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Grain market hide-and-seek

Look for basis pushes to turn futures’ lemons into lemonade.

Futures markets have yet to provide farmers with many marketing opportunities for 2019 inventory one month into the new year. But as frequently happens, weak prices in Chicago are strengthening corn and soybeans bids in the cash markets for growers ready to separate their basis and futures decisions.

The difference between cash and futures typically narrows when futures disappoint farmers, who lock bin doors tight, forcing end users to bid up their basis to attract supplies. This cat-and-mouse game can’t go on forever. At some time farmers must clear bins to make way for the next harvest or to raise cash and pay off loans and buy inputs. So it’s time to do a gut check on your own basis situation to determine whether it’s time to hold ‘em or fold ‘em.

The text book says basis reflects the cost of storing and transporting goods to the time and place specified by a futures contract. Supply and demand also figure into the equation. When supplies are big and demand weak, buyers may be in no hurry. But when supplies are tight or demand strong, those end users must pay up to obtain what they need. All of these factors are in play currently.

Stocks of corn and soybeans as measured by the number of days’ supply are tighter than a year ago, though neither crop is scarce. Nationally, average corn basis is around 21 cents stronger at the start of February 2019, running around nine cents better than normal. Soybean basis is nearly 42 cents stronger than last year, though it still lags typical levels by around six cents.

With so much uncertainty about the size of the 2019 corn crop due to record prevent plant acres, corn basis has held fairly firm since the start of the marketing year Sept. 1. Soybeans bids, by contrast, strengthened nicely after harvest weakness.

Demand was the obvious trigger for the soybean improvement. Negotiation of phase one of the trade deal with China cleared the 800-pound gorilla from the room that crushed the bean market in much of 2019. Year-to-date export inspections are up 23.5% thanks to renewed Chinese interest. Soybean crush for the first four months of the marketing year is down slightly from the record achieved by the 2018 crop, but still looks strong thanks to processor margins that remain at very attractive levels.

Demand for corn is less rosy. Export inspections are down by 52% due to large supplies from South America. A huge Brazilian crop harvested in 2019 lingered on the world market, which expects more grain to be coming in 2020. Usage to make ethanol so far during the 2019 marketing year is down around 1%, keeping margins for plants depressed.

The livestock industry’s appetite for corn is projected to the strongest this year since ethanol byproducts began displacing feed grains more than a decade ago. Still, even that forecast comes with an asterisk because it’s based on so-called disappearance during the first quarter of the marketing year. Feed demand may not be as strong as USDA believes if that disappearance, noted in lower than expected Dec. 1 stocks, was caused by smaller 2019 production instead.

Nonetheless, those Dec. 1 corn stocks were down 5% from the previous year, and changes in where that supply is held help account for some of the shifting basis patterns over the last year. Illinois, whose share of inventories is down 15% has the greatest basis improvement so far, while areas with higher shares saw no or little strengthening from a year ago. And despite weak margins, average basis at ethanol plants strengthened 14 cents. Those plants need corn day in and day out and don’t exist in a basis vacuum.

Still, tighter supplies and shifts in demand don’t account for all the basis strengthening in corn and soybeans this year. Some of the costs that figure into basis math are also lower. The cost of rail cars was 20% lower in January compared to the previous year, and surcharges carriers demand for fuel was down 22%. The cost for barges to haul grain to the Gulf is more than three cents a bushel less as well.

The cost of money to finance grain storage is also cheaper. Rates for 90-day Treasuries are nearly a full percentage point lower following cuts by the Federal Reserve.

That expense is important to commercial firms storing grain and it should be part of farmers’ decision-making on basis too. Even if bins are fully depreciated it costs money to store. Interest costs for corn at today’s prices runs 1.2 cents a month. For beans the bank gets 2.75 cents a month. Add in at least a penny a month for handling and basis must improve 11 cents to break even on corn stored to the end of June. For soybeans the tab is 18.75 cents.

Of course, the futures market could always rally to make flat price storage a winner. But commercial merchandizers can’t gamble on that. They hedge grain purchased from farmers in the futures market, keeping close tabs on carry, the difference between contracts for nearby and later delivery. Current March-July carries in corn of 2.7 cents and soybeans of 6.8 cents a month would pay for on-farm storage in paid-for bins. But the cost of storage at locations deliverable for futures is up to 8 cents a bushel per month.

As a result, carry is hardly an incentive to keep storing for commercials. So to make money they need basis appreciation. And they’re hedged up, especially in soybeans. Short soybean positions held by commercials at the end of January reported by the Commodity Futures Trading Commission were up 24% from the previous year during the depths of the trade war. Those short positions amounted to 2.2 billion bushels, beans that are in “strong hands” as the saying goes. Soybean inventories held on the farm Dec. 1 were down 25% from 2018 crop levels, but the off-farm stocks were only 5% lower.

Average levels for both corn and soybean basis can continue to strengthen into the spring and early summer if farmers are too busy – or too stubborn -- to move grain. But with so much gain so far it’s far from a slam dunk. Be on the lookout for pushes due to winter weather or need for grain to fill barges as the river system reopens. With some up river locations seeing water levels this winter that are more normal for May, there’s no guarantee the 2020 spring selling season will be a cakewalk.

There’s one other development in the basis market this winter of note. As the trade war freeze thawed, China began buying U.S. sorghum again. The feed grain was the poster child for Chinese demand – and the first to feel the trade war’s bite. Sorghum basis in the export pipeline strengthened more than 40 cents off fall lows, and could be poised for more if China keeps on buying as it tries to fulfill terms of the deal.

Knorr writes from Chicago, Ill. Email him at brycemarkets@gmail.com

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

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