By Jon Scheve, Superior Feed Ingredients, LLC
Fear of the coronavirus seems to be spreading faster than the actual disease and this is impacting the grain markets.
Meat consumption uncertainty
Some are fearing people won’t want to leave home and will dine out less, resulting in less overall meat consumption. However, there are also stories of supermarkets running low on meat, as people prepare for possible extended home stays. So, the market may be overreacting to the fear of the unknown. Until more is understood about how the virus spreads, the recovery time, and the mortality rate, the market will likely select the direction that seems less risky.
Tight corn spreads
Because the markets have dropped so much and so quickly many farmers are simply not selling their grain. This has contributed to the narrowest May/July corn spread since the spring of 2013. Typically, a tight spread indicates a supply shortage where the market wants grain now instead of waiting. If this doesn’t encourage enough grain movement then the market will incentivize anyone with unsold grain to sell with either a futures or basis rally.
Often in situations like this, elevators will dump the grain they own on basis instead of waiting. This is because the spread doesn’t pay them enough to store the grain. However, elevators don’t seem to own a lot of grain right now. Most of what is in their storage is unsold farmer grain that they are only collecting storage on.
East vs. West
Spreads between futures contracts can also narrow when the Eastern Corn Belt, where the board of trade elevators are located and the delivery process takes place are have trouble procuring corn, like we’re seeing this year. This can cause elevators in the Western Corn Belt to move their grain now with strong basis and little opportunity to collect carry because of narrow spreads instead of waiting for a potential basis rally in the future.
Could futures or basis rally in the next few weeks?
In theory, yes that is what is usually expected to happen when the spreads tighten, but there are other factors that may prevent that from happening. A futures rally may be challenging due to ethanol plants having low profit margins, and export pace being slower than the USDA estimated. On the upside, U.S. corn prices are competitive globally right now, but by mid-summer Brazilian corn will be harvested from their second crop and become the U.S. farmer’s biggest competitor.
Would a Phase One China deal help?
Yes, if they would actually start to buy either corn or ethanol. China did buy some sorghum in the last two weeks, which is a hopeful sign. However, the coronavirus is making global trade logistics difficult and sporadic shutdowns in attempts to contain the virus could cripple world economies and demand.
What about basis?
I’ve noticed western corn basis at ethanol plants is down about 5 cents since last week, while eastern corn basis remains steady. This is historically consistent and has happened in 5 of the last 6 years. By April, typically basis values have recovered in the west and corn basis ultimately traded higher after that point in both the east and west.
Spring of 2016 was the only year that didn’t follow this pattern, mostly because it followed the 2015 harvest that had significant production issues and reduced corn yields in the Eastern Corn Belt. Basis moved little in March and drifted lower in April as the futures spreads narrowed to levels we see currently. By the end of May though, futures rallied 40 cents compared to late March. Then during the summer, a hot and dry June helped push the market up an additional 40 cents.
During these rallies the basis initially fell but by the end of June was at the same level or higher than where it was in mid-March. From the March 2016 spring low until the mid-June summer high, the market moved 86 cents higher.
At this point I’m not under the belief that we will see a move as great as that of 2016. There is no way of knowing what the second crop of corn that was just planted in South America will be. It’s difficult to know how many acres the American farmer will plant to corn this spring or what kind of precipitation the crop will receive in the summer.
The market has sustained many bearish attacks the past several weeks and is now in the low end of its recent trading range. Any positive news for the market could turn things around quickly.
Please email email@example.com 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.
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.