By Jon Scheve, Superior Feed Ingredients, LLC
I’ve often been asked why basis is so high in some areas but lower in others. There are many factors contributing to these variances, but it’s important to realize that basis values across the U.S. also correlate with each other.
Land values and basis values
While local yields can impact land values the most, basis values have a strong relation to those values as well. I’ve seen social media posts recently with farmers comparing basis values across the U.S., specifically that Ohio is getting +50 while parts of North Dakotas get -80. While this might frustrate some farmers, it’s important to realize that average basis values are actually “baked” into land values and cash rents. For instance, Ohio usually has a +20 basis in a normal year; but Ohio’s land costs are typically double of North Dakota’s, where -70 basis is common.
Basis values move together
When basis values in one area move in any price direction, other areas shifted similarly. It may not be perfect or exact, but there is similar movement. One reason is that end users are monitoring their competitors’ bids in any given area. For instance, when a large end user adjusts a bid, other end users nearby may change their bids within 3 days, 3 hours, or sometimes even 3 minutes. When the end user is smaller, the change may take 3 weeks. The point is, bids are always shifting depending on end user demand.
These adjustments have a domino effect throughout the U.S. Commercial storage operators and cash grain trading companies want to get the highest basis price possible for the grain they buy, so they move grain from areas of high supply and low basis, to areas of higher demand and basis values. This leads to an efficient market place.
Why are basis bids so different nearby though?
Farmers may get aggravated when they see a commercial storage facility bid 30 cents less than a processor located within 50 miles. But there are transport costs to move grain 50 miles (around 20 cents) and there is overhead to keep their doors open and the lights on (around 10 cents). After these added costs are considered, the difference between bids at the commercial storage facilities and the processors are usually minimal.
Competition challenges among different processors locally
Of all U.S. corn usage, ethanol and corn milling plants account for about 45% of total usage while feed users consume about 40%. Each of these end users want to pay the lowest basis price possible, but it’s challenging bidding for the grain available locally because of the massive amounts of grain needed, especially if there is a supply issue.
The remaining 15% of U.S. corn is exported, which is where a commercial facility can have a basis bid advantage, if the export market is strong. Few farmers can load shuttle trains or barges in any major quantity like commercial facilities can, which is necessary when accessing the export markets. While commercial facilities frequently use trains and barges for exporting grain, sometimes those logistics can be used for domestic use too. For example, last summer the eastern Corn Belt started buying corn by shuttle trains from northern states to supplement the areas that couldn’t get planted. You can see this in the zoomed in section of the chart below (top red box) when central Ohio’s basis shot up quickly.
As the basis stayed elevated, the market began pulling corn from North Dakota, the lowest basis area in the Corn Belt. After a week, the North Dakota processor had to increase their basis bid (lower red box) to compete with the commercial facilities in their backyard that were buying corn and shipping it to the eastern Corn Belt.
The chart above also shows as harvest started in mid-September end user bids dropped quickly everywhere. In mid-October the North Dakota processor had to raise bids for a short time (the green box) because harvest was delayed from snow and rain. Once harvest was going strong by November, basis started trading lower in that area.
Now that harvest is over across the country, basis values are trending higher as farmers are reluctant sellers.
The basis market is complex
The basis market has a lot of moving parts and can be as complex as the futures market. However, it usually only ranges 20 to 40 cents during a normal year, while futures can move $1 per bushel or more during the same time frame.
It’s important that farmers watch and study the basis market locally and nationally to understand trends and what’s impacting bids, because selling at the best basis levels helps farmers maximize their profit potential. Just because basis is higher than “normal,” right now it doesn’t mean it can’t go higher…or lower. Being aware of what is impacting basis values can help farmers increase their revenue.
Please email firstname.lastname@example.org with any questions or to learn more. 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.
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