Futures have turned sideways, does basis need to go higher?

By Jon Scheve, Superior Feed Ingredients, LLC

Last week:

• July corn finished down about 16 cents

• December corn finished down about 10 cents 

• November beans finished down 28 cents

• July wheat finished 62 cents lower.

Over the last 2 weeks, the corn and bean markets have moved into a sideways trading pattern. The market remains uncertain on what will happen to the old crop corn and wheat trapped in Ukraine and how much of their new crop will get planted this spring or harvested this summer.

Why corn basis values are down and possible summer basis outcomes

Since war broke out in Eastern Europe corn futures have seen a big rally, while the basis market has suffered. Many variables are affecting the basis market including the spreads between the May and July contracts, end user demand throughout the U.S., and overall freight costs to move the grain.

When Russia invaded Ukraine, many traders believed it would lead to a possible grain shortage. Therefore, funds started buying the market, which drove futures prices higher. This rally led to a rush of farmers selling their grain. With the sudden movement of cash priced grain about two weeks ago, many U.S. end users quickly dropped basis values to slow the rate of grain they were buying. 

One big way end users were able to drop basis was to shift their bids from the May contract to the July contract. Due to the market’s quick reaction to the situation in Ukraine, July futures were increasing at a much slower rate than the May futures. So, while it seems like basis values are higher now compared to before the Ukraine invasion, they are lower when accounting for the spread between contract months of May and July.

Moving forward the basis market against the July contract could also be affected by rising fuel prices, the backlog of railcars, and fewer trucks available to move grain. These factors have led to higher basis values at export facilities. However, due to increased freight rates back to the Midwest, local bids are trading closer to values we typically see this time of year. If the demand for exports picks up moving into the summer, then basis values still have a chance for higher values.

However, several commercial elevator managers noted that one major U.S. railroad operator sets their fuel surcharges only 30 days out and bases those rates on the 30-day moving average of fuel prices. This makes it very difficult for grain buyers to know how much it will cost them to move grain month to month and with the wild price increases in fuel since the beginning of the war the freight rate increases these facilities are dealing with have been extremely expensive. Therefore, many commercial traders have adopted a “wait and see” approach, which is reflected in their lower basis value bids for summer shipment periods.

With no carry in the market, commercial elevators also have no incentive to store any grain moving forward. Consequently, many have likely already traded their positions away and will not have any more grain to sell in the market until farmers sell them more. This seems to have contributed to the big basis decline in the market over the last few weeks. However, it could also suggest the basis market will likely have to deal with limited grain availability at some point for end users and exporters from late June through early September.

How likely is it that farmers will sell their remaining grain in storage?

Market traders seem to believe farmers, as a whole, have traded 80% of their physical corn supply already for the 2021 crop. In conversations with producers who still have grain in storage, most are concerned with summer weather, geopolitics, inflation, and the general feeling of the unknown. Many seem to be waiting to see what their crop looks like in the middle of summer before selling their remaining grain still in storage regardless of the price point. I suspect it could be extremely difficult for end users to pry the last 20% of corn out of farmers hands before July 4^th. If there are any indications of dry weather this summer, it could mean the possibility of higher basis values down the road.

Please email jon@superiorfeed.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.

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