Weekly Basis Review
Stronger basis doesn't assure stronger price.
Published: May 16, 2013
Fireworks erupted when May corn and soybean futures went off the board on Tuesday. Soybeans closed at $15.245, after early reaching their highest level since Nov. 2, while corn ended at $7.0675. To be sure, elevators weren't bidding off the May; they'd long since rolled to July. But the May represented a price closer to where the red-hot cash market was trading. The big premiums to July enjoyed by the May contracts reflected basis trading at historically strong levels for spring in most areas.
But great basis doesn't mean a great price necessarily. Cash corn and soybean prices worked lower over the winter and spring. Even those who followed textbook hedges may not have earned a higher net price than just selling off the combine.
Flat prices for soybeans held up the best. The average cash price for beans in Iowa after the halfway point of harvest passed at the start of October was $14.83. On Wednesday that average stood at $14.765, 6.5 cents lower. Of course, a farmer storing soybeans also incurred costs, even for crops held on farm. The cost of interest paid by not repaying loans at 4% amounts to 36.65 cents, reducing the net selling price to $14.40, even before costs for shrink, depreciation, insurance and labor.
Storing cash corn fared even worse, because prices ground steadily lower into spring. The Iowa average price faded from $7.42 to $6.945 on Wednesday, a loss of 47.5 cents. Add in interest costs of 18.2 cents per bushel and the net price falls to $6.76 before other costs.
Hedging would have improved these results, because being short is the only way to be assured of capturing basis gains, though it also doesn't guarantee a higher net price. Consider what happened with soybeans. In October, July futures sold for $14.5175. They closed at $14.1275 on Wednesday, a gain of 39 cents for a hedger, before fees and commissions. This would have paid for the cost of interest and little else, bringing the net price to $14.79 – still less than the harvest price.
Corn fared better. July futures sold for $7.46 in October and closed at $6.5075 Wednesday, a gain of 95.25 cents for the short hedger. Even after deducting interest, adding these gains to Wednesday's cash price brought a net price of $7.715, better than the harvest price before other storage charges are deducted.
Soybean basis with November futures was weak, 48.75 under, but basis with July was already positive because there was a big bull spread in the market – 80 cents. After a short crop in both the U.S. and South America, the market wanted beans immediately last fall but hedging from South America was already working against deferreds. Basis against the July bean contract strengthened, but didn't improve that much.
December corn futures were also premium July back in October, but by a much more modest amount, just 10.75 cents. Cash basis against July futures was actually negative, allowing much more room for appreciation, with those gains more than paying for the cost of interest.
Producers who are still short July futures against cash now face a decision: Should they finally take the money and run, or wait for more basis appreciation? History is mixed. Corn basis in Iowa last year kept strengthening after the roll to July, reaching very strong levels in late June. For beans that surge didn't come until late August, requiring hedges to be rolled to September.
But, one lesson recent history has taught is how volatile basis has become. That's a word of caution for those considering rolling the dice more.
Download the complete report using the link below.
Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
Download file: WBR051613.pdf
Size: 450.44 KB (Kilobytes)
Created: 05/16/2013 01:23 PM
Last Modified: 05/16/2013 01:23 PMClick here
to download this file.
Permalink: Click here