The Grain Hedge Team provides a macro-focused daily view of the world’s grain markets. Kevin McNew received a bachelor’s degree from Oklahoma State University and his master’s and Ph.D. degrees in Economics from North Carolina State University. He spent 10 years as a Professor of Economics with the University of Maryland and Montana State University focusing on commodity markets and is widely regarded for his ability to boil-down complex economic situations into easy-to-understand concepts for applied life.
A Good Run on Basis, But It May Be Done
Mar 26, 2009
There have been few bright spots in the grain market this year. Eroding end-user demand, a weak economy, and ample stocks have all led to staggering losses in grain futures since harvest of 2008. But, the one silver lining is the strong improvement in basis over the last 6 months.
Since November 1, 2008, US average corn basis has gained 40 cents a bushel while soybeans are up 60 cents a bushel against May futures. In contrast, last year corn basis had only inched higher by 15 cents while soybean basis was mostly unchanged over this same time period. So what has helped fuel basis gains this year?
A combination of improving grain transportation, combined with ample crops and tight-fisted farmers have kept basis levels on the upward climb over this marketing year. Barge rates in particular have corrected sharply over the last 6 months thanks to a weak economy, lower fuel costs and sluggish grain export demands. Current barge rates are at the lowest level we’ve seen in nearly two years and off nearly $1 a bushel since their peak last Fall.
At harvest, farmers also seemed more willing to hold tight to corn stocks than beans. Based on USDA’s survey of on-farm stocks of corn and beans, farmers kept more of their corn relative to beans than they had for the last 5 years. That means that grain users had to bid harder later in the season to get beans out of the hands of farmers and combined with strong bean exports has helped lift bean basis more so than corn.
Although basis levels have been higher, some parts of the US have not faired as well. For both corn and beans, basis levels have seen the best gains in areas associated with river movement, pinned to lower barge rates and strong bean export business. In the Western Cornbelt and Plains, basis levels have been relatively weaker in part tied to weak feed demand and ethanol users.
While it’s been a great run for basis, don’t expect the gains to continue. Seasonally, the second-half of the marketing year is weaker than the first-half so the odds against a prolonged rally seem unlikely. Furthermore, barge rates have likely bottomed and the possibility of river flooding could limit barge traffic and drive down basis at key river terminals. Finally, as futures prices have recovered, farmers have rewarded the rally by increasing cash movement which has eased grain basis levels. With limited prospects for changing end-user demand, expect basis levels to top out and move lower over the coming weeks. Once farmers return to the fields for planting, basis levels might show some further upside movement.
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