After summer highs, farmers might be reluctant to sell cash corn this winter. One strategy is to separate futures and basis pricing.
But analysts recommend you watch your basis
After a wild year when corn futures prices soared through the season but plunged in September, the market might be headed into a relatively calm winter. December, for example, was a slow, quiet month compared with past Decembers, says Rich Nelson, director of research at Allendale Inc., McHenry, Ill.
At this point in the crop year, U.S. production estimates have stabilized and traders have a general sense of demand for the coming months.
That doesn’t mean analysts agree, though. Just prior to Thanksgiving, analysts at Société Générale and Standard Chartered banks predicted that the drop in corn prices this past fall would recharge demand, which would drive prices above $7 in the first half of 2012.
Less than two weeks later, Rabobank analysts said they expect futures to gain seasonally to average about $6.45 per bushel in the second quarter, then back off to average $6.10 in the fourth quarter. They added that projections are difficult because the U.S. is moving from deficit to surplus status, and the market will still try to allocate 2012 acreage.
Prospects for Demand. Rabobank bases its forecasts on prospects for record-high ethanol production and Chinese imports of 4 million tons of U.S. corn. The U.S. Grains Council projected in early October that China would import 5 million to 10 million metric tons of corn from all sources by the end of 2012.
The Food and Agriculture Organization (FAO) reported that the average Gulf price for corn
in October had fallen 11% from August. "The outlook for supply and demand in 2011–12 has been exceptionally uncertain since the beginning of the season," noted FAO in its semiannual Food Outlook issued in November. The tight U.S. market "has proven to be one of the foremost determining factors of price changes."
Corn Basis Opportunities. Corn demand to feed ethanol plants has narrowed the corn basis through the year, especially in spring and summer months, says Steve Johnson, a farm management specialist with Iowa State University.
"Ethanol plants will push out an extremely narrow basis in spring to ensure they have adequate supplies of corn to get to the next crop," Johnson says. "What farmers have not always done a good job of is recognizing that those attractive basis pushes are available in spring and are not attractive when the summer months arrive."
Basis is also strong now because of the slow pace of producer selling during December.
"A lot of farmers don’t unhook futures from cash," he says. "Now, my strategy is to grab the basis but keep the futures price open."
In some parts of Iowa, cash corn bids have been 10¢ to 15¢ under nearby futures. Many producers didn’t want to sell in December because they wanted to defer their income to 2012.
"Not to mention they just lost $2 by missing $7 corn this summer," Johnson says. "Psychologically, a lot of farmers will struggle this winter to sell cash corn because they saw such an extreme price movement to higher levels last June and August."
He recommends that producers remove the basis risk. His rule of thumb is to lock futures at high price levels, not basis. When the futures prices fall, lock basis.
"I think we are going to see volatility in futures and variability in basis, so you have to disconnect the two," he says. "Use a basis contract. Agree to deliver the bushels. Give the market a chance to rally, but at least grab the basis."
- January 2012