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What do higher corn prices, stronger basis mean to your marketing plan?

NolanBerg11/ThinkstockPhotos Harvesting corn - aerial view. Combine and grain cart
What does it mean when basis is this strong at tail end of harvest?

The big news today is that cash corn bids have surpassed $4 in parts of Iowa. This seemed impossible only a couple of months ago. 

In addition to continued price rallies, we have seen an extremely strong basis. Basis is the difference between the futures price and the cash price. Its value is primarily determined by transportation costs, storage costs and local demand conditions.  Northwest Iowa has a historical basis of 43 cents under the futures price. It did not seem to fluctuate much from this up until last year, when record late planting pushed prices higher and lower production saw end users bid up for remaining stocks. 

Meanwhile basis at our local ethanol plant is currently only 8 cents under. With December corn futures currently trading around $4.14, that means cash prices are $4.06. 

Basis tracking is important because it also helps give us a good indication of what crop is really out there. The fact that we are at the tail end of our harvest and basis is this strong should tell us something. This is the time of year when end users should be flush with supply, yet, the basis levels suggest otherwise. It is a pretty strong signal that the crop was well below expectations. 

For a brief period, our basis was 20 cents over Chicago last year and so it would not be surprising to see us hit that level again this year. 

How widespread is this?

The question then is how widespread is this or is it simply limited to just parts of Iowa?

Some traders were surprised that USDA did not lower corn yields more than what they did in the October report, and are beginning to expect a downward revision in the next report. USDA is known for taking their sweet time when it comes to updating reports, which allows end-users more time to buy cheap grain from farmers. 

No doubt there were several good production areas this year, but the market still remains skeptical of an overall 178.4 bpa yield for corn and 51.9 bpa for beans.

And then there’s South America

Things really begin to get interesting when we look at what is going on in South America right now. Dry weather in Mato Grosso is pushing back planting season to the point they won’t be able to meet export commitments in January. This should help improve our exports as China will have nowhere else to go for soybean needs for at least another month.

It also calls into question Brazil’s ability to get their second crop of corn planted on time. Time is limited between their first crop of beans and their second crop of corn. Either they will have to reduce their planted area to compensate, or they run the risk of a much lower yield. 

It is pure speculation at this point, but it would not be far-fetched for Brazil to lose 10 million metric tons, which amounts to nearly 400 million bushels. This would represent a yield reduction of over 4 bpa here in the U.S.

Don’t wait too long

Before we all get too excited, let’s remember what the market has done the last several years. Since 2014, each time we rose above the $4 threshold, we didn’t seem to stay around very long. As the old saying goes, the market takes the stairs up to the top, but it takes the elevator down to the bottom. If you have unsold bushels, the market appears to be giving us a gift today and it would be prudent to act on it.

Only two months ago the market was completely depressed, and it seemed unimaginable that things could turn around as quickly as they have. Any farmers surveyed a few months ago would have jumped at these prices and so it is important to stay disciplined and reduce your risk by continuing to make sales. That is the purpose of risk management.

Matthew Kruse is President of Commstock Investments.  He can be reached at 712-227-1110 or by email at matthewdk@commstock.com. 
Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. 
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.       
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