By Jon Scheve, Superior Feed Ingredients, LLC
Corn futures continue to trend sideways, as the market waits for the Aug. 12 USDA yield estimate. This week saw the first fields of the 2021 corn harvest begin in several southern states.
As a result of harvest beginning in the South basis values will come under pressure. Old crop corn basis levels have been dropping over the last few weeks, but many basis bids throughout the U.S. still hover around +60 to +70. During the middle of harvest most of these same locations will likely be bidding -40 to -30. This means there will likely be a $1 per bushel decrease in basis values between now and the end of September regardless of what futures prices do. While this drop is likely slow for the next week or two it will begin to drop rapidly as the harvest pushes northward.
This past week the Gulf barge market, which is the most widely traded basis in the country, had bids and offers as wide as 60 cents. Usually, it’s rare if bids and offers are more than 6 cents apart for this particular market. This likely means current flat price values are not high enough to incentivize farmers, who still have grain in the bin to make sales. The market seems to be indicating with its lower posted basis bids, most end users currently have much of their needs covered. However, there are reports of a few end users that have strong basis bids that are not publicly posted in place to meet their weekly requirement needs.
Some end users who still need to procure grain are using unusual tactics with their posted prices. One end user decreased their posted bids by 25 cents, but then was willing to pay 60 cents above that new posted price for anyone willing to make a new sale for quick shipment. When asked why, they said they had too much corn on “free price later” that they had already used up. Plus, they saw no reason to maintain higher basis values for the farmers with remaining stored grain at their facility, because those farmers will likely price that grain over the next month before harvest anyway.
This illustrates why farmers who use “free price later”, or deferred pricing, will eventually pay a very high price for something that is labeled as “free.” Most types of deferred pricing are very beneficial to those end users offering that kind of service because the basis values in those contracts are tied to the whims of the company they are sold to. It’s important to remember that in grain marketing nothing is ever free. There is a cost to provide “free” storage because these locations are taking on the risk of basis dropping. After all, they don’t want to pay higher prices than they need to. Bushels on free price later or deferred pricing are captured bushels with no other competitive opportunity to be sold elsewhere.
Ideally, no farmers would move grain before setting the basis level first because that would force the market to bid a real price for all grain, which would benefit all farmers collectively. Unfortunately, there will always be a few farmers who don’t understand how their actions hurt themselves and all other farmers at the same time.
Another farmer told me that they sold a basis only contract 2 weeks ago for +80 to their local co-op. That co-op then dropped their posted bid to +65 cents. The farmer ended up 2 loads short of filling his contract, so he asked the co-op to buy his way out of the shortage. The co-op said there would be a 35 cent charge above the current posted basis value to get out of the contract. The farmer was shocked there would be such a high penalty, since posted bids were much lower from what he had sold.
When a farmer comes up short on a contract, the grain buyer will also be short on the contracts they have sold and must find someone in the market to cover this shortage. And when there is limited supply in the market, like right now, the end user will usually have to charge much higher values to get themselves out of the short situation the farmer created and they in turn need to pass that expense back on to the farm who was short.
End users that are hedgers likely have very limited supply left because inverse spreads that showed up in the market after Feb. 1 would have told a hedger to make sure they were out of grain by early summer. When July futures were so much higher than September in late spring, it incentivized all commercial grain companies to have their grain basis levels sold by the end of June. Since most end users also hedge grain, they likely aren’t holding on to too many bushels at this point either, because they know corn basis will drop as harvest approaches. In a market inverse, no hedger wants to keep any inventory on hand because the grain is worth less with each passing day.
In the end, the farmer who was short a couple loads secured grain from a neighbor at better values than what the co-op was offering to cancel the contract. The neighbor got a premium for the loads, the farmer didn’t have to pay as high of a price as the penalty the coop was going to charge, and the co-op could still honor their commitments to their buyers on the other side. It seems that all players involved with the trade ended up winning in this case.
The basis market will likely continue to struggle with posted bids not truly representing what the market is actually trading for another 6 weeks. Therefore, any farmer with remaining stored corn should get bids with multiple end users because they may be pleasantly surprised what is still available. However, one might want to avoid waiting too long. Harvest is quickly approaching, which will eventually put downward pressure on basis values soon.
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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