Grains on the Plains

For years the wind blew freely through empty concrete silos and flats in the Western Plains. Space was readily available and storage rates were low; many traders figured a lot of space would never be filled again. But a dramatic shift has occurred that’s impacting logistics, basis, and should raise storage rates. The Plains farmer has steadily increased corn and soybean acreage, largely at the expense of reduced wheat and sorghum acreage. Plains corn and soybean yields were solid in the late ‘90s, wheat exports were declining, cattle feeding margins recovered, and cattle numbers climbed steadily in Kansas and Nebraska. Ethanol production grew steadily, with Nebraska a central part of this new demand base. These and other factors nudged Kansas to a milestone in 2010: Corn and soybean acreage now exceeded wheat for the first time in history.

Nebraska farmers have changed as well. Since 1994, Nebraska farmers have cut wheat acres by 600,000, adding 2.5 million acres to soybeans, and a few hundred thousand to corn. (Nebraska’s corn acreage peaked in 2009 at 9.15 million before retreating to 8.8M in 2010.) Oklahoma has also shifted: Wheat acreage has fallen 1.8 million since 1994, down 26%, but remains No. 1 at 52% of the state’s crop acres. (The biggest move there was into hay, although corn and soybean acres have climbed somewhat.)

Plains corn yields were coming in around 150+ bushels/acre, compared to 35 to 45 bpa for wheat and 70 bpa for sorghum. Now those same acres were turning out sharply higher handling volumes. Slowly those drafty silos and flats filled again with grain. But it wasn’t until the 2008 harvest that the Plains first “hit the wall”, where production and carryover stocks exceeded available space. In 2008, it was still close; some areas ran out of space, with only the steady consumption of corn for ethanol and livestock tempering the overall demand for space. The 2009 crop pushed the regional space shortfall to almost 300 million bushels, and this harvest it could reach 350 million bushels! (Table 1) As in ’08 and ’09, weekly disappearance will temper the tightness somewhat, but not enough. In Kansas alone, production of corn, soybeans and wheat will exceed total available storage capacity* (Chart 2) — farm and commercial combined.

Plains farmers were shocked this summer when the hard red wheat basis collapsed to record low values as harvest began. Terminals had carried over large inventories of wheat after exports lagged this year, and buyers then ran headfirst into a big harvest with low protein in many areas. Export sales called for higher protein and buyers pushed basis lower and lower on the combination of quality and space issues. U.S. wheat has been noncompetitive on the world market to all but a few markets, and our exports have suffered as a result. Wheat basis remains weak even as the start of corn harvest draws closer. Wheat basis will recover in time, but not before the corn combines roll.

A train wreck ahead?

Western farmers called their Congressional representatives and senators to complain about the record cheap wheat basis, but worse may lie ahead. These three states will harvest nearly 3 billion bushels of corn, sorghum and soybeans this fall and swamp the remaining space. Wheat prices have climbed enough that it will be uneconomical to feed the low-quality wheat in this region unless wheat basis falls even further. Corn basis could fall hard as harvest overruns farm bins and eventually commercial space, although strong exports and good feeding margins may help somewhat. Strong export demand for soybeans and razor-thin carryover stocks should keep soybean basis from suffering as bad a fate this fall as wheat. There will be a big fall PNW soybean export program to China that will pull millions of bushels from the Western Corn Belt/Plains. But bigger overall crops and tight space will force corn and sorghum basis low enough to justify putting corn on the ground, to pay gut-slot freight premiums, or to discount the grain to someone else who can hold it. Table 1 shows potential surplus or deficit ( ) space in both the Western and Northern Plains; the numbers are actually slightly worse than shown as oats and barley are not reflected in these “demand for space” calculations — all numbers in millions of bushels. The crop years were selected just to show the trend over time.