Deep discount questions

Ontario farmers took deeper discounts on moldy corn than farmers elsewhere in 2018. The question is, why?

Ontario corn farmers faced deep discounts on corn infected by deoxynivalenol (DON) in 2018, exposing their vulnerability in a market dominated by domestic users.

While farmers in this province usually see attractive basis levels due to strong domestic demand for corn from the ethanol processors and livestock sector, neither market is keen on taking diseased corn that contains high levels of toxins such as DON.

Why it matters: Instead of celebrating above-average yields, Ontario farmers are finding it stressful because much of their crop is being deeply discounted, if it can be sold at all.

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The convergence of a dense and lush corn crop with hot and rainy conditions in August and September meant that there was more corn affected with Gibberella ear rot. That resulted in higher levels of DON, a vomitoxin that is toxic to some animals.

Blake Vince, who farms in the Merlin area of Chatham-Kent questions how the Ontario crop system dealt with the high-vomitoxin corn situation, and he worries that nothing will change after this troublesome year.

“A lot is coming back to a common denominator and that’s profiteering off the farmer,” he said.

“This year it’s evident we don’t take bushels to the bank. We have all kinds of yield but don’t have quality product to sell.”

Indeed, Agricorp’s corn numbers so far show that of insured farmers reporting corn yields as of mid-December, yield is a record at 181 bushels of corn per acre. That compares to a 10-year average of 170 bushels per acre for those farmers.

Statistics Canada estimates corn yield at 166 bushels per acre, down a bushel from its 167-bushel average in 2017. That compares to a five-year average of 155 bushels per acre. Statistics Canada says total corn production was 8.8 million tonnes in Ontario, compared to 8.7 million tonnes in 2017.

While the 2018 corn story should be about that tremendous production, instead it is about managing DON marketing and agronomy issues. Watch for our next edition for a look at the agronomy issues and lessons.

Ethanol plants influence price

The price for DON-infected corn shows how much of an effect ethanol production has on Ontario corn production and pricing. At about a third of the market, the ethanol plants set the DON discounts for much of southern Ontario, said Don Kabbes, general manager of Great Lakes Grain, the grain-marketing arm of AGRIS Co-operative and Growmark. It manages about 30 country elevators.

“We’re taking the lead from the ethanol plants primarily,” said Kabbes. “A good amount of corn goes to Suncor, IGPC and Greenfield. That’s the benchmarking and that’s where the discounts derive from.”

Ethanol can be processed with high-vomitoxin corn, but the problem for ethanol producers comes from the valuable ethanol plant byproduct, dried distillers grains (DDGS), a feed for animals. Vomitoxin levels in corn are multiplied three times in the distillers’ grains after processing.

Most grain receivers will take corn under three parts per million without discount as it can be easily blended. Over three parts per million resulted in a cascading series of discounts until eight or 10 parts per million, at which point most corn was rejected.

At six parts per million in Ontario, the discount was around $1 per bushel, but once it reached the eight parts per million discount was about $2 or about half the normal price of the corn.

In Michigan, corn was discounted about C27 cents at five to seven parts per million.

The deep Ontario discounts were caused by factors that usually protect Ontario grains and oilseeds growers.

The domestic market for corn in Ontario is driven by demand from the livestock and ethanol sectors. When combined with the weaker Canadian dollar, it typically creates an attractive basis and helps shield Ontario growers from some of the wilder swings in the American and global market.

However, when neither of those major markets wants your crop, pricing can go backwards quickly and steeply.

Bruce Burnett, director of markets and weather for Glacier FarmMedia said that most of the Ontario-Michigan price difference is based on geography.

In the relatively small geography of southern and western Ontario, compared to the rest of North American corn production areas, the opportunities for dealing with high vomitoxin corn are few. If the ethanol plants won’t take it, and the exporters don’t want much of it, and the feed grains market needs to blend it, then the result is deep discounts.

“The market becomes very small,” said Burnett. “The only other option is to move it across the border somewhere, where it can find a significant quality of corn to blend with, which is what it is trying to find.”

Across the line in Michigan, it’s relatively easy to access corn for blending from corn-growing states such as Ohio and Indiana. U.S. exports of corn are still good, he said, which means that there’s more impetus to blend the poor quality Michigan corn and get it out through the Gulf of Mexico ports to other destinations. As a result, the ethanol companies in Michigan didn’t have to discount as deeply.

Kabbes said the Michigan-Ontario price spread wasn’t as large at the end of the season and that the Michigan growers are already taking a lower farm-gate price than in Ontario.

Why should the seller take the entire discount?

Blake Vince, as well as other farmers who have talked to Farmtario, question why farmers are taking the hit for the impact on DDGS, as it is a by-product of the ethanol process.

Burnett said that the distillers’ grain, similar to soybean meal coming out of a soybean oil crushing plant, is a necessary co-product that makes ethanol processing profitable.

Vince sees some of his neighbours destroying corn or plowing it down because they have no ability to store the low-quality product. They got a crop insurance claim passed through Agricorp and so destroyed the crop. Some of that would have been saleable, but would have taken much more work, time and risk to manage.

Testing has also been an issue, with farmers finding highly variable testing at sales points. Research projects have been initiated to look at better options.

Burnett said grain-handling systems have focused on high throughput and efficiency. That leaves them poorly equipped to handle the 2018 crop. This year, the cost has been pushed back onto the farmer, which may cause some to re-think their on-farm storage needs and becoming less reliant on direct shipping.

There are also pinch points for elevator systems, said Kabbes, who said his company’s capital allocations over the new few years will be examined through the lens of 2018.

“In our system, some elevators have handled it better than others,” he said. That will have an effect on planning for how to handle and store corn. Material handling will also be a capital priority, he said.

“When the ethanol business came to town we stopped cleaning corn. Now we’re firing up cleaners we haven’t used for years in order to build a better product for our end user. These are some of the things we are managing through.”

Kabbes also takes issue with those who think the elevators are profiting highly from DON-infected corn.

“I think there’s a perception out there that the grain elevator business is going to make a mitt full of money out of blending this corn. I look at it the opposite way. I have more risk then I want to take on, and I can’t do much about it.”

He said that about 10 per cent of the corn that went into 25 elevators is over eight parts per million. It was taken from growers at a heavy discount, but “even as we sell this corn, I’m not sure we can blend out of this thing.”

That could mean having to hold the corn into next harvest in order to get enough corn to blend with the poor quality corn, or importing clean American corn for blending. The discount can be eaten up quickly, he said.

What he calls a “steady-eddy” approach will see most of the corn pass through the system eventually, said Burnett. Some exporters have found homes for the corn, the IGPC ethanol co-op has done unlimited DON level processing runs through its plant, using up some of the highest vomitoxin corn.

“Any end user doesn’t want eight or 10 parts per million corn. That’s why they discount the heck out of it. If a feed mill wants three parts per million corn, they are still getting that. We’ll get through it,” said Kabbes.

About the author

Editor

John Greig has spent his career in agriculture journalism and communications. He lives on a farm near Ailsa Craig, Ontario. Contact John at [email protected] or follow him on Twitter @jgreig

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