Corn basis strategy

Corn

The Tuesday USDA report didn’t hold any surprises last week. However, the Monday afternoon report showed farmers planted 40% of acres in one week. Some Chicago analysts say there is a downside to this quick corn planting. Weather within days of July 1 now becomes extremely critical for pollination across the Midwest. Weather variances in this single week could swing the national bushels per acre by five, or corn futures from $3 to just short of $5. So much money could be made if we knew what the weather would be in just that one week. Preliminary El Nino reports indicate good weather is a higher probability than bad in early July.

On Thursday last week wheat rallied 30 cents on rumors Russians are going to stock pile grain and freeze potential in the Dakotas. Speculators have a huge short position on, so when they go to cover those positions the market gets very volatile. If something spooks corn speculators, we could see a similar type of rally. But, no one knows what would be that spark right now.

 

Soyeans

The USDA estimates 350 million carryout bushels in 2015, which is more than double what is considered adequate. The USDA is predicting 500 million bushels next year. If this happens, it would be extremely burdensome to the market, and would likely cause prices to drift to $8. This is why beans do not have a lot of potential for price rallies. Lack of farmer selling is probably the most bullish story out there right now.

 

Corn basis strategy

Basis is the spread between the CBOT futures price and the cash price paid locally for corn. Basis represents the demand for grain in any area of the country (or world). It increases or decreases at each location based on grain demand or movement.

For example, if farmers are not selling grain, an end user’s only choice to get the grain they need is to increase the basis. Conversely, if farmers are selling a lot, demand by end users decreases, so they can bid lower than the CBOT (slowing the pace of grain movement). This is why it is so important farmers watch the basis AND the CBOT futures prices. It’s also why we seldom if ever see corn basis and futures prices hit highs at the same time.

Many farmers have the “deer in the headlights” approach to selling their remaining old crop as futures prices have fallen the last few weeks. They are frozen with fear. Many think if they wait it out the price will rally (which has happened in some recent years). This collective holding strategy has allowed basis prices to rally some. But, end users know farmers are holding on to a lot of bushels that need to be moved before new crop is harvested. It’s just unclear when farmers will sell.

This “holding” is scaring some end users that there won’t be enough coverage for their next two months’ needs, so they are putting on coverage right now. This has increased basis the last few weeks. If futures were to rally though, the basis would likely fall because farmers would sell their old crop. Eventually corn will have to be sold, when it does, basis will collapse.

This week I advised my clients to set the basis on any remaining old crop bushels. This does NOT mean they set futures or cash prices, just the basis. As I mentioned before, this is one of the three independent “levers” farmers can use as part of their grain marketing/pricing strategy — one many farmers don’t utilize to its optimal profit potential.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE.  Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process.  After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits.  A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

 Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons.  All of these investment products are leveraged, and you can lose more than your initial deposit.  Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction.  The information provided here should not be relied upon as a substitute for independent research before making your investment decisions.  Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs.  All investors should obtain advice based on their unique situation before making any investment decision.  The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative.  The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions.  Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

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