Corn basis in our area is reaching levels we haven’t seen in a long time.
What does that mean?
Well, we almost always see basis with a negative sign in front of it.
To turn the table upside down and have grain buyers posting a positive basis doesn’t happen often.
To give you a feel for what it looks like in our area, basis moved from $+0.05 on Monday, to $+0.07 on Tuesday, to $+0.09 on Wednesday for corn delivered in the first half of July at a Cargill location near us.
That’s an $0.02 improvement for consecutive days after already being in positive territory.
Another location in Nebraska was posting $+0.20!! Yes, I stopped too when I first saw that, expecting it to be a negative twenty.
And from what I’ve heard and read…our area is not an anomaly in the Midwest this year.
Here’s the FIRST big question:
WHY is corn basis strengthening so much across the midwest right now?
We’re in a situation where there’s optimism in the market again and a lot of uncertainty about the size of this year’s corn crop, which means that farmers aren’t exactly jumping at the opportunity to sell grain.
Rather, many farmers with unsold grain in the bin are willing to wait it out and take a risk under the assumption that the market may go higher.
As a grain buyer, since basis is the portion of the cash price they control (see THIS ARTICLE on how basis impacts cash price!), they improve basis when they need to incentivize farmers to sell grain.
End users, like ethanol plants or feeders, can’t go short on supply and neither can elevators with sales contracts to fill to ship grain.
Thus, when supply get’s tight, they need to get farmers to sell grain in order to fill their needs.
The only way they can do that is through BASIS improvement, since the grain buyer has no control over the futures price.
Here’s the SECOND big question:
How can you or I take advantage of historically strong basis levels in our marketing strategies?
#1: You can sell grain on a CASH contract.
This is the most obvious choice. If the cash price meets a profit target of yours, then selling cash grain can be a smart decision.
Additionally, if you don’t feel that futures or basis will improve much from the current levels, then a cash contract would be a good option.
With a cash price established, all price risk is taken off the table on those bushels.
#2: You could sell grain on a cash contract now, and buy back the bushels on paper in the futures market.
This would be a good option if you want to get your grain delivered to the buyer and collect the check. However, you still feel optimistic (bullish) about prices and want to stay active in the market to take advantage if there is a rally.
We won’t get in the details on how to execute this option in this article, but ask your marketing advisor or broker (if you work with one) about this option.
#3: You could sell bushels on a BASIS contract.
If you are feeling confident that futures have good opportunity to continue to rise, but you don’t want to miss out on these current basis levels, then a basis contract might be a good option to consider.
How is a basis contract different than a cash sale?
To put it simply: A basis contract allows you to LOCK-IN basis now, but gives you more time to set futures.
You won’t have a cash price on the contract yet because you’ve only established ONE element of price in the cash calculation (FUTURES + BASIS = CASH).
How long do you have to set futures on the basis contract?
Your grain buyer will have a ‘price by’ date on the contract, which means you’ll have to establish the futures price either prior to or on that date.
The price by date is not arbitrarily determined. Rather, it’s based on when the futures month on the contract expires.
For instance, right now, grain buyers are bidding against the September futures month for corn (CU19) when posting bids for July delivery.
In the case of a basis contract made today for bushels to be delivered in July, the grain buyer may have a price by date of August 30, 2019 on the contract.
Basis Contract Example:
Your local grain buyer is posting a bid for first half (FH) July at a basis level of $+0.10 CU19 (September corn futures) and you decide to create a basis contract for 10,000 bushels, the following occurs.
- You’ve established one element of price on your contract — BASIS at $+0.10.
- You can choose to set futures WHENEVER you want prior to the price by date OR, you could ‘roll’ the contract to the next futures month. (This would take into account the spread between the futures months, so your basis level would change when you roll–more on that later!)
- You’ve agreed to deliver 10,000 bushels to the grain buyer by July 15th.
- You have until the end of August to establish the futures price on the basis contract to determine the cash price. (?? (Futures not established) + $+0.10 (BASIS established) = CASH).
All in all, we all love to see basis improvement because it helps our cash price. However, just like anything in life, don’t let a good thing pass you by without taking advantage of it if you can.
Some days I’m bullish, and some days I’m bearish. At least there are marketing options that can allow me to take advantage of good basis levels regardless of how I’m feeling. 🙂