Pick the right marketing tool to build profitability
With rising volatility and greater participation of speculative trading funds in the grain markets since 2008, doing basis analysis on your local cash markets has never been more important.
Many times, farmers do an excellent job of marketing grain by price but leave pennies per bushel on the table by picking the wrong marketing tool. That might not sound like much, but pennies per bushel turn into dollars per acre, hundreds of dollars per field and thousands of dollars per farm.
Basis trades independently of futures price action. That means you can have weaker-than-normal basis in times of weak futures prices or strong basis in times of weak prices. You can also have weaker-than-normal basis when futures prices are strong, or you can have strong basis in times of strong prices. The futures price does not matter to the basis market.
Over time, basis has a tendency to return to "normal" levels. In basis trade, "normal" is the three-year average. But do your basis analysis the right way. Compare today’s basis for old- or new-crop delivery to the three-year average for the same day. Don’t compare basis for delivery in April to basis levels for delivery in July to determine if your current basis is stronger or weaker than normal.
Because basis has a tendency to return to normal levels, you should pick marketing tools that lock in basis when basis is trading at stronger-than-normal levels to capture current strong basis. Conversely, you should pick marketing tools that leave basis open when basis is trading below the three-year average to leave open the opportunity to capture basis appreciation.
Only after you’ve done the basis analysis should you turn your attention to price trends. The futures price itself has a small role in picking the right marketing tool. The exception is when prices are strong enough to provide an acceptable return on the investment you’ve made (or will make) to grow a crop. Still, the price trend and your expectations of upcoming price action is more important in picking the right marketing tool than is the current price.
After you’ve decided to either lock in (or leave open) basis, turn your attention to price trends. If you believe prices will trend higher (bullish), pick a marketing tool that will leave price open. If you believe prices will trend lower (bearish), pick a tool that will lock in price.
Don’t Ignore the Impact of Exports
Corn exports in the 2012/13 marketing year totaled just 731 million bushels, the lowest tally since the 1971/72 marketing year. That means four decades of work to prove to importers that the U.S. is a reliable supplier of corn was erased. There were bumps in that reliability during those 40 years, but it never took a hit like it did in 2012/13 with a 56.6% year-to-year drop in exports.
But importers view the one-year hit to U.S. exports for what it was—a one-year hit. After exporting 1.543 billion bushels of corn in the 2011/12 marketing year, exports fell to just 731 million bushels in 2012/13 and are expected to climb back above the 2011/12 exports in the current marketing year to 1.6 billion bushels. That’s an amazingly quick recovery, again helping to shorten the period of low (or no) corn profitability.
Soybeans didn’t suffer the export losses that corn did. Exports totaled 1.365 billion bushels in 2011/12 and fell just 3.3% to 1.33 billion bushels in 2012/13. That’s barely a hiccup in the U.S. market’s ability to supply importers with soybeans. In 2013/14, soybean exports are expected to climb 14.4% in a year that total supplies increased just 6.8%. So as soybean supplies recovered with the 2013 crop, demand is chewing through available supplies at a quicker-than-expected pace. Again, that will help shorten the period of low (or no) soybean profitability.
- April 2014