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Corn+Soybean Digest

New Delivery Points Should Stabilize Basis

Except as a curiosity, Chicago cash prices for corn and soybeans are a thing of the past. Illinois River cash prices now are the ones to watch.

The Commodity Futures Trading Commission recently approved a Chicago Board of Trade (CBOT) request to change the futures contract primary delivery point from the last remaining grain elevator in Chicago to the upper Illinois River.

Elevators at Toledo, OH, and St. Louis, MO, were also removed as alternate corn delivery points. Soybeans can be delivered anywhere along the Illinois River, from St. Louis to Chicago. Price differentials have been established to account for transportation and to help spread delivery among available facilities.

So what does this have to do with your local cash corn or soybean price?

If everything works as intended, the only effect might be to help stabilize basis (the difference between local and delivery-point prices).

When CBOT was established 150 years ago, Chicago had the most active cash grain market in the U.S. Grain was shipped out of the city by rail and lake vessel. But most commercial elevators in Chicago have shut down.

"There is very little commercial trade of corn and soybeans through Chicago, so it makes sense to have delivery points somewhere in the flow of grain," says Darrel Good, University of Illinois extension ag economist.

Less grain is being shipped out of the Toledo port, too, and delivery on futures contracts there has also declined in recent years.

"When the delivery location is not in what I would call the natural flow of the commodity, you tend to get price distortions because of the delivery process," Good says. "I think this change minimizes those distortions."

"Establishing the Illinois River delivery points for corn and soybeans might affect basis, particularly in the winter, since the shipping season is longer on the river than on the lake," says Bob Wisner, Iowa State University extension ag economist. "But it should have no impact on cash prices. And it should not have any impact on the way grain flows or on how it is marketed by farmers or elevators in the U.S."

Delivery on futures contracts seldom happens.

"It's not the question of how much grain is delivered, but whether there's a viable threat of delivery," Wisner points out. "Delivery is the mechanism that keeps the futures market in touch with reality. If delivery is not possible, futures can get out of touch with what's going on in cash."

Doug Jackson, a vice president with the Farmers Commodities Corp., West Des Moines, IA, says delivery is what allows the convergence of cash and futures prices.

"If the delivery point is too far removed from the area of production, the whole marketing system loses credibility," says Jackson.

He says farmers and especially elevators need realistic, equitable and predictable price basis.

"From our point of view, it's important that the delivery system be viable and not skewed to one end of the Corn Belt," says Jackson. "It's important that we be able to access the delivery points, and that's what the new system is intended to do."

Dave Lehman, CBOT's commodity products group manager, says the new delivery points should make basis more stable and easier to forecast.

Lehman says that the change was needed because of the decline in grain warehouse space in Chicago.

"Toledo was supposed to have been an alternate delivery point. However, in recent years, it had become the main delivery point. In the eastern Corn Belt, Toledo was some distance from most of the corn production. Because the Illinois River is more centrally located, we should see a more stable basis," he says.

"Supply and demand, and not distortions in basis, will tell the market when to carry grain, when grain should be moved onto the market and when deliveries should occur," Lehman adds.

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