Seeing -20 wind chills in November isn’t entirely unusual in the Northern Plains — and seeing -$1.00 basis bids definitely isn’t. Farmers in North and South Dakota may have tried to forget about those triple-digit threats to revenue during the past couple of years of national grain scarcity, but their familiarity came flooding back recently while elevators have tried to ship out massive stockpiles via bottlenecked rail lines.
Throughout the past nine months, the average cash bid for corn in North Dakota has been more than 90 cents under the nearby futures price. At the cash market’s nadir in April, the average North Dakota soybean basis was $1.50 under, shaving about 10% off the overall price tag.
It’s been frustrating for a number of reasons.
- While the entire grain industry watched corn futures fall to $3.18 at the start of October, for instance, North Dakota farmers were seeing a wildly unprofitable cash price of $2.18.
- Because this region is full of captive rail shippers with no nearby barge market, processing plant, or feedlot to add competitive bids to the mix, there was basically nothing they could do to influence or counteract the delays and punitive shipping costs on the rail lines.
- It is very difficult to prove how much blame lies anywhere because it’s nearly impossible to calculate what basis “should” have been in a world unaffected by rail delays and high shipping costs.
Basis — the difference between the price of a physical commodity at a specific location and the price of a futures contract for that commodity — is determined by a region’s own unique blend of supply and demand. There is always the opportunity to arbitrage physical grain against the expiring futures contracts, so basis has always theoretically included the transportation costs to get grain to an exchange’s delivery warehouse.
Thus, basis has historically tended to be relatively weak out on the fringes of the Corn Belt, where the transportation costs to demand sinks (ports, regions with heavy livestock concentration, etc.) are the highest.
This demand picture has fluctuated in the past decade, especially for corn, as ethanol plants have popped up all across the northwestern Corn Belt, but it wasn’t until the railroads got slowed down and plugged up last spring that it became clear just how dependent on rail the Northern Plains still really are.
During a typical March, for instance, one might reasonably expect to see spring wheat basis in the Dakotas be near zero. In March of 2014, the average wheat bid recorded by DTN from 140 elevators in North Dakota was 59 cents under the futures price. In April, corn basis is typically around -60 in this region. In April of 2014, the average corn bid in North Dakota was -117. In a normal May, North Dakota soybean basis could reasonably be -95. In May of 2014, it was -134.
Those were the months when the pain was the greatest, but I’ve waited until now to crunch the numbers because no one was sure how well or poorly the huge 2014 harvest would be handled by the railroads and the elevators that ship grain on the railroads. Now, with the entire 2013-14 marketing year behind us and a good start on the newly-harvested 2014-15 marketing year, we can start to tally up just how much money this quagmire has sucked out of farmers’ pockets.
There has already been at least one intrepid attempt to do so, by Dr. Frayne Olson at North Dakota State University in an executive summary to Senator Heidi Heitkamp. His analysis went through April of 2014 and found “there has been an approximately $66.6 million dollar loss in North Dakota farm level revenue” and “potential for an additional $95.4 million dollars in lost farm revenue.” This has been met with great interest and concern among policy makers debating the Keystone XL pipeline and any other proposal for expanding the overall transportation capacity of the United States.
The most elegant piece of Dr. Olson’s analysis was to choose the 2009-10 marketing year as a reference period, effectively defining that year’s basis pattern as a normal standard against which we can compare the current basis levels. Other recent years had haywire supply and demand situations, and an average from years too far back wouldn’t account for the increased regional demand. So the 2009-10 proxy was defined, and between that normal standard and the recent performance, “changes in basis levels capture both the impacts of delayed rail car deliveries/shipments and the higher cost of hopper bottom rail cars.”
I have respectfully appropriated Dr. Olson’s methodology and included data from the ensuing months since April. I also brought in a more robust data set and looked at a larger region. The NDSU analysis used an average of nine North Dakota elevators’ basis bids as a representation for the entire state, but with DTN’s vast collection of basis bids collected every day from individual elevators across the United States, I was able to confirm the basis situation of both North and South Dakota with hundreds of geographically dispersed data points.
Like Dr. Olson, I calculated a figure for each month’s basis losses due to rail congestion and multiplied it by the number of bushels we assume were sold in that month, according to the most recent marketing patterns shown in the 2013 North Dakota Annual Statistics Bulletin. Expressed by distinct marketing years, the results show astounding, statistically meaningful losses.
There has been $97.7 million lost just from North Dakota’s wheat, corn, and soybean revenue during the 2013-14 marketing year, to say nothing of the specialty crops that also ship by rail via single car orders that are even more expensive than shuttles and unit trains. The biggest part of that overall figure was $77 million lost from the wheat market, equivalent to 4.2% of crop’s total value.
Soybean basis was fairly strong during North Dakota’s 2013 harvest, and it wasn’t until the spring of 2014 that the freight costs really started to eat into revenues. Similarly, the losses from the corn market came mostly from that April/May/ June timeframe. Assuming there have been similar seasonal marketing patterns in the current 2014-15 marketing year, it looks like North Dakota’s wheat farmers have already lost $33.6 million to freight inefficiency.
Meanwhile, South Dakota is geographically closer to southern grain demand, farther away from the source of additional crude oil tankers on the rail lines, and marginally less subject to slow train speeds in extreme cold temperatures. I calculated that South Dakota farmers earned $33 million less in the 2013-14 marketing year than they would have theoretically earned during a year with “normal” wheat, corn, and soybean basis. Most of those losses were from the weak cash corn market during spring. The weakness has continued into the 2014-15 marketing year, and they are on track to lose at least another $20 million as they ship out the grain that was piled up during harvest.
Even if you yourself don’t sell grain in this region, these calculations are more than just a historical footnote. American railroads are being crowded with a lot more grain than they’ve ever handled before, oodles more intermodal (container) traffic than they’ve ever handled before, more oil, and even a little more coal than they were shipping a year ago at this time.
So it’s not too hard to envision a theoretical apocalyptic scenario where all U.S. rail shippers face the additional delays and costs that the Northern Plains have seen over the past year. In reality, some portions of the U.S. grain market could turn to alternative shipping methods. But let’s say they couldn’t. Let’s say, for instance, that the entire 2 billion bushel wheat crop was subject to similar freight losses as what North Dakota experienced in 2013-14. Those losses would be over half a BILLION dollars.