Guenther: Farmers’ cash flow concerns feeding wide basis

Saskatoon | Grainews — Prairie farmers have been feeling the pain of a basis wide as the Saskatchewan sky, and the situation isn’t likely to improve any time soon.

“We need to get rail movement to tighten supplies and improve these basis levels,” Cliff Jamieson, grains analyst with DTN, told delegates at the Grain Handling and Transportation Summit here last Wednesday.

Using all available Internet quotes, he put the average Prairie basis — the gap between the futures market price and cash/street price — for spring wheat at $1.74. He was hesitant to use the basis, he said, because “everybody’s posting the nearby basis but that doesn’t mean they have a bid and can take any grain. So I use that with a grain of salt.”

Canola crush margins were sitting at $228 a tonne last week, compared to $38 a tonne last year, University of Saskatchewan ag economist Richard Gray told delegates. The March 12 canola basis hit $266, compared to a 10-year average of $114.

Cash flow concerns are forcing farmers to sell into a bearish market, so “as long as we keep feeding this market we’ll see these basis levels continue,” said Jamieson.

Not all the players in the ag industry are on the wrong side of the abyss between cash and future prices, though. Farmers who contracted forward last year are capturing some of those rents, Gray said.

“But not many producers hedged all their crop and all their basis for certain because you don’t know what you’ve got until you’ve grown it.”

Elevator companies are catching a good chunk of the rents, although there is a bit of demurrage, Gray said. But Gray said the demurrage was a “tiny amount” compared to the rents. “It’s probably somewhere around $100 million compared to billions of additional rents there.”

Asked how motivated grain companies are to fix logistics issues given the basis, Gray said the Western Grain Elevator Association is speaking out about railway problems for the first time.

“If they are willing to work together as a whole industry to actually resolve these issues, then in fact that will show the answer,” said Gray.

“There are certainly players within the grain industry that have suffered,” he added. “But some of the players are doing really well.”

“Terrible solution”

Current carry-out targets, assessed by Agriculture and Agri-Food Canada (AAFC), “could be optimistic,” said Jamieson.

Most observers are using something like a five-year average to calculate next year’s production, and supplies in 2014-15 will be extremely high even with average yields, Jamieson said. “One terrible solution would be to grow another crop like we have right now.”

Gray expects to see a high carry-out into next year as well, which will create problems in 2015-16. “If we get a big crop, it gets even worse,” he said.

Current supplies aren’t moving as quickly as AAFC forecast, either, Jamieson told delegates. Wheat exports are about one million tonnes behind the steady pace needed to hit the 17 million-tonne export target.

Domestic canola crush is about 260,000 tonnes behind schedule to meet AAFC’s 7.2 million-tonne goal. And canola exports are lagging about 309,000 tonnes behind the pace needed to move the 8.1 million-tonne target, Jamieson said.

“Estimates were pathetic”

In terms of rail, Gray listed infrastructure investments, improved short line access and more liberal interswitching provisions as necessary changes. He added enhanced access to producer cars and other routes were needed “to keep everybody honest within the system in terms of competition.”

Public planning is also necessary, he added. “Each of the players is going to build a system they want. And if you want one that works for everybody you have to actually think about a public planning process.”

The railways aren’t the only part of the logistics chain that needs tweaking, Gray told delegates. The industry should be investing in West Coast terminal capacity, he said — and the grain business could be more competitive, he added.

“If you count the number of players that own terminal facilities, it’s not that competitive. It could fit on one hand easily.”

Better production forecasting was also near the top of Gray’s wish list. “I think we can all agree that the 2012 and 2013 public crop estimates were pathetic. They weren’t even close,” he said, adding post-harvest estimates are too late for planning logistics.

Gray suggested sending out agrologists every two weeks during the growing season to count plants and pool information into crop reports.

Without long-term planning and action, he said, basis levels would stay high — “stifling for farm income and economic growth for years to come.”

— Lisa Guenther is a field editor for Grainews at Livelong, Sask., reporting from Saskatoon.

 

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