Corn Futures Calming; Watch the Basis

December 7, 2011 08:15 PM
Corn Futures Calming; Watch the Basis

After a wild year when corn futures prices soared through the season but plunged in September, the market may be headed into a relatively calm winter.

“We've got five to six weeks of quiet trading in front of us before we see the next market moves,” says Rich Nelson, director of research at Allendale, Inc., McHenry, Ill. “It's going to be very slow, very quiet, even quieter than most Decembers.”
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. Just ahead of Thanksgiving, analysts at Societe Generale and Standard Chartered banks predicted that the drop in corn prices this 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/bu. 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. market is moving from deficit to surplus status, and the market still will try to allocate 2012 acreage.
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 reported that the average Gulf price for corn in October had fallen 11 percent 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 semi-annual Food Outlook issued in November. The tight U.S. market “has proven to be one of the foremost determining factors of price changes.”

Seasonal trend for December futures

Seasonal futures price trends are stronger for the December contract through the production season than for the March contract through winter.
“There's a tendency, not a certainty, for prices in the new-crop contract to decline from spring to fall,” says Ed Usset, economist at the University of Minnesota.
Data from the university's Center for Farm Financial Management show that from 1990 through 2011, prices on December corn futures declined in 17 years and rose in five years from May 1 to Oct. 1. However, he says, “Don't expect strong seasonality in the futures for March.”
March futures may not have a clear seasonal trend, but cash prices do normally rise modestly from a bottom in October and November. “I'm personally kind of bullish on the basis long term, out to next spring,” says Usset. In the near term, “Demand is a little mushy. Basis levels are pretty good in corn.”

Farm sales slow in December

Producers usually don't sell as much corn in December as in other fall and winter months.
Based on information collected from operations that buy directly from producers, USDA data show that in the past five years, producers marketed about 9% of their corn in December. That compares with more than 12% in October and November and 14% in January. USDA bases the marketing month on the date the buyer takes possession of the corn.

Corn basis offers opportunities

Corn demand to feed ethanol plants has narrowed the corn basis through the year, especially in spring and summer months, says Steve Johnson, farm management specialist with Iowa State University.
“Ethanol plants will push out extremely narrow basis in spring to ensure they have adequate supplies of corn to get to the next crop,” says Johnson. “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 are 10 to 15 cents under nearby futures. Many producers don't want to sell because they want to defer their income to 2012.
“And they just lost $2 by missing $7 corn this summer,” says Johnson. “Psychologically, I think a lot of farmers will struggle this winter to sell cash corn because they saw such an extreme price movement to higher levels last in June and again in 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 I think 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.”

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