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Harvest photo submitted by Jon Miller.

Consider market carry when making basis comparisons

Wheat futures continued their collapse in early September, down 16% in value since August. In the last 3 months, corn is down 12% and beans 20%.

A record harvest is expected and many farmers are sitting on a lot of unpriced old crop. This in turn is creating logistical problems everywhere. Without a huge surprise yield reduction in the USDA report this week or a trade fix with China, the market will probably stay at these low values through harvest.


Understanding market carry’s relationship to basis values

I recently reviewed if there was a better basis opportunity to sell my 2017 corn earlier this year. My explanation confused a few people. Here is recap of that review:

I had the opportunity to set the basis at -.21 the Sep instead of the -.43 the Dec that is posted today. However, if we apply the value of the spread at 15 cents to the Sep basis we find that -.21 the Sep is/was actually -.36 the Dec. So really all I have seen is a drop in basis of 7 cents from the best value this summer. Either way it’s remained a better decision to hold the grain until after harvest.

When comparing basis values, I always have to take into consideration the market carry between future contracts. In the case of last week, there was a 15-cent market carry from Sep to Dec futures. With the best basis value being against the Sep this year at -$.21, the equivalent value of basis against the Dec would have been -$.36. The reason is because the 15-cent carry needs to be considered as well.

In other words, the best basis value near my farm was indeed the -$.21 against the Sep, but that equates to only -$.36 against the Dec and the basis level is currently trading at -$.43. That turns out to be only 7 cents worse than the best bid I have seen to this point. That doesn’t seem as low as I might have expected with what has happened as of recent in the markets. But it is why market carry is very important when looking at current or even forward basis levels.


Looking at new crop values

One of my local end users had the following basis level bids posted last week:

  • September -.43 Dec
  • October -.43 Dec
  • November -.32 Dec
  • December -.18 Dec
  • January -.28 Mar
  • February -.25 Mar

Every year most end users’ December basis bids tend to look better than their harvest delivery bids. Having a better December bid versus harvest makes sense. End users get flooded with grain during harvest and they need to entice someone to hold grain until harvest is complete.

But, another trend I see among nearly every end user is that their January basis bid will appear much lower than their December bid. For instance, this end user has a -$.18 bid against Dec futures and a -$.28 bid against the March futures for January delivery. At first glance it might seem like the December bid is much better than waiting a month to price the grain for January delivery. But, how great of a bid is it?

To judge which month is a better sale one has to consider the market carry between Dec and Mar futures. The Dec to March futures spread is currently 12 cents. So, farmers with a hedged position and using futures can “roll” their sales from Dec to March and collect 12 cents. This also means a -$.18 against Dec for a December bid is the equivalent of -$.30 the March futures for December delivery. When market carry information is considered, the December bid is actually worth 2 cents LESS than the January bid. The -$.18 December bid isn’t as impressive as originally thought.

This doesn’t necessarily mean I should be holding my grain until January to make a sale though. There is also the interest cost (explained last week) to hold the grain that needs to be considered too.

Assuming 5.5% loan interest on the current corn cash value of $3.09 (i.e. the cost to physically move, sell and collect a check on the corn in the bin and pay down my operating loan) means it costs me 1.4 cents/month to continue to hold it in storage. (Math: $3.09 x 5.5% = 17 cents for a year / 12 months = 1.4 cents per month).

Once I add the interest cost in for either selling in December or January I find its nearly the same value. That opens up another list of questions that pertain to when I should set basis and move any grain I have in storage.


Should the December basis be sold now or not?

There are a lot of variables to consider when making this decision. Some of the questions that I will begin to ask are:

  • Do I need income before the end of the year?
  • How am I going to store the grain or what kind of conditions will the grain be in at the end of the year?
  • What are the market dynamics in the area?
  • Are there any market conditions to consider (i.e. crop size variances locally compared to the region)?
  • What are the chances basis will rally beyond -$.30 against March futures in December or the first couple of months in 2019?
  • Historically, what have normal basis levels been in the area?

Then there is the question of what will the Dec/Mar futures spread do. Could it widen from the current level of 12 cents out to 15 cents like the Sep/Dec spread did last week? Or might it narrow to 10 cents because no one is selling corn at low levels after harvest? A 2- to 3-cent change in the spread in either direction could change the decision of selling either in December or January.

So before jumping on a seemingly good basis price, it’s important to consider the market carry before making a decision. Sometimes bids that look too good to be true might not be all that great at the end of the day. Understanding market carry’s relationship to basis values can improve my bottom line.


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. He can be contacted at jon@superiorfeed.com.

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