September 7, 2001

By Brian Doidge, Market Analyst, Ridgetown College, University of Guelph

U.S. & World
As the condition of Ontario crops deteriorated through the summer of 2001, basis offers to growers exploded for corn, but not so for soybeans. Also, basis offers improved much more for old crop than for new crop in both corn and soybeans, even though it was the new crop production that was suffering from the drought.

In the 3 months May 31-August 31, basis offers for old crop corn FOB the farm improved from $0.86 cents over on May 31 to $1.40 over on August 31, a gain of 63% far exceeding the 9.4% increase ($0.20/bu) in Chicago DEC contract pricing. By comparison, old crop soybean basis FOB the farm improved only 5%, which did not keep pace with Chicago NOV contract pricing which improved 12.5%. New crop corn basis delivered to the elevator at harvest improved 58% (versus Chicago DEC gain of 9.4%) while new crop soybean basis improved 26% (versus Chicago NOV gain of 12.5%).

Why the apparent strength in old crop corn basis relative to apparent relative weakness in old crop soybean basis? Part of the explanation may be that Ontario’s 2000 corn crop was small, only 176 million bushels versus 1999 at 232 m, 1998 at 238 m, and the previous 5-year average of 212 m. In a small crop year, a smaller percentage than normal of the grain corn crop is marketed through the commercial grain trade system, while a higher percentage than normal is fed on farm or sold farm-to-farm. For example, by the end of June only 85 m bushels (49% of the crop) had been sold through the commercial system vs 117 m (51%) in 2000, 124 m (52%) in 1999, and 95 m (51%) as a 16-year average. In a short crop situation, the trade is hammered two ways: smaller volume to handle, and a smaller percentage of that smaller crop is marketed. Knowing this well in advance, the Ontario grain trade more than tripled imports of U.S. corn in 2001 versus 2000 to fill processor and feed mill order books. Ontario basis moved to an import-competitive price ceiling.

Keep something in mind: generally Ontario corn wet millers book requirements out much further (perhaps 5-6 months) than do Ontario feed mills/users (perhaps 1-2 months). But now something has happened. By mid July, the drought was taking hold, not only in Ontario, but also in Michigan and northwestern Ohio, which are the normal sources for imported U.S. corn supplies. Those supplies started to dry up quickly as producers and users there began to worry about having enough to meet their own domestic requirements in 2001/2002. Supplies of old crop started to dry up as U.S. sellers became reluctant. The Ontario feed industry in particular was caught short. A scramble ensued for available old crop supplies. Basis exploded. In August alone, FOB farm old crop corn basis surged 65%. And that is just the published basis offers. There are numerous anecdotal reports of FOB farm offers very much higher than the $1.40 quoted on August 31. Many reported offers and sales were 30 cents or more higher. For example, at the end of August, rail cars of U.S. corn from Indiana cost about $1.77 over DEC to deliver versus the published Ontario FOB farm basis offer of $1.40 over DEC.

Note: Old crop prices have been converted over the DEC contract for simplicity of comparison over the time period and for comparison to new crop offers.

The lesson is that Ontario was already in a short crop situation and the grain trade was importing U.S. corn at a record pace. When access to U.S. supplies became more difficult due to drought worries, the Ontario feed industry was caught short and the grain trade reacted with higher published basis offers and even higher unofficial offers to individual growers. The other message to growers is that you must shop around as the posted basis may not be truly reflective of real offers available in such a situation.

Talking about real offers, keep this also in perspective. The published elevator ‘track’ (or selling price) basis, when adjusted for exchange rate variation, was + $0.23/bu on August 31 and had gained 30 cents in a month. Impressive. However, that was still 14 cents less than the 5-year average of + $0.37/bu and 8 cents less than the 24-year average of + $0.31/bu for the date, even though the last 5 years were on largely an export pricing footing (i.e., lower) rather than an import pricing footing (i.e., higher). This suggests that either there was a lot more upside potential remaining, or that the published track basis was also under-reporting the actual grain trade selling price for corn just as the published FOB basis was apparently under-reporting the actual buying price. Likely both are plausible. For example, while the grain trade was reporting an old crop elevator selling basis on August 31 of $1.52 over the Chicago DEC contract (and posted FOB farm basis was $1.40 over), the actual average mid-western Ontario feed mill buying basis for the same day was close to $1.75 over Chicago DEC (almost matching the laid-in cost for U.S. corn delivered by rail). Once again, the message is shop around.

What was different about the old crop soybean situation? To start with, the 2000 soybean crop was the third largest ever grown in Ontario, at 85.5 m bushels versus the previous 5-year average of 80 m. We were not short soybeans. Secondly, instead of the aggressive processing and feed demand prevalent in corn, domestic soybean crush was a little weaker than the year prior, running about 3.5% less than in 1999/00. Although June weekly crush pace had been good, generally surpassing the year prior, by July, weekly crush activity slowed sharply (due to seasonal maintenance shut-downs) relative to 1999/00 and the 5-year average. For example, whereas Ontario weekly soybean crush activity in May was 34,900 mt and June was 36,300 mt, July slowed to only 24,900 mt, very much slower than anything in the previous 3 years. Thirdly, the Ontario crushers generally book further ahead than is the custom for the Ontario feed trade. Fourthly, the main drought of 2001 (mostly July/early August) tended to take a heavier toll on the U.S. corn crop than on the U.S. soybean crop. This eased U.S. upward pressure on Chicago soybean contract prices relative to corn contract prices. (Notice in the table above that Chicago corn prices climbed from June through August, whereas Chicago soybean prices eased lower in August.) Taken together, these factors meant that there was not a scramble for old crop soybeans as there was for old crop corn in Ontario. The result? Basis offers for soybeans did not explode higher as they did for corn.

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