Should You Be Doing Anything with Your Stronger Basis?
Dec 03, 2012
Corn producers who have enjoyed an abnormally strong basis as of late should be thinking long and hard about locking in they risk. Traditional wisdom would tell you that when freight and delivery charges start working themselves higher the "basis" will generally tend to start weakening. The fear is if the river were to close or have traffic drastically limited down around St.Louis (a delivery point for corn) then the basis could start to really feel some pressure. The one saving grace is the fact that exports "might" start to pick back up. The thought is if the US becomes one of the only sources for corn, then the importers will be willing to pay up the additional delivery and freight charges. If however the exports don't pick up, or the global importers aren't in much of a jam for the bushels, then the additional expenses will roll back onto the producer in the form of a reduction in the basis. This is a tough mystery to solve, and I could honestly see it going either direction, but since we are best trying to manage "risk" and build a more profitable business, I would urge those who are happy with their current "basis" to pull the trigger now on at least a significant portion of your remaining risk. There is simply no need to get greedy at this stage of the game. Flat price corn also remains somewhat of a mystery to me and I remain "neutral." As a producer, one thing you have to pay attention to is the fact the recent gains in flat price has allowed the basis to weaken to some degree. The last thing you want to see happen moving forward is the basis weakening even further, then all of a sudden the flat price starts to break. To avoid these possibilities producers might want to think more about reducing hedges and or selling more cash bushels while both the basis and cash prices are fairly strong, then re-owning on paper if we catch a downward price break. The volatility and premium in the front-end of this market seems relatively cheap right now, meaning this could be our best combination.
As for today there is talk that a seven-month high in the HSBC Chinese manufacturing purchasing managers' index (50.6), additional rains still being forecast in Argentina, Egypt's purchase of US wheat, fewer corn acres possibly in South America, a weaker US dollar, and beginning of the month money-flow coming back into the trade are providing some early morning tail-winds and pushing prices higher. The question is can prices hold as more uncertainties about the US fiscal cliff unfold and are discussed by the media??? Corn producers should think about locking in a strong basis on any "unsold" remaining corn bushels.
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