, Port Colborne and Cardinal and the ethanol plants springing up across the province. Basis levels are different among these different end users. However, replacing Ontario corn with abundant amounts of US corn is always the hammer for basis in Ontario. Anytime local supply and demand makes the value of Ontario corn close to or exceeding the replacement cost of US corn, the incentive to bid up the Ontario basis is gone. US corn coming into Ontario historically has always put a cap on Ontario corn basis. The exception would be in the time period when Canada had a countervail duty on US corn coming in.

So what is the US replacement price for a bushel of Ontario corn? What can corn be landed in Chatham or any other location in Ontario from the US? How does this affect basis all the way throughout the province and throughout the whole system? Take Tuesday January 9th for instance. On that day, the nearby March 2007 futures month fell 9 cents per bushel finishing at #3.54 per bushel. In southeast Michigan corn could be bought out of farmer’s bins for -20 cents US under the $3.54 per bushel March futures price, giving the Michigan farmer $3.34 per bushel US for his corn. The cost of transferring that corn by truck to Chatham is expensive... approximately 40 US cents per bushel. Adding these 40 cents to the $3.34 per bushel gives us a landed price in Chatham of $3.74 US cents per bushel. With the Canadian dollar hovering
around 85 cents US, the US replacement price for Ontario corn this past January 9th, 2007 after converting to Canadian funds was $4.40 per bushel.

In a perfect world this US replacement price would be close to the prices Ontario farmers were receiving for their corn. However, on January 9th, 2007 that was not the case. Elevator cash prices for corn ranged in elevators across southern Ontario from $3.47 to $3.60 per bushel. FOB bids across southern Ontario on January 9th were $3.55 to $3.60. Casco in London was bidding $4.00, Port Colborne, $4.05. Ethanol bids ranged from $3.85 to $4.05 per bushel. The western Ontario feed bid, which represents about four large feed mills and other assorted brokers
was the closest at a price of $4.20 per bushel.

So was Ontario corn basis too low on Tuesday January 9th, based on replacement values coming in from the US? It would seem so, but the answer isn’t straightforward. Ontario had a huge crop in 2006. Statistics Canada said it was a 150 bu/acre average. However, many feel the crop was over 160 bu/acre. So there is a huge “Ontario born” supply still here. With vomitoxin still an issue within the Ontario crop; basis was still being negatively affected.

In 2006 vomitoxin muddied the water on basis. However, at this level when it comes to the “Ontario corn basis” the waters are not only muddy but also the players involved hold their cards very close to their vest. They are buying and selling Ontario corn underneath that US
value. Knowing when to hold them, knowing when to fold them and knowing when to walk away becomes very important. The bigger Ontario
buyers such as the ethanol plants, Casco and the bigger feed mills are the price setters underneath that US replacement price.

Farmer selling is also a very important factor determining corn basis. In Ontario, it can be crucial, especially with the spectre of US corn coming into Ontario. If Ontario farmers are reluctant sellers and Ontario processors need corn, it can accelerate the process where US corn replaces Ontario corn. For instance, it is not just by truck. “Water corn” refers to corn, which is loaded in US terminals like Toledo or Milwaukee and comes to Ontario ports like Sarnia, Port Colborne, Cardinal, Prescott and possibly in the future to Wallaceburg by ship or barge. The cost of transferring large amounts of “water corn” is less than the trucking cost of 40 cents US per bushel. It’s more in the range of 15 to 23 US cents per bushel, opening the possibility of a reduced US replacement cost. However, one cannot back up a ship or barge to an auger coming from some US farmer’s bin. These vessels are loaded with more expensive US corn at terminals such as Toledo mitigating some of that advantage. However, when these ships do come in it quickly dampens Ontario corn basis. The closure of the Seaway at freeze-up between
December 15-20th and April 15 factors into this grain movement.

The Ontario corn basis is also buffeted by regional variations, harvest time pressures and interest rates and storage costs. In Eastern Ontario, the Cardinal Casco plant is the price setter. However, basis in this area is also affected by the demand from corn deficient areas in Vermont and upper New York State where large dairy farms need Ontario corn. Quebec corn grown under the provincial ASRA program comes into the Cardinal plant affecting local basis. The Varennes, Quebec ethanol plant now starting production may alleviate this in the future further affecting basis in the east.

Still, you might ask why my local elevator in southwestern Ontario is offering a cash price on January 9th, 2007 of $3.50, while US replacement cost on the same day is $4.40? Casco in London on the same day was buying corn for $4.00; Greenfield ethanol in Chatham
was buying corn for $3.85. A typical elevator’s “handle” (what they make) is 25 cents per bushel. A rule of thumb is it takes 15 cents anytime corn is put on a truck to transfer corn to a buyer, even if it’s close. That 35 cents is approximately the difference between the elevator and the ethanol plants. Any price difference above that, needs to take into consideration more transportation costs. Interest on the money and storage
costs are factored into basis when considering delivery in future months.

So what’s the basis? Clearly there are many factors to consider. One of the best daily resources to look at basis is the Farm Market News Corn Report produced by John Jordan at the Ridgetown Campus of the University of Guelph. This can be accessed under the Facts/Figures heading on the OCPA website. (www.ontariocorn.org)