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Accounting for Basis Whims

September 1, 2010
Prairie Elevators

TP Web Extra IconThe annual harvest dance of combines, grain wagons, semi trucks, bins, dryers, trains, barges and ships requires new choreography each year. On-farm logistics are determined by both your crop and field conditions and by local and even national and international factors that may lead to unexpected basis levels.

Basis has been erratic in many areas (see "Market Strategy,", for one example). "Some of the basis differences are due to quality," says Diana Klemme of Grain Service Corporation, a consultant to elevators. "The Gulf is buried under barges that are less than No. 2 yellow corn, waiting for better corn to blend in. That pushes barge freight rates higher, which weakens upriver basis."

These aberrations are occurring in a context of an overall widening, however. "From 2005 to 2008, the basis for soybeans in Nauvoo, Ill., widened from –21¢ to –78¢. At the same time, basis at the Gulf of Mexico went from +45¢ to +48¢," reports Jay O’Neil, senior ag economist at the International Grains Program at Kansas State University. Whether this is related to increased transportation costs, rising cost of doing business at elevators or a switch from a "supply push" to a "demand pull" market, it means bigger basis risk and, in some cases, more reliance on on-farm storage.

"This year’s harvest likely will be 180 degrees from last year," says Jerry Gulke of the Gulke Group. "Minimum storage charges are being pushed a month earlier due to the fast maturation of the corn crop. No doubt I will harvest some No. 2 corn at 15% moisture and 56 lb. this year that I can easily store, leaving the commercial facilities sitting idle. No doubt also there will be surprises in national yield not being what it appears due to the fast maturity, rather than the prolonged kernel fill we are used to allowing for. We may see early harvest lows in September.

"I suspect that with what appears to be a record export year for the U.S. for all grains combined, barge freight and rail rates will likely explode and another segment of our agricultural food chain will benefit at the producer’s expense. Our basis will reflect those increasing transportation costs," Gulke says.
Commercial Storage. Some of the basis variations may be related to local storage availability. "We may have the biggest total volume ever this year of corn, soybeans and wheat on hand," Klemme says.

"There probably won’t be severe storage shortages on a widespread basis," adds Terry Barr, economist for CoBank. "Old crop has been moving the past 60 days. Some is still around that needs to be blended, so those harvesting good No. 2 corn early may get premium prices for it," he says. "The wheat rally has gotten some farmers to move their crop to make room for corn and beans."

Steve Beier of The Andersons, an elevator chain in Ohio, expects a split harvest, with some available in late September and some coming in the more traditional fall harvest window. "By the time the later crop comes in, the early corn may be gone, especially with good export interest," he says.

The eastern Corn Belt is accustomed to piling corn on the ground, and it is easier to move into export channels there. Elevators offer deferred pricing contracts and other tools, and farmers are used to them. In the northern and western reaches of the Corn Belt, on the other hand, storage facilities that have stood empty for years now are full to overflowing.

"Wheat acres have been shifting to corn," Klemme points out. "Western capacity was ample until recent years. In eight years, we’ve gone from a 1 billion bushel excess to a 1.5 billion deficit, and basis is being affected. I don’t think farmers fully appreciate that this will be a continuing issue. Those signing 2011 hedged-to-arrive contracts thinking they won’t see –$2 basis again may regret it next year."Elevators and farmers are building capacity to handle the added bushels from corn, but that will not happen overnight," she adds.

DeBruce Grain, headquartered in Kansas City, Mo., for example, is expanding its elevators, barge fleet and train-loading facilities in the U.S. and Mexico. The company’s physical assets and new business could double in three to five years, according to management, based on the expectation that domestic and international demand will grow as fast as or faster than they have in the past five years.

Transit Needs. The U.S. lays claim to the best infrastructure in the world—and agriculture uses every feature of it, from rural roads to ocean freighters. Agriculture earns the top ranking as a user of transportation, accounting for 31% of all ton-miles in 2007, for example.

A recent study conducted by O’Neil Commodity Consulting for the Soy Transportation Coalition reveals just how close the tie is between transportation costs and farmgate prices. Over time, all general increases in transportation costs are primarily absorbed at interior locations, according to the study of 36 soybean-loading facilities in seven states.

When transportation costs rise, basis at inland locations worsens (see graph below). The same does not hold true at the export terminals, such as New Orleans, where basis tends to move in the same direction as transportation costs. Not only does the inverse relationship appear at all interior locations studied, but it is true of all modes of transportation.

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FEATURED IN: Top Producer - September 2010

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