By Jon Scheve, Superior Feed Ingredients, LLC
The week’s biggest story was the inverse spread between the May and July contracts. Inverses mean that the market is short and really needs to find supply.
Corn rarely sees inverse at this point in the year, so when they show up in the spring, they are a very big deal. The spread opened in late April with May being 23 cents higher than July on Monday. By Thursday’s close it was 51 cents higher. This kind of spread hasn’t happened since the spring of 2013 which followed the drought year of 2012.
That Thursday was the last trading day on the May futures for most market participants before the delivery process starts on the May contracts. Therefore, it was also the last day that the May contract had a daily price limit. From now until its final trading day in mid-May, May futures movement won’t really matter because there are few market participants trading it. Everyone’s focus will now be directed to the July futures. July futures on the last Friday in April were up the limit of 25 cents but an analysis from the options market suggested that July corn was trading at $6.85 or 12 cents above the posted close.
Beans were almost as exciting as corn in terms of the spread. The week started out with beans at a 13-cent inverse and saw them trade to a 40-cent inverse by the close of trading on Thursday the last week of April.
Huge basis increases
The second biggest story of the week was the massive increase in basis values in the western belt for both crops. The massive May/July inverse also had a significant impact on corn basis values and caught a lot of end users without enough coverage off guard. This forced many end users to scramble to get coverage in place quickly. Plus, with fewer planted acres last year, the northern states are nearly out of corn, causing basis levels to surge 50 cents higher than normal with some farmers telling me they have never seen basis values like this before. Basis values in the middle western part of the Corn Belt are also 50 cents above normal and that places them at levels unseen in the last 8 years. Interestingly, the eastern Corn Belt seems to be the least affected and are only about 15 cents above normal right now. Consequently, this is causing corn to be shipped in strange directions from what we normally expect.
Bean basis is also seeing much higher levels than normal with many areas in the western Bean Belt reporting levels 70 cents above normal. The far eastern Bean Belt still has normal basis levels posted for the time being. As with corn, beans may start to move in strange directions to fulfill demand. With no cancellations yet in the market there is certainly fear among end users that we could run out of beans in the U.S. later this summer.
Basis and spread adjustments have done some to help ration demand, but they can only do so much. With what we know today, the most likely scenario would be for the futures market to rally significantly for both crops to incentivize the market to slow consumption or induce cancellations. With many end users of both products still profitable at current price levels it seems there may be a need to have a rally that is big and quick to curtail demand.
With basis values in the eastern Corn Belt not enjoying the same increase as the west it could be suggesting the possibility of potential imports of both corn and beans into the East Coast later this summer.
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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