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A variety of factors shaping the basis

By Jon Scheve, Superior Feed Ingredients, LLC

The U.S. and China indicated last Friday they are close to completing a deal to end the 19-month trade war. Potentially, China could buy $40 billion worth of agricultural products in 2020, up 50% from $27 billion in 2017. However, which commodities and how much of each would be purchased are unclear and nothing has been signed.

The market didn’t react well to all of the unknowns in the news. Initially corn was up 8 cents and beans were up 16 cents, but by the end of the day corn was only up 3 cents and beans were up just 8 cents. Perhaps the market still remembers last month’s trade deal that ultimately fell apart. Still the news is probably more bullish than bearish for both crops.

 

Basis

There has been a lot of discussion recently if basis will remain strong or if it’s time to sell. Understanding the factors that impact basis is helpful in maximizing profit potential and is a strong grain marketing strategy. I’ve detailed current variables affecting basis below.

 

Farmers are behind on sales

Most farmers didn’t sell much grain before harvest. As a result, end users have less coverage on and therefore have had to increase basis values since harvest to entice farmers to pull grain out of storage. Farmers don’t usually rush to price grain once harvest is over and bins are locked, so it seems unlikely there will be a departure from this strategy any time soon.

 

Acres and yield uncertainty

Final yield and acre estimates are uncertain, and many producers won’t believe the USDA numbers releasing in January, regardless of what is published. Plus, there’s still grain in the fields, which won’t be harvested for several months. End users in these areas will have to bid up to find grain they were expecting to get at harvest.

 

Limited supply in the East

There isn’t enough grain to meet Eastern Corn Belt needs, so those bushels need to be shipped in from somewhere else. Areas typically supplying grain to the East either didn’t have a great year or harvest isn’t finished yet.

Places like South Dakota, that usually have some of the worst basis in the country in a normal year, are nearly on par with parts of Iowa due to all the prevent plant acres in that state. This may mean basis values will remain above “normal” values for the balance of the marketing year. That could lead to those desperate for grain to pay higher basis prices to pull it from non-traditional locations.

 

Quality

While there is good quality, high test-weight corn available throughout the U.S., there is also an abundance of low-test weight and low-quality corn too. Basis bids vary 10 to 15 cents depending on the quality even before any discounts for low-test weights are considered. Basis bids could improve as end users look for higher quality grain to be used to blend lower quality product up. While it could be argued that basis bids might drop for lower quality grain, it might come down to the overall low cash prices in the market determining the basis direction and if farmers with lower quality grain want to take the low prices now or continue to wait for higher prices.

 

Low prices

Corn and bean futures are well below where most farmers want to sell. Some farmers seem to think they will eventually get $4.20 corn and $10 bean futures at some point. With prices below $3.90 and $9.20 on the futures, most farmers are waiting for better values. There is a joke among commercial grain handlers that prices are always 20 cents away from where farmers want to sell. Right now, it seems as though the prices are 50 cents away from what they want. If farmers aren’t selling, end users need to rally basis to entice farmers to move grain when futures won’t do the work. Some farmers might give up on their lofty goals and sell at $4 and $9.75 futures if basis values are strong, but even if prices get to these levels, greed may take over and slow many from selling until later this year.

 

Trade deal

If a trade deal is signed, futures could rally nicely, but that doesn’t mean basis necessarily needs to fall. While it seems unlikely that basis would go up under a big futures rally, there could still be a fight between exporters and processors for owning both crops. This could help basis values stay firm.

 

Market carry

The market is paying, through the spreads, a respectable amount to commercial operators to continue to store any grain they might buy from the farmer right now. As long as the futures spreads are incentivizing commercial operators to hold their grain in the bin it’s possible that basis will not pull back for quite some time.

 

Remember last year?

Often the memories of the previous year impact current year decisions. Many farmers may wait to see if the 2020 crop gets planted and if there are weather issues. These farmers will often argue that they waited last year and received an additional 90-cents from a futures rally for waiting and another 50-cent increase in basis. If enough farmers wait, prices might rally, but will it be through futures, basis or a combination of both? If there is a rally in the market will it be a $1 per bushel or 50 cents or just 20 cents?

 

Where will basis go?

It’s difficult to predict which way basis levels will go because most processors for both crops avoid paying a basis premium more than 30 to 60 days out. Plus, as detailed above, there are so many factors that can change futures, spreads or basis values quickly in either direction. With the information we have today, it seems like basis could remain strong for quite some time.

 

Strong basis largely reflects lack of selling and/or good demand in the market. If futures don’t improve and farmers keep waiting to sell, basis has upside potential. A futures rally doesn’t mean basis has to pull back, it could just stall. It’s important to remember that last summer corn saw both futures and basis rally together.

 

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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