Railway congestion | Extreme price spreads are the result of supply and demand challenges
For once, outrageous basis levels are nailing farmers and grain companies at the same time.
Prairie farmers are paying big negative basis levels when they deliver grain to elevators, but some of those companies are having to pay huge positive basis levels to buy spring wheat for customers that they can’t supply.
“It’s crazy,” Austin Damiani, a trader with Frontier Futures in Minneapolis, said about plus basis levels in the Minneapolis area, which at time have reached $4 per bushel recently. “They’re big, big premiums.”
Farmers are used to receiving a discount to futures prices when they sell to an elevator, but not by the amount they are today.
Millers also have to pay basis to futures to get crop where they want it, usually paying plus basis of a few dozen cents on most purchases.
However, the spreads have now shot wide in both directions because of the clogged railway system.
Grain companies can’t deliver wheat so are being forced to pay millers whatever it takes to buy the needed supply in the millers’ local U.S. cash market, sometimes taking the price to more than $10 per bushel.
“The logistical backlog on the CP (Canadian Pacific Railway) and the BN (Burlington Northern) has reached such an extreme that the grain elevators in the country that forward sold wheat to millers here in the U.S., they’ve been essentially unable to get the rail cars to ship that wheat, so they’re in default of their contracts and the millers have to cover it at the shipper’s expense in the spot market,” said Damiani.
Bruce Burnett of CWB said the situation is a stark example of the overburdened state of the grain handling system.
“You’re seeing some mills having to purchase wheat $2 to $4 a bushel over a very high protein spring wheat (futures contract price) because they just quite frankly don’t have it nearby,” said Burnett.
“Probably it’s sitting on a rail track somewhere in western North Dakota.”
Burnett and Damiani said grain companies that made the forward sales assumed they could comfortably meet their obligations because they had the crop on the Prairies and arrangements for rail service. However, they were caught short when the railways couldn’t provide enough cars.
These sorts of basis extremes and spreads happen when there is a block between the supplies and demand of a crop. Farmers have already seen U.S. Midwest oat prices soar above the prairie cash market prices because ample supplies of prairie oats can’t reach the demand.
Damiani said the situation has worsened because of the revolutionary growth of the oil industry in places such as North Dakota, which is using badly needed rail capacity in the heart of prairie farm country. Now that there’s a big Canadian crop to move as well as lots of oil traffic, the system is over-stretched.
“We’ve seen a huge investment by the rail companies in the oil industry and we’ve had relatively low grain supplies in the last five years, and now we have big crops and we’re finding there isn’t capacity to ship this stuff,” said Damiani.
“We’re competing with an oil industry that wasn’t there five years ago.”