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Basis values on the rise

By Jon Scheve, Superior Feed Ingredients, LLC

While planting progress continues across wetter parts of the Midwest this week, it still seems unlikely much more than 90% of corn acres will eventually get planted by the end of June. The market rationed demand very quickly once July corn exceeded $4.20. Questions will continue throughout summer on how many acres were actually planted and what the potential yields will be.

 

Improving basis values

The widespread uncertainty in futures prices is helping to improve basis prices around the country. End users are planning for upcoming production issues this winter by raising bids now for both new and old crop.

But it seems that farmers aren’t selling much new crop on this rally. Instead most are focused on pricing grain already moved to end users or sitting in commercial storage. Even farmers with on-farm storage are holding back some of their old crop, so they can use it against new crop sales that were already made before the rally should they not get all their acres planted or if their yields are below normal. Plus, many farmers believe there is enormous upside potential yet for futures, so they are waiting to see where the market goes for some of their old and much of their new crop.

This has made procuring corn by end users difficult; therefore, June basis values are approaching the highest levels of the year. New crop basis values are creeping higher too, especially in the eastern states where end users are concerned about getting enough grain sourced.

The same thing happened during recent drought years (i.e. 2010 – 2012) when the corn supply was tight, basis values at end users across the country were quite high compared to the last 5 years when supply was more than adequate.

 

Corn basis sale

At the end of April, I was approached by some end users 300 miles away desperately needing corn. The Missouri river valley flooding was preventing rail cars from reaching their usual destinations in Oklahoma and Arkansas, so end users there were looking for alternative locations to source their grain. They had to increase their basis to entice farmers to move corn during planting season. Since I use futures to hedge my grain, I can stay very flexible and move my grain to the highest bidder anytime and anywhere.

In the end I received -19 on July futures, picked up on my farm, which was better than any posted local bids when all freight costs were considered. This bid was also 23 cents better than what I received for my ’17 crop last summer. So, while futures price may have been disappointing for the ’18 crop, I improved my overall sales by taking advantage of the best basis opportunity available to me.

I sold about 50% of my ’18 production with this sale. I’m holding the rest of my ’18 corn until after harvest because the carry in the market will more than cover my interest until late winter and I have plenty of storage capacity for the remainder of the ’18 crop and all of the ’19 crop I have growing in the field. Plus, I think basis levels will be the same as they are now or maybe better after the new year. Obviously, there is some downside basis risk that I’m taking on by not setting basis at this time, but I’ve noticed the last few years that holding hedged grain as long as possible was the more profitable market strategy. The potential lack of corn supply from the ’19 crop could work to my advantage later this year.

 

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.

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.

 

 

 

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